PowerPoint Author Brandy Mackintosh CA Learning Objective 111 Explain the role of stock in financing a corporation Corporate Ownership The major advantage of the corporate form of business is the ease of raising capital as both large and small investors can participate in corporate ID: 637801
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Slide1
Chapter 11
Stockholders’ Equity
PowerPoint
Author:
Brandy Mackintosh, CASlide2
Learning Objective 11-1
Explain the role of stock in financing a
corporation.Slide3
Corporate Ownership
The major advantage of the corporate form of business is the ease of raising capital as both large and small investors can participate in corporate ownership.
Simple to become an owner
Easy to transfer ownership
Provides limited liability
Because a corporation is a
separate legal entity
, it can
Own assets.
Incur liabilities.
Sue and be sued.
Enter into contracts.Slide4
Voting rights.
Dividends.
Residual claims.
Stockholder
Benefits
Corporate Ownership
Preemptive rights.Slide5
Equity Versus Debt Financing
Advantages of equity
Equity does not have to be repaid.
Dividends are optional.
Advantages of debt
Interest on debt is tax deductible.
Debt does not change stockholder control.
Advantages of equity and debt financing.Slide6
Stockholders’ EquitySlide7
Learning Objective 11-2
Explain and analyze common stock transactions.Slide8
Authorization, Issuance, and Repurchase of Stock
The maximum number of shares of capital stock that can be issued to the public.
Issued shares are authorized shares of stock that have been distributed to stockholders.
Unissued shares of stock are shares that have never been distributed to stockholders.
Unissued
Shares
Treasury
Shares
Outstanding
Shares
Issued
Shares
Treasury shares
are issued shares that have been reacquired by the corporation.
Outstanding shares
are issued shares that are owned by stockholders.
Authorized
SharesSlide9
Authorization, Issuance, and Repurchase of StockSlide10
Par value is typically a very nominal amount such a $0.01 per share.
Stock Authorization
Par value
is an arbitrary amount assigned to each share of stock when it is authorized.
Market price
is the amount that each share of stock will sell for in the market.
Slide11
Some states do not
require a par value to be stated in the charter.
No-par Stock
Stock AuthorizationSlide12
Stock Issuance
Initial public offering (IPO)
The first time a corporation issues stock to the public.
Seasoned new issue
Subsequent issues of new stock to the public.
National Beverage
issues stock.Slide13
Most issues of stock to the public are cash transactions.
Stock Issuance
National Beverage issued 100,000 shares of
$0.01 par value common stock for
$20
per share.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash +2,000,000
Common Stock +1,000
Additional Paid-In
Capital +1,999,000
2
Record
Cash (100,000 x $20)
Common Stock (100,000 x $0.01)
Additional Paid-In Capital (2,000,000 – 1,000)
1,000
1,999,000
2,000,000Slide14
Stock Exchanged between Investors
Transactions between two investors
do not affect
the corporation’s accounting records.
I’d like to sell 100 shares of National
Beverage stock.
I’d like to buy 100 shares of National Beverage stock.Slide15
Stock Used to Compensate Employees
Employees pay packages can include stock options.
Gives the employees the option to acquire company stock at a later date at a predetermined price.
If the employees work hard and meet the corporation’s goals the stock price will increase.
Employees can then exercise their option to acquire stock at the lower predetermined price and sell it at the higher price for a profit.Slide16
Repurchase of Stock
A corporation repurchases its stock to:
Send
a signal that the company believes
its
stock is
worth acquiring.
Obtain
shares to reissue for the purchase
of other companies.
Obtain shares to reissue to employees aspart of stock option plans.
Reduce the number of outstanding shares
to increase per-share measures of earnings.Slide17
Repurchase of Stock
National Beverage repurchases its own stock
(Treasury stock)
Stockholders
Stock options
allow employees to purchase stock
at a later date from
the corporation at a fraction of the stock’s market price.
Employee
Employee compensation package includes salary plus
stock options
.Slide18
No voting or dividend rights
Contra equity account
When stock is reacquired, the corporation records the treasury stock at
cost
.
Treasury
stock is not
an asset.
Repurchase of StockSlide19
National Beverage reacquired 50,000 shares
of its common stock at $25 per share.
Repurchase of Stock
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash -1,250,000
Treasury
Stock (+xSE) -1,250,000
2
Record
Treasury Stock (+xSE)
Cash
1,250,000
1,250,000Slide20
Reissuance of Treasury Stock
National Beverage reissued 5,000 shares
of the Treasury Stock at $
28
per share.
No profit or loss is recognized on treasury stock transactions.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash +140,000
Treasury Stock (-xSE) +125,000
Additional Paid-In
Capital +15,000
2
Record
Cash (5,000 x $28)
Treasury Stock (-xSE) (5,000 x $25)
Additional Paid-In Capital [5,000 x ($28 - $25)]
125,000
15,000
140,000Slide21
Learning Objective 11-3
Explain and analyze cash dividends, stock dividends, and stock split transactions.Slide22
Dividends on Common Stock
Declared by board of directors.
Not legally
required.
Creates liability at declaration.
Requires sufficient Retained Earnings and Cash.Slide23
Dividends Dates
Declaration Date
Date of Record
Date of Payment
Year EndSlide24
Dividends Dates
National Beverage declares
a cash dividend of
$118,139,000 during it’s 2013 fiscal year.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Dividends
Payable +118,139,000
Dividends -118,139,000
2
Record
Dividends
Dividends Payable
118,139,000
118,139,000Slide25
Dividends Dates
National Beverage paid the previously declared
cash
dividend
of $118,139,000.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash -118,139,000
Dividends
Payable -118,139,000
2
Record
Dividends Payable
Cash
118,139,000
118,139,000Slide26
Dividends Dates
All temporary accounts, including Dividends, are
closed
into
Retained
Earnings at
each accounting year-end.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Dividends +118,139,000
Retained
Earnings -118,139,000
2
Record
Retained Earnings
Dividends
118,139,000
118,139,000Slide27
No change in total stockholders’ equity.
No change in
par values.
All stockholders retain same percentage ownership.
Stock Dividends
Corporations issue stock dividends to:
Reduce the market price per share of stock.
Demonstrate commitment to stockholders while conserving cash during difficult times.
Signal that the company expects strong financial performance
in the future.
Distribution of additional shares
of stock to stockholders.Slide28
Record at current
market value
of stock.
Record at
par value
of stock.
Small
Large
The journal entry moves an amount from
Retained Earnings to other equity accounts.
Stock Dividends
Stock dividend
>
25
%
Stock dividend
<
25
%Slide29
Stock Splits
An increase in the number of shares and a corresponding decrease
in par value per share.
Retained
earnings is not affected.
A stock split creates more pieces of the same pie.
Assume that a corporation had
1,000,000
shares of
$0.01
par value common stock outstanding before a 2–for–1 stock split.Slide30
Comparison of Distributions
to StockholdersSlide31
Learning Objective 11-4
Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Slide32
Preferred Stock Issuance
National Beverage issued
400,000
shares of its
$1 par value preferred stock for
$19,704,000.
Usually has no voting rights
Usually has a fixed dividend rate
Preferred Stock
Priority over common stock
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash +19,704,000
Preferred Stock +400,000
Additional Paid-In
Capital +19,304,000
2
Record
Cash
Preferred Stock
Additional Paid-In Capital
400,000
19,304,000
19,704,000Slide33
Preferred Stock Dividends
Current Dividend Preference:
The current preferred dividends must be paid before paying any dividends to common stock.
Cumulative Dividend Preference:
Any unpaid dividends from previous years
(
dividends in arrears) must be paid before common dividends are paid.
If the preferred stock is
noncumulative, any dividends not declared in previous years are
lost permanently. Slide34
Assume the preferred stock of Flavoria carries only a current dividend preference and that the company declares dividends totaling $8,000 in 2015 and $10,000 in 2016. How much would the preferred and common stockholders receive in 2015 and 2016?
Preferred Stock Dividends Slide35
Preferred Stock Dividends Slide36
Assume that Flavoria Company has the same amount of stock outstanding. However assume that dividends are in arrears for 2013 and 2014. How much would the preferred and common stockholders receive in 2015 and 2016?
Preferred Stock Dividends Slide37
Preferred Stock Dividends Slide38
Retained Earnings
Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating.
Baker Company incurred a loss of $
130,000
in
2014
thatresulted in an Accumulated Deficit in Retained Earnings.
Baker CompanyComparative Balance Sheets (Partial)
For Year Ended December 31
Stockholders’ Equity Common Stock Additional Paid-in Capital Retained Earnings (Deficit) Total Stockholders’ Equity
2015$ 100,000750,000 50,000900,000
2014
$ 100,000750,000(70,000) 780,000Slide39
Statement of Stockholders’ EquitySlide40
Learning Objective 11-5
Analyze the earnings per share (EPS), return on equity (ROE), and price/earnings (P/E) ratios.Slide41
Net
Income – Preferred Dividends
Average Number of Common Shares Outstanding
EPS =
National Beverage’s income for
2013
was
$46.92 million, preferred dividends of $0.15 million,
and the average number of shares outstanding during the year was
46.2 million.
Earnings per share is probably the single most widely watched financial ratio.
Earnings Per Share (EPS)
$46.9 – $0.2 46.2 Shares
EPS =
=
$1.01
per shareSlide42
Return on Equity (ROE)
Net Income – Preferred Dividends
Average
Common Stockholders
’ Equity
ROE =
National Beverage’s income for
2013
was
$46.9 million, preferred dividends were $0.2 million, and the average Common Stockholders’ Equity was $86 million.
Return on equity is the amount earned for each dollar invested by
common stockholders.
$46.9 - $0.2
$86
ROE =
=
54.3
percentSlide43
Price/Earnings (P/E) Ratio
Current Stock Price (per share)
Earnings Per Share (annual)
P/E =
The P/E ratio is a measure of the value that investors place on a company’s common stock.
National Beverage’s stock price was
$17.92
when
the company reported its
2013
EPS of $1.01.
$
17.92
$ 1.01
P/E =
=
17.7Slide44
Comparison of EPS, ROE,
and P/E RatiosSlide45
Supplement 11A
Owners’ Equity for Other Forms of BusinessSlide46
Learning Objective 11-S1
Account for owners’ equity in other forms of business
.Slide47
Owner’s Equity for a Sole Proprietorship
Only two owner’s
equity accounts.
A
Withdrawal
account
to record the owner’swithdrawals of assets.A Capital account to recordthe owner’s investmentsand the periodic incomeor loss.
Closed to the capital account
at the end of each period.
No separate retained
earnings account.Slide48
Accounting for Owner’s Equity
for a Sole Proprietorship
To record a $150,000 investment by H. Simpson, the owner.
To record H. Simpson’s $1,000 monthly withdrawal.Slide49
Accounting for Owner’s Equity
for a Sole Proprietorship
To close revenue and expense accounts to capital.
To close the $1,000 monthly drawings to capital.Slide50
Accounting for assets, liabilities,
revenues,
and expenses follows the same accounting principles as any other form of business.
Accounting for partners’ equity follows the same pattern as for a sole proprietorship.
Separate
Capital
and
Drawings
accounts are maintained for each partner.
Accounting for Partnership EquitySlide51
Accounting for Partnership Equity
To record investments by partners Able and Baker
who will divide net income as follows: Able, 60
percent and
Baker,
40 percent.
To record the partners’ monthly withdrawal.Slide52
Accounting for Partnership Equity
To close revenue and expense accounts to partners’ capital.
To close the monthly drawings to partners’ capital.Slide53
Other Business Forms
Limited Liability Partnership
(LLP)
Protects innocent
partners from
malpractice or
negligence claims.
Most states hold all partners personally
liable for partnership debts.
Limited Liability Company
(LLC)
Owners have same
limited liability feature as owners of a corporation. A limited liability
company typically has a limited life.Slide54
Learning Objective 11-S2
Record journal entries for large and small stock dividends.Slide55
National Beverage
declared a large stock dividend several years ago, resulting in the issuance of 7.6 million common shares with a par value of $0.01 per share.
Large Stock Dividends
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Retained Earnings -76,000
Common Stock +76,000
2
Record
Retained Earnings
Common Stock
76,000
76,000Slide56
Assume National
Beverage
issues a small stock dividend of 10,000 common shares when its stock is trading at $20 per share. A small stock dividend is accounted for at the market value of the company’s stock.
Small Stock Dividends
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Common Stock +100
Additional Paid-In
Capital +199,900
Retained Earnings -200,000
2
Record
Retained Earnings
Common Stock
Additional Paid-In Capital
100
199,900
200,000Slide57
End of Chapter 11