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Chapter 8. The Analysis of the Statement of Shareholders’Equity. The Analysis of the Statement of Shareholders’ Equity. Link to Previous Chapter. Chapter 7 gave a design for. financial statements that. readies them for analysis. This Chapter. What is hidden. How is dirty. -. How is the.

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Chapter 8

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Chapter 8

Chapter 8

The Analysis of the Statement of Shareholders’Equity

Chapter 8

The Analysis of the Statement of Shareholders’ Equity

Link to Previous Chapter

Chapter 7 gave a design for

financial statements that

readies them for analysis.

This Chapter

What is hidden

How is dirty


How is the

This chapter reformulates the




surplus income

statement of

statement of owners’ equity

income ?

treated in the

owners’ equity

according to the design in

reformulation ?


Chapter 7. The reformulation

to highlight the

information it

highlights comprehensive

contains ?


Link to Next Chapter

Chapters 9 continues the

reformulation with the balance

sheet and the income


For more applications,

visit the website

Link to Web Page

What you will learn from this chapter

What you will learn from this Chapter

  • How GAAP statements of shareholders' equity

  • are typically laid out

  • Why reformulation of the statement is

  • necessary

  • What is reported in "other comprehensive

  • income" and where it is reported

  • What "dirty-surplus" items appear in the

  • statement of shareholders' equity

  • How stock options work to compensate

  • employees

  • How stock options and other contingent equity

  • claims result in hidden expenses

  • How management can create (or lose) value for

  • shareholders with share transactions

Chapter 8

GAAP Statement of Shareholders’ Equity

Opening book value of equity (common and preferred)

+ Net share transactions with common stockholders

+ Capital contributions (paid in capital from share issues)

- Share repurchases (into treasury stock or against paid-in capital)

+ Net share transactions with preferred shareholders

+ Capital contributions (share issues)

- Share redemptions

+ Change in retained earnings

+ Net income

- Common dividends

- Preferred dividends

+ Accumulated other comprehensive income

+ Change in unearned (deferred) stock compensation

Closing book value (common and preferred)

The governing accounting relation

The Governing Accounting Relation

Book value, beginning of period

+ Comprehensive income

- Net payout to shareholders

= Book value, end of period

Reformulated statement of stockholders equity

Reformulated Statement of Stockholders’ Equity

Reformulation the steps

Reformulation: The Steps

  • Restate beginning and ending balances for items incorrectly included in or excluded from common equity

    • Preferred stock

    • Dividends payable

    • Unearned (deferred) compensation

  • Calculate net transactions with shareholders

    Cash dividends + share repurchases – share issues

  • Calculate comprehensive income

    Net income + Other comprehensive income –

    Preferred dividends

  • The gaap statement nike inc 2004

    The GAAP Statement: Nike Inc., 2004

    Nike the reformulated statement

    Nike: The Reformulated Statement

    Balances: 2003 2004

    Reported $3,990.7 $4,781.7

    Dividends payable 36.9 52.6

    Unearned compensation 0.6 5.5

    Restated balance4,028.24,839.8

    The gaap statement reebok international ltd 2004

    The GAAP Statement: Reebok International Ltd., 2004

    Reebok reformulated statement

    Reebok: Reformulated Statement


    2003 2004


    Unearned compensation 1.2 5.8

    Restated balance1,034.91,225.8

    Chapter 8

    Dirty Surplus Accounting in the US

    Fasb statement no 130

    FASB Statement No. 130

    Requires the reporting of comprehensive income

    in one of three ways

    • Within the income statement

    • In separate statement

    • Within the equity statement

      Most firms choose the last alternative

    Chapter 8

    Ratio Analysis

    Payout and Retention Ratios

    Ratio analysis continued

    Ratio Analysis (continued)

    Shareholder Profitability Ratio

    Growth Ratios

    Hidden dirty surplus

    Hidden Dirty Surplus

    • Shareholders lose when shares are issued at less than the market price (e.g. exercise of options)

    • This loss, however, is not recorded as expense.

    • What is the nature of this loss? If options are part of a compensation package, this loss is an employee compensation expense. If from a conversion of a bond, preferred stock or warrants, the loss is a financing expense.

    • What is the amount of the loss? Market price - exercise price.

    • Special case: options granted in the money are recorded as deferred compensation

    Fasb statement no 123r

    FASB Statement No. 123R

    • Statement 123R requires an expense to be recognized at option grant date, equal to the value of the option at that date

    • Up to 2006, pro forma net income, including the expense, was reported in footnotes. The expense must now be reported in the income statement.

    • No further expense recorded as the option moves into the money or at exercise date.

    • Firms record a tax benefit (for non-qualified options) at exercise date, and credit this to shareholders’ equity.

    • IFRS2 has a similar requirement.

    Measuring the loss from exercise of stock options method 1 reebok

    Measuring the Loss from Exercise of Stock Options: Method 1 (Reebok)

    Expense is implied from the tax benefit:

    Measuring the loss from exercise of stock options method 2 reebok

    Measuring The Loss from Exercise of Stock Options: Method 2 (Reebok)

    Calculate difference between average stock price and exercise price:

    Use when tax benefit is not reported, or for incentive options (where there is no tax benefit).

    Reebok reformulated statement1

    Reebok: Reformulated Statement

    Shares are issued at market value, and the difference between the market value and after-tax receipts from the shares issued is a loss from exercise of options.

    Hidden losses on put options dell computer

    Hidden Losses on Put Options: Dell Computer

    From the 2002 equity statement (see Chapter 2):

    The Loss:

    The gaap statement of shareholders equity dell computer 2002

    The GAAP Statement of Shareholders’ Equity: Dell Computer, 2002

    Dell reformulated statement

    Dell: Reformulated Statement

    Dell Computer Corporation

    Reformulated Statement of Shareholders’ Equity

    Balance, February 2, 2001 $5,696

    Transactions with shareholders:

    Shares issued in stock option exercises

    (at market)$1,747

    Shares repurchased (at market) (1,632) 115

    Comprehensive income

    Comprehensive income reported 1,222

    Loss on exercise of employee stock options $1,391

    Tax benefit for employee stock options 487 (904)

    Loss on put options (1,368) (1,050)

    Other (3)

    Balance, February 1, 2002 $4,758

    Losses on convertible securities

    Losses on Convertible Securities

    Loss = Market price of common issued -

    Book value of convertible surrendered

    The market value method vs. the book value


    - The market value method recognizes losses on


    - The book value method records the shares at

    the book value of the convertible securities,

    with no loss recognized

    Almost all firms use the book value method.

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