1 / 67

Fundamental Financial Accounting Concepts Third Edition by Edmonds, McNair, Milam, Olds

mahogony
Download Presentation

Fundamental Financial Accounting Concepts Third Edition by Edmonds, McNair, Milam, Olds

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

    1. Fundamental Financial Accounting Concepts Third Edition by Edmonds, McNair, Milam, Olds PowerPoint® presentation by J. Lawrence Bergin

    2. 11- 2 Accounting for Equity Transactions Chapter 11

    3. 11- 3 Issues in deciding between sole proprietorship, partnership, or corporation Personal liability Taxation Transfer of ownership Ability to raise capital Government regulation Characteristics of Different Forms of Business Organization

    4. 11- 4 Equity in Proprietorships Contributed capital and retained earnings are combined into a single capital account: John Doe, Capital $XXXX Distributions are called withdrawals. As withdrawals increase, equity decreases. John Doe, Withdrawals $XXXX

    5. 11- 5 Equity in Partnerships Each partner has her/his own separate “capital” account, each containing the partner’s invested capital and share of retained earnings. As with proprietorships, partnerships use withdrawal accounts for the distributions made to the owners. Each partner has his/her own “withdrawal” (or “Drawing”) account.

    6. 11- 6 Corporations A corporation is a popular form of business because . . . It is simple for individuals to purchase small amounts of stock. It allows for an easy transfer of ownership through established markets, like the New York Stock Exchange. It provides stockholders with limited liability.

    7. 11- 7 Corporations Because a corporation is a separate legal entity, it can . . . Own assets. Incur liabilities. Sue and be sued. Enter into contracts independent of the stockholder owners. Many Americans own stock through a mutual fund or pension program.

    8. 11- 8 Ownership of a Corporation Owners of common stock generally receive the following rights: Voting (in person or by proxy). Distributions of profits (in the form of Dividends). Distributions of assets in a liquidation. Offers to purchase shares of a new stock issue (pro rata basis).

    9. 11- 9 Creating a Corporation State laws govern the creation of corporations. An application for a charter (or articles of incorporation) must include the corporation’s name and purpose, kinds and amounts of capital stock authorized, and other detailed information.

    10. 11- 10 Creating a Corporation Once the state issues a charter, the stockholders elect a board of directors.

    11. 11- 11 Authorized, Issued, and Outstanding Capital Stock

    12. 11- 12 Authorized, Issued, and Outstanding Capital Stock

    13. 11- 13 Authorized, Issued, and Outstanding Capital Stock

    14. 11- 14 Authorized, Issued, and Outstanding Capital Stock

    15. 11- 15 Sale and Issuance of Capital Stock An initial public offering (IPO) is the very first time a corporation sells stock to the public.

    16. 11- 16 Common Stock Basic voting stock of the corporation Ranks after preferred stock for dividend and liquidation distribution. Dividend rates are determined by the board of directors based on the corporation’s profitability and other factors.

    17. 11- 17 Par Value and No-par Value Stock Par value Is a nominal value per share of capital stock specified in the charter. Has no relationship to market value. Serves as the basis for legal capital. Legal capital is the amount of capital, required by the state, that must remain invested in the business. It serves as a cushion for creditors.

    18. 11- 18 Par Value and No-par Value Stock No-par value is capital stock that does not have an amount per share specified in the charter. When no-par stock is issued by a corporation, the amount of legal capital is defined by the state. Stated value is an amount per share that is specified by the corporation when it issues no-par stock.

    19. 11- 19 Preferred Stock Has dividend and liquidation preference over common stock. Cumulative preferred stock has a preference for all past dividends over any paid to common shareholders. Generally does not have voting rights. Usually has a par or stated value. Usually has a fixed dividend rate that is stated as a percentage of the par value.

    20. 11- 20 Special Features of Preferred Stock Convertible preferred stock may be exchanged for common stock. (It’s up to the stockholder to decide.) Callable preferred stock may be repurchased by the corporation at a predetermined price. (It’s the company’s choice.)

    21. 11- 21 Accounting for Capital Stock Transactions Two primary sources of stockholders’ equity: Contributed capital Par or stated value of issued stock. Additional paid-in capital in excess of par or stated value. Retained earnings The cumulative net income earned by the corporation less the cumulative dividends declared by the corporation.

    22. 11- 22 Accounting for the Issue of Common Stock When stock is issued, the equity account Common Stock is credited (increased) for the par or stated value of the stock. If the stock sold for more than par, the additional amount is credited (increased) to the equity account Paid in Capital in Excess of Par, Common Stock.

    23. 11- 23 Record these transactions using the Horizontal model then state their effects:

    24. 11- 24 Accounting for Capital Stock Transactions

    25. 11- 25 ..

    26. 11- 26 Record the financial statement effect of each transaction on this form.

    27. 11- 27 Special Note regarding the Horizontal Model The horizontal model that follows only has a Balance Sheet section. Why?

    28. 11- 28 1. ABC Co. issued 21 shares of $10 par common stock for $12 per share. Income Statement: No effect. Statement of Changes in Equity: Stk.Eq. (PIC) increases by a total of $252. Statem’t of Cash Flows: Fin. Activ. $252 cash inflow.

    29. 11- 29 Accounting for the Issue of Preferred Stock When stock is issued, the equity account Preferred Stock is credited (increased) for the par or stated value of the stock. If the stock sold for more than par, the additional amount is credited (increased) to the equity account Paid in Capital in Excess of Par, Preferred Stock.

    30. 11- 30 2. ABC Co. issued 10 shares of $100 par, 6% cumulative preferred stock for $110 per share. Income Statement: No effect. Statement of Changes in Equity: Stk.Eq. (PIC) increases by a total of $1,100. Statem’t of Cash Flows: Fin. Activ. $1100 inflow. ..

    31. 11- 31 Treasury Stock A corporation’s own stock that had been issued but was subsequently reacquired and is still being held by that corporation. Why would a corporation reacquire its own stock? To reduce the shares outstanding. Because the market price is low. To increase earnings per share, if shares won’t be reissued soon. To use in employee stock option programs.

    32. 11- 32 Treasury Stock is considered issued stock but not outstanding stock. has no voting or dividend rights. is a contra equity account. reduces total stockholders’ equity on the Balance Sheet.

    33. 11- 33 3. ABC Co. bought back 2 shares of its $10 par common stock for $11 per share. Income Statement: No effect. Statement of Changes in Equity: Stk.Eq. decreases because T.S. (contra Eq.) increases. Statem’t of Cash Flows: Financing Activ. $22 outflow. ..

    34. 11- 34 Treasury Stock Transactions Treasury stock is recorded at cost. The account, Treasury Stock, is contra to all of Equity and subtracted at the end of the Equity section on the Balance Sheet. If the treasury stock is subsequently resold for more than the cost, another equity account, PIC-Treasury Stock, would be credited (increased) for the excess over cost. If resold for less than cost, debit (decrease) PIC-Tr.Stk. NO gains or losses are recorded on the purchase or on the reissue of treasury stock.

    35. 11- 35 4. ABC Co. reissued 1 share of its $11 Treasury Stock for $13 per share. Income Statement: No effect. Statement of Changes in Equity: Stk.Eq. increases because T.S. (contra Eq.) decreases & PIC incr. Statem’t of Cash Flows: Financing Activ. $13 inflow. ..

    36. 11- 36 Accounting for Cash Dividends Dividends must be declared by the board of directors before they can be paid. The corporation is not legally required to declare (and subsequently pay) dividends. Once a cash dividend is declared, a liability (Dividends Payable) is created. Cash dividends require sufficient cash and retained earnings, but NOT necessarily Net Income in the current year, to cover the dividend.

    37. 11- 37 Dividend Dates Date of declaration Date of record Date of actual payment to shareholders

    38. 11- 38 Dividends on Preferred Stock Current preferred dividends must be paid before paying any dividends to common stock. If a preferred dividend is not paid, the unpaid amount is either cumulative (a dividend in arrears) or noncumulative. Cumulative: Unpaid dividends must be paid before common dividends. Noncumulative: Unpaid dividends are lost.

    39. 11- 39 Calculating Preferred and Common Dividends Remember ABC Co. has 10 shares of $100 par, 6% cumulative preferred stock outstanding. Assume that NO dividends were paid in 19X1. At the end of 19X2, the Board of Directors declares a total of $200 worth of dividends for its preferred and common shareholders. How much will go to the preferred shareholders?

    40. 11- 40 Preferred Shareholders get their dividends first: Cumulative means that the preferred shareholders get all the past dividends that they were not paid (called “dividends in arrears” which must be footnoted, but NOT reported as a liability on the balance sheet) before common stockholders can receive a dividend. 10 preferred shares x $100 par x .06 = $60/year They get a total of $120: $60 for 19X1 dividends in arrears and $60 for 19X2 current year dividend. Common shareholders get the remaining $80. ($80/30 shares outstanding=$2.67 per share.) [31 shares issued - 1 still in Treasury = 30 shares outstanding.]

    41. 11- 41 5. On 12/7 ABC declared dividends totaling $120 on Preferred and $80 on Common. (Assume sufficient Unappropriated Ret. Earnings exist.) Income Statement: No effect. Statement of Changes in Equity: R. Earn. decreases because Div. (contra Eq.) increases. Statem’t of Cash Flows: No effect. ..

    42. 11- 42 6. On 12/30 ABC Co. paid the dividends to the stockholders of record on 12/24. Income Statement: No effect. Statement of Changes in Equity: No effect. Statem’t of Cash Flows: $200 Financing Act. outflow. ..

    43. 11- 43 Journal entries: Dividends 200 Dividends Payable, Pref. 120 Dividends Payable, Com. 80 To record the declaration of cash dividends. What is the journal entry when the dividends are actually paid to the shareholders? Dividends Payable, Pref. 120 Dividends Payable, Com. 80 Cash 200

    44. 11- 44 Cash Dividends What’s needed to pay cash dividends? retained earnings cash (but, could borrow cash to pay dividend) no restrictions from outsiders Effects of cash dividends on financial statements decreases Assets (when they are actually paid) and Retained Earnings (dividends). NO EFFECT on Net Income.

    45. 11- 45 Accounting for Stock Dividends Stock dividends are distributions to stockholders of additional shares of stock, NOT CASH! Why issue a stock dividend? Low on cash (but want to “reward” stockholders) To decrease market price of stock. Why? To increase number of stockholders (assuming some of the newly issued stock will be sold).

    46. 11- 46 Accounting for Stock Dividends All stockholders receive the same percentage increase in the number of shares they own (pro rata basis). No change in total stockholders’ equity. No change in par values. Affect on financial statements?

    47. 11- 47 7. ABC declared a 10% stock dividend on Com. Stk. [30 outstanding $10 par shares, $15 market value each.] Income Statement: Statement of Changes in Equity: Statem’t of Cash Flows:

    48. 11- 48 Valuing the Stock Dividend How many new shares are issued? Stock Dividend % X # shares outstanding % X shares = new shares Value of the STOCK dividend? # of new shares X Market value on date of declaration shares X $ = $ in total

    49. 11- 49 Valuing the Stock Dividend How many new shares are issued? Stock Dividend % X # shares outstanding 10% X 30 shares = 3 new shares Value of the STOCK dividend? # of new shares X Market value on date of declaration 3 shares X $15 = $45 in total

    50. 11- 50 Valuing the Stock Dividend How is the $45 allocated to the stock accounts? Value of Stock dividend $ Less: $10 par value of 3 new shares = Paid in Capital in excess of par-C.S. $

    51. 11- 51 Valuing the Stock Dividend How is the $45 allocated to the stock accounts? Value of Stock dividend $45 Less: $10 par value of 3 new shares 30 = Paid in Capital in excess of par-C.S. $15

    52. 11- 52 7. ABC declared a 10% stock dividend on Com. Stk. [30 outstanding $10 par shares, $15 market value each.] Income Statement: No effect. State. of Ch. in Eq: No effect on total Eq, but less R.E, more PIC. Statem’t of Cash Flows: NO EFFECT! (Not a CASH div.) ..

    53. 11- 53 Retained Earnings Appropriating (or Restricting) Retained Earnings Board of Directors can restrict (imposed by outsiders) or appropriate (company’s choice) portions of retained earnings. It is a way of communicating why more dividends are not being paid. Does NOT change TOTAL Ret. Earnings. An appropriation (or “restriction”) only separates the retained earnings into two categories, unappropriated and appropriated. (Must have Unappropriated or Unrestricted R.E. to declare dividends.)

    54. 11- 54 8. Board appropriated $20 of Retained Earn. for future plant expansion. Income Statement: No effect. State. of Ch. in Eq: No change in TOTAL Ret. Earn. or Equity. Statem’t of Cash Flows: No effect.

    55. 11- 55 9. At year-end, the company closed out the “Dividends Declared” account.

    56. 11- 56 What is the financial statement effect of each transaction: ..

    57. 11- 57 Calculate final balances for the Stockholders’ Equity section of the year-end Balance Sheet. ..

    58. 11- 58 Stockholders’ Eq. section of ABC’s Balance Sheet

    59. 11- 59 Stockholders’ Eq. section of ABC’s Balance Sheet

    60. 11- 60 Accounting for Stock Splits Distributions of 100% or more of stock to stockholders. Decreases par value per share of stock, but total par value stays the same. Increases number of outstanding shares. No change in total stockholders’ equity. Does not require a journal entry.

    61. 11- 61 Stock Split: example XYZ Co. has 1000 shares outstanding. Each share has a $10 par value, but is selling on the NYSE for $80 per share. The Company declares a 4 for 1 stock split. Complete the following: Before After # shares outstanding Par value per share Total par value Total stock market value Market value per share

    62. 11- 62 Stock Split: example XYZ Co. has 1000 shares outstanding. Each share has a $10 par value, but is selling on the NYSE for $80 per share. The Company declares a 4 for 1 stock split. Complete the following: Before After # shares outstanding Par value per share Total par value Total stock market value Market value per share

    63. 11- 63 Stock Split: example continued XYZ Co. has 1000 shares outstanding. Each share has a $10 par value, but is selling on the NYSE for $80 per share. The Company declares a 4 for 1 stock split. Ms. Smith owned 100 shares before the split. Complete the following for Ms. Smith’s stock: Before After # shares owned…………... Total company shares…... % of stock owned………... Total market value of Ms. Smith’s stock…….

    64. 11- 64 Stock Split: example continued XYZ Co. has 1000 shares outstanding. Each share has a $10 par value, but is selling on the NYSE for $80 per share. The Company declares a 4 for 1 stock split. Ms. Smith owned 100 shares before the split. Complete the following for Ms. Smith’s stock: Before After # shares owned…………... Total company shares…... % of stock owned………... Total market value of Ms. Smith’s stock…….

    65. 11- 65 Retained Earnings Represents the net income that has been earned less dividends that have been declared since the first day of operations for the company.

    66. 11- 66 Retained Earnings What affects Retained Earnings? net income (through closing entries) cash dividends stock dividends prior period adjustments Accounting ERRORS made in previous years that are being corrected now.

    67. 11- 67 Price-Earnings Ratio Selling price of one share of stock Earnings per share* This ratio is used by analysts to evaluate the future prospects of a company. The higher the PE ratio, the more optimistic investors are about a company’s future. * Earnings per share = net income - preferred dividends divided by the weighted average number of common shares of outstanding stock. [Why is the “weighted average” number of shares used?]

    68. 11- 68 Chapter 11

More Related