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Shareholders' Equity

Shareholders' Equity. Chapter 10. Corporations. A corporation is an entity which is owned by its shareholders and which raises equity capital by selling shares of stock to investors. Corporations. Each share of stock represents a fractional interest in the issuing company. Corporations.

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Shareholders' Equity

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  1. Shareholders' Equity Chapter 10

  2. Corporations • A corporation is an entity which is owned by its shareholders and which raises equity capital by selling shares of stock to investors.

  3. Corporations • Each share of stock represents a fractional interest in the issuing company.

  4. Corporations • Large business firms prefer to organize as corporations.

  5. Corporations • A primary advantage of the corporate form of business organization is the ability to raise large amounts of cash by selling stock to many different individuals and institutions on the major security exchanges.

  6. Corporations • Stockholders expect to receive dividends or to earn capital gains on their investment.

  7. Corporations • Dividends are distributions of corporate assets, usually cash, to shareholders.

  8. Corporations • Capital gains (or losses) occur when the shares of stock increase (or decrease) in price while investors own the shares.

  9. Corporations • Each state has laws governing the formation of corporations.

  10. Corporations • The state issues to a new corporation a charter which lists various items, among them the businesses’ purpose and the number and types of shares of stock the corporation is allowed to sell.

  11. Corporations • The most basic type of ownership is common stock.

  12. Corporations • Common shareholders are residual owners of a corporation.

  13. Corporations • If a business liquidates, then the order of distribution of assets (if any) is creditors, preferred shareholders, common shareholders.

  14. Shareholders' Equity • Shareholders' equity, or net assets consists of invested capital and retained earnings.

  15. Shareholders' Equity • Invested capital (usually consisting of par value and paid-in capital) is the amount received by the corporation upon the sale of its stock to investors.

  16. Shareholders' Equity • Retained earnings is the amount of prior earnings that the firm has not paid to shareholders in the form of dividends.

  17. Shares of Stock • Shares of stock are classified as authorized, issued, or outstanding.

  18. Shares of Stock • Authorized shares are the shares that the firm is permitted to issue according to its corporate charter.

  19. Shares of Stock • Issued and outstanding shares are those presently held by investors.

  20. Shares of Stock • All issued shares may not necessarily be outstanding.

  21. Shares of Stock • The term "issued" means that the shares of stock have at one time been sold into the marketplace but does not necessarily mean that the shares are currently still in the marketplace.

  22. Shares of Stock • At times, a business may buy back its own shares from investors in the marketplace.

  23. Shares of Stock • For legal purposes, the shares of most firms have a par or stated value.

  24. Shares of Stock • Par value is usually a very small amount, such as $.25, and bears no relation whatsoever to the dollar amount for which the shares are selling in the marketplace (called the fair market value).

  25. Transactions Affecting Shareholders' Equity • Three basic transactions account for most of the changes in shareholders' equity.

  26. Transactions Affecting Shareholders' Equity • Sale of stock to investors • Recognition of net income or loss • Declaration of cash dividends to shareholders

  27. Sale of Stock to Investors • If a corporation sells 100,000 shares of its $1.00 par value common stock for $5.00 per share, then cash and shareholders' equity both increase by $500,000.

  28. Sale of Stock to Investors • There is a further subdivision within shareholders' equity.

  29. Sale of Stock to Investors • Par value increases by $100,000 while the remaining $400,000 increases capital in excess of par value.

  30. Sale of Stock to Investors

  31. Sale of Stock to Investors • The corporation may issue stock for noncash assets, too, such as land or equipment.

  32. Recognition of Periodic Net Income or Loss • Net income (loss) represents an increase (decrease) in a firm's shareholders' equity due to its revenues, expenses, gains, and losses during the accounting period.

  33. Recognition of Periodic Net Income or Loss • Firms prepare statements of retained earnings which are reconciliations of the beginning and ending balance in the retained earnings account.

  34. Recognition of Periodic Net Income or Loss • The ending balance reflects the net income earned by the firm less net loss incurred and dividends paid over the entire life of the firm.

  35. Declaration and Payment of Cash Dividends • There are three dates which are important in the declaration and distribution of cash dividends.

  36. Declaration and Payment of Cash Dividends • On the date of declaration, the dividend becomes a liability.

  37. Declaration and Payment of Cash Dividends • Retained Earnings is decreased and Dividends Payable is increased by the amount of the dividend.

  38. Declaration and Payment of Cash Dividends • Shareholders who own the stock on the date of record are eligible to receive the dividend.

  39. Declaration and Payment of Cash Dividends • Shareholders who purchase the stock after the date of record but before the date of payment buy the stock "ex dividend," which means "without the dividend."

  40. Declaration and Payment of Cash Dividends • Shareholders who purchase the stock after the date of record but before the date of payment buy the stock "ex dividend," which means "without the dividend."

  41. Declaration and Payment of Cash Dividends • On the date of payment, both the liability and cash are reduced by the amount of the dividend.

  42. Date of Declaration of Dividends

  43. Date of Payment of Dividends

  44. Additional Transactions • A variety of less frequent occurrences may affect the amount and composition of shareholders’ equity.

  45. Stock Dividends • Stock dividends are dividends issued to shareholders in the form of shares of stock, not cash.

  46. Stock Dividends • A corporation has outstanding 10 million shares of common stock and decides to issue a 2% stock dividend when the market price of the stock is $45 per share.

  47. Stock Dividends • The firm will issue 200,000 new shares (10 million shares X 2%), and the total value of the dividend is $9 million (200,000 X $45).

  48. Stock Dividends • Retained Earnings will decrease and Invested Capital will increase by $9 million.

  49. Stock Dividends • Invested Capital will be further subdivided into par value and capital in excess of par value.

  50. Stock Dividends • Only the shareholders' equity section of the accounting equation is affected.

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