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Contributed Capital. Why are we studying Stockholders’ Equity Owners Investments Residual Equity Required Reconciliation Statement Expanded to included Non-Equity Transactions Increase/Decrease in security values Foreign currency gains and losses. Equity_Book v Market Value

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Presentation Transcript

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  • Why are we studying Stockholders’ Equity

    • Owners Investments

    • Residual Equity

    • Required Reconciliation Statement

    • Expanded to included Non-Equity Transactions

      • Increase/Decrease in security values

      • Foreign currency gains and losses


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  • Equity_Book v Market Value

    • BV determined by accounting rules

    • Market value determined by investors perception of growth, dividend or other potential market opportunities

      • Competitors products

      • Net income

      • Cash flows

      • Regulatory climate


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Characteristic of Corporate Form

  • Forms of Business Operations

    • Proprietorship

    • Partnership

    • Corporations


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Types of Corporations

  • Private

    • Open

    • Closed

  • Public

  • Domestic

  • Foreign


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  • Charted in one State

    • Domestic v Foreign Corporation

    • NYSE over 2/3 Delaware Corporations

    • Board fiduciary responsibility to shareholders

    • Officers are Agents of Corporation


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  • Ownership represented by Shares

    • Right to share proportionally in

      • Profit and loss

      • Management –election of directors

      • Assets upon liquidation

      • New issue proportionally—(preemptive right)


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Components of Shareholders Equity

  • Capital Stock

  • Additional Paid in Capital

  • Other changes in Assets Accounts

    • Comprehensive Income


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Procedure for Issuing Stock

  • Issue for Cash

    • At par, above par, below par

    • No par, stated value

  • Issue Common stock in combination with preferred stock or bond.

  • Issue stock for non cash transaction

    • Services, equipment


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Basic Terminology

  • Authorized Capital Stock

  • Issued capital Stock

  • Outstanding capital Stock

  • Treasury Stock

  • Subscribed capital Stock


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Terminology

  • Legal capital

  • Par value Stock

  • No Par Stock

  • Stated value





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Package-Unit – Lump Sale

  • Issue stock Lump Sum Sale

    • Proportional method >

      • Market value of each security is known

    • Incremental Method >

      • Market value of one or more securities is unknown


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Allocation of Package proceeds

  • Allocation to Common:

    • (FMV common/(FMV common+FMV Other))*Proceeds

    • (FMV Other /(FMV common+FMV Other))*Proceeds

    • Other = Preferred Stock or Bond

    • Proceeds = amount realized from sales of all packages

    • E16-2 Common and Preferred

    • E16-3 Common and a Bond


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Non-Monetary Exchange E16-4

  • Stock issued for non-cash transaction

  • Use fair value more readily determinable

    • Is stock widely traded

    • Is the appraisal independent

  • Acquire a patent>


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  • Cost of Issuing Stock

    • Debit additional paid in capital

    • Reduction of proceeds

  • Note Receivable arising from sale of stock should be classified as contra-equity account

    • You can not have a receivable from yourself. Enron inflated assets and equity to create watered down stock


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Stock Split E16-6

  • Proportional

    • Multiply split time # of shares outstanding

    • Divide split amount by par value

    • Memo entry

  • Nonproportional

    • Journal entry is required


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Nonproportional stock Split

  • Debit Common stock for pre-split shares times pre-split par value

  • Credit common stock for pre-split shares, times split, times new par value assigned

  • Debit or credit additional PIC for balance


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