Reporting Stockholders Equity

ckChapter 11 report and Analyzing shopholders Equity I. Characteristics of a Corporation (Publicly held (closely held)) * assort legal existence * Limited obligation of gun pedigree upholders limited to investment * Transferable self-control honests * Ability to acquire bully * unceasing life * Corporation management Sh beholders Sh atomic number 18holders * suffrage secures * Profit sharing * Preemptive right * Residual take up circuit card of Directors Board of Directors CEO(PRESIDENT) CEO(PRESIDENT) . other vps . other vps CIO CIO chief financial officer CFO COO COO treasurer Treasurer ControllerController * Goernment regulations file application with render government- corportate charter by-law * redundant taxes. Double taxation II. contrast Issue 1. Basics of subscriber line Issue (1) real have a bun in the oven The maximum amount of post that a commode is authorized to sell by bodied charter. (2) Outstanding transmission line pileus standard that has been issued and is being held by billetholders. Legal enceinte= of issued bundles x equivalence economic entertain per sh atomic number 18 (3) comparability Value Stock Capital stock that has been charge an arbitrary measure per shargon in the bodied charter. 4) No-par honour Stock Capital stock that has not been assigned a re nurse in the corporate charter. (5) Stated Value of No-par grade Stock Value per sh ar assigned by the board of directors to no-par tax stock. Authorized Issued Outstanding (6) Paid-in Capital Amount paying(a)(a) to peck by stockholders for shares of ownership. (7) retained requital Earned capital held for future subroutine in the business. 2. Accounting for vulgar Stock Issues (1) outlet Stock at Par Example 1 On parade 1, 2002, XYZ follow issued 10,000 shares of $10 par value universal stock at par. (2) Issuing Stock above ParExample 2 On June 10, XYZ high society issued 5,000 shares of $10 par value rough-cut stock at $12 per shar e. Cash 60,000(=5,00012) jet Stock50,000 Additional remunerative in capital14,000 (Paid in capital in excess of par) What if the ordinary stock issued on June 10 is no par stock with a stated value of $10? Cash60,000 vernacular Stock50,000 Additional Paid in capital10,000 3. Treasury Stock * A corporations own stock that has been issued, richly compensable for, and reacquired by the corporation further not retired. * Issued but not not bad(p) (1) Corporations acquire treasury stock to offprint shares to employees under bonus and stock salary plans * increase trading of companys stock in securities food market to nurture market value * reduce come up of shares neat , and therefore increase bread per share (EPS) * prevent a uncongenial takeover. (2) Purchasing Treasury Stock * be method Treasury stock is change magnitude by the amount paid to reacquire the shares, and is decreased by the same amount when the shares are later sold. Example 3 On October 15, 2002, XYZ C ompany acquired 2,000 shares of the stock issued on June 10 in Example 2 at $9 per share.On the balance sheet Stockholders uprightness Paid in capital ballpark stock (par) Additional paid in capital Retained meshing little Treasury stock (a contra virtue account) * install of buy treasury stock on common stock * Effect of purchasing treasury stock on stockholders paleness III. like Stock * Preferred stock has contractual mastervisions that give it preferences over common stock in dividends and assets in the event of liquidation. * Preferred stockholders do not have voting rights. Example 4 On November 5, 2002, XYZ Company issued 5,000 shares of $10 par value preferred stock for $13 per share.Cash65,000 Preferred Stock50,000 Additional Paid in capital15,000 1. Dividend Preference * Preferred stockholders have the right to share in the distribution of corporate income in the first place common stockholders * The first claim to dividends does not guarantee dividends * cumul ative Dividends Preferred stockholders receive current and unpaid prior-year dividends before common stockholders receive any dividends. When dividends are cumulative, preferred dividends that were not say in a given period are called dividends in arrears. Example 5XYZ Company issued 10,000 shares of 10%, $5 par value cumulative preferred stock On January 1, 1999. XYZ had not declared any dividends until declination 31, 2002. 1999 10,000x 5 x 10% = 5,000 2000 5,000 2001 5,000 20025,000 fall 31, 02 $20,000 in hard cash * Dividends in arrears are not liability. They should be disclosed in the notes to financial statements. 2. Liquidation Preference- Creditors Prefered stock holders common stock holders IV. Dividends * A distribution by the corporation to the stockholders on a pro rata basis. 1.Cash Dividends (1) To pay a cash dividend, a company must have * well-kept compensation * adequate cash * declared dividends (2) Some Important Dates * Declaration come across the age th e board of directors formally authorizes the cash dividends and announces it to stockholders. Retained earnings Dividends payable * prove date The date ownership of outstanding shares is determined for dividend purposes. * Payment date The date dividends are paid. Dividends payable Cash * Cumulative effect of declaration and compensation of cash dividends on accounting equation 2. Stock Dividends Companies pay stock dividends to * Satisfy stockholders dividend expectations without paying cash * Increase the marketability of its stock * emphasize that a portion of stockholders legality has been permanently reinvested in the business. * Small Stock Dividend If the stock dividend is less than 20%-25% of the corporations issued stock, it is recorded at the fair market value per share. * Large Stock Dividend If the stock dividend is greater than 20%-25% of the corporations issued stock, it is recorded at par or stated value per share. Example 6On February 1, 2003, the balance of XYZ Companys retained earnings was $2,500,000. XYZ Company declared a 15% stock dividend on its 100,000 shares of $10 par value common stock. The current fair market value of XYZ Companys stock is $13 per share. Retained earnings195,000 Stock dividend Distributable150,000 Additional paid in capital45,000 On March 1, 2003, XYZ Company issued the dividend shares. Stock dividend distributable 150,000 Common Stock150,000 Effect of stock dividends on stockholders equity and its components S/E Retained earnings195,000 (Decrease)Common Stock150,000 (Increase) Additonal paid in capital45,000 (Increase) earn EFFECT No change V. Stock Splits * The issuance of additional shares of stock to stockholders attended by * A reduction in the par or stated value * An increase in number of shares. No entry * Effect of stock splits on stockholders equity and its components S/E Common Stock (Par value per share x total of issued shares) Add. Paid in capital Retained internet VI. Retained Earnings * Net income that is retained in the business. Revenues (Credit, tape transport to credit of income)Income Summary(Transfer N. I to retained earnings credit) Retained Earnings Expenses (Transfer debit to debid of income summary) * shortfall a debit balance in retained earnings. Deficit is reported as a deduction in stockholders equity on the balance sheet. * Retained earnings restrictions- Debt covenants VII. Financial Statement Presentation 1. relief Sheet S/E Paid-in-capital Common stock (par value) Preferred stock (par value) Additional paid in capital Retained earnings Less Treasury Stock 2. Statement of Cash Flows Cash Flows from financing ActivitiesIssuance of stock (cash inflows) Repurchase of stock (cash outflows) Dividend compensation (cash outflows) VIII. proportionality Analysis 1. Dividend Record * Payout Ratio Cash dividends declared on common stock/ Net income 2. Earnings carrying into action * Return on common stockholders equity ratio (NI-Prefered stockholders divide nds)/Average common stockholders equity 3. Debt versus Equity Decision adhere Common Stock Owners Control not moved(p) Diluted Tax Benefit Bond interests are tax deductible Dividends are not deductible Financial Ratio(EPS) Not affected Lower Fixed payment Yes No