Week14, Chap11 Accounting 1A, Financial Accounting

Transcription

1 Week14, Chap11 Accounting 1A, Financial Accounting Reporting and Interpreting Owners Equity Instructor: Michael Booth

2 Explain the role of stock in the capital structure of a corporation.

3 Understanding The Business Advantages of a corporation Simple to become an owner Easy to transfer ownership Provides limited liability

4 Understanding The Business Because a corporation is a separate legal entity, it can... Own assets. Incur liabilities. Sue and be sued. Enter into contracts.

5 Ownership of a Corporation Voting (in person or by proxy). Stockholders Rights Proportionate distributions of profits. Proportionate distributions of assets in a liquidation.

6 Ownership of a Corporation Stockholders (Owners of voting shares) Appointed by directors Board of Directors Internal (managers) and External (non-managers) President Elected by shareholders Vice President (Production) Vice President (Marketing) Vice President (Finance) Vice President (Controller)

7 Authorized, Issued, and Outstanding Capital Stock Authorized Shares The maximum number of shares of capital stock that can be sold to the public.

8 Authorized, Issued, and Outstanding Capital Stock Authorized Shares Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold.

9 Authorized, Issued, and Outstanding Capital Stock Authorized Shares Outstanding shares are issued shares that are owned by stockholders. Issued Shares Outstanding Shares Treasury Shares Unissued Shares Treasury shares are issued shares that have been reacquired by the corporation.

10 Analyze the earnings per share ratio.

11 Earnings per share (EPS) EPS = Net Income Average Number of Shares Outstanding Outback s income for 2003 is $170,000,000 and the average number of shares outstanding is 75,260,000. Earnings per share is probably the single most widely watched financial ratio.

12 Earnings per share (EPS) EPS = Net Income Average Number of Shares Outstanding $170,000,000 EPS = = $2.26 per share 75,260,000 Shares Earnings per share is probably the single most widely watched financial ratio.

13 Earnings per share (EPS) Sonic EPS Comparisons Over Time $ 0.78 $ 0.91 $ EPS Comparison With Competitors Jack in the Box Ruby Tuesday Wendy's $ 3.84 $ 1.68 $ 2.07 Earnings per share is probably the single most widely watched financial ratio.

14 Characteristics of common stock and analyze transactions affecting common stock.

15 Types of Capital Stock Common Stock Preferred Stock

16 Common Stock Basic voting stock Ranks after preferred stock Dividend set by board of directors

17 Par Value and No-par Value Stock Par Value Nominal value Legal capital Legal capital is the amount of capital, required by the state, that must remain invested in the business.

18 Par Value and No-par Value Stock Par Value Market Value I get it!

19 Accounting for Capital Stock Two primary sources of stockholders equity Contributed capital Retained earnings Common stock, par value Capital in excess of par value

20 Sale and Issuance of Capital Stock Initial public offering (IPO) Seasoned new issue The first time a corporation sells stock to the public. Outback Outback issues new stock. Subsequent sales of new stock to the public.

21 Secondary Markets Transactions between two investors that do not affect the corporation s accounting records. I d like to sell some of my Outback stock. I d like to buy some of your Outback stock.

22 Sale and Issuance of Capital Stock On July 6, Sonic issued 100,000 shares of $0.01 par value common stock for $20 per share. Date Description Debit Credit July 6 Prepare the journal entry to record this transaction. GENERAL JOURNAL

23 Sale and Issuance of Capital Stock On July 6, Sonic issued 100,000 shares of $0.01 par value common stock for $20 per share. 100,000 shares $0.01 par value = $1, ,000 shares $20 per share = $2,000,000 GENERAL JOURNAL Date Description Debit Credit July 6 Cash 2,000,000 Common Stock 1,000 Capital In Excess of Par Value 1,999,000

24 Stock Options Sonic If Sonic does not have new stock to issue when the stock options are exercised, then.. Employee compensation package includes salary and stock options. Stock options allow employees to purchase stock from the corporation at a fraction of the stock s value in the secondary market. Employee

25 Treasury Stock Sonic Sonic buys its own stock in the secondary market. (Treasury stock) Stockholders Management compensation package includes salary and stock options. Stock options allow management to purchase stock from the corporation at a fraction of the stock s value in the secondary market. Management

26 Treasury Stock No voting or dividend rights Contra equity account When stock is reacquired, the corporation records the treasury stock at cost.

27 Treasury Stock On May 1, Sonic reacquired 100,000 shares of its common stock at $20 per share. The journal entry for May 1 is.... GENERAL JOURNAL Date Description Debit Credit May 1 Treasury Stock 2,000,000 Cash 2,000, ,000 shares $20 = $2,000,000

28 Treasury Stock On December 3, Sonic reissued 10,000 shares of the treasury stock at $30 per share. The journal entry for December 3 is... 10,000 shares $20 cost = $200,000 10,000 shares $30 = $300,000 GENERAL JOURNAL Date Description Debit Credit Dec. 3 Cash 300,000 Treasury Stock 200,000 Capital in Excess of Par Value 100,000

29 Dividends and analyze transactions.

30 Accounting for Cash Dividends Declared by board of directors. Not legally required to declare. Creates liability at declaration. Requires sufficient Retained Earnings and Cash.

31 Dividend Dates Declaration date Board of directors declares the dividend. Record a liability. GENERAL JOURNAL Date Description Debit Credit Retained Earnings XXX Dividends Payable XXX

32 Dividend Dates Date of Record Stockholders holding shares on this date will receive the dividend. (No entry) X

33 Dividend Dates Date of Payment Record the dividend payment to stockholders. GENERAL JOURNAL Date Description Debit Credit Dividends Payable XXX Cash XXX

34 Analyze the dividend yield ratio.

35 Dividend Yield Ratio Dividend Yield = Dividends Per Share Market Price Per Share McDonalds paid a dividend of $2.29 per share in 2009 and the market price was $63.60 per share. This ratio is often used to compare the dividend-paying performance of different investment alternatives.

36 Dividend Yield Ratio Dividend Yield = Dividends Per Share Market Price Per Share Dividend Yield $2.23 = = 3.50% $63.60 This ratio is often used to compare the dividend-paying performance of different investment alternatives.

37 Dividend Yield Ratio 2009 Dividend Yield Comparison With Competitors McDonald's Industry S& P % 0.3% 1.5% This ratio is often used to compare the dividend-paying performance of different investment alternatives.

38 Purpose of stock dividends, stock splits, and report transactions.

39 Accounting for Stock Dividends Distribution of additional shares of stock to stockholders. No change in total stockholders equity. No change in par values. All stockholders retain same percentage ownership.

40 Accounting for Stock Dividends Small Large Stock dividend < 25% Stock dividend > 25% Record at current market value of stock. Record at par value of stock.

41 Stock Splits Stock splits change the par value per share, but the total par value is unchanged. Stock -Split Parlor Banana Splits On Sale Now

42 Stock Splits Assume that a corporation had 3,000 shares of $2 par value common stock outstanding before a 2 for 1 stock split. Before Split After Split Common Stock Shares 3,000? Par Value per Share $ 2.00? Total Par Value $ 6,000?

43 Stock Splits Assume that a corporation had 3,000 shares of $2 par value common stock outstanding before a 2 for 1 stock split. Before Split After Split Common Stock Shares 3,000 6,000 Increase Par Value per Share $ 2.00 $ 1.00 Total Par Value $ 6,000 $ 6,000 Decrease No Change

44 Purpose of preferred stock and analyze transactions affecting preferred stock.

45 Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate

46 Dividends on Preferred Stock Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock. Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

47 Dividends on Preferred Stock If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently.

48 Dividends on Preferred Stock Kites, Inc. has the following stock outstanding: Common stock: $1 par, 100,000 shares Preferred stock: 3%, $100 par, cumulative, 5,000 shares Preferred stock: 6%, $50 par, noncumulative, 3,000 shares Dividends were not paid last year. In the current year, the board of directors declared dividends of $50,000. How much will each class of stock receive?

49 Dividends on Preferred Stock Total dividend declared $ 50,000 Preferred stock (cumulative) Remainder Preferred stock (noncumulative) Remainder Common stock Remainder

50 Dividends on Preferred Stock Total dividend declared $ 50,000 Preferred stock (cumulative) Arrearage ($100 par 3% 5,000 shares) $ 15,000 Current Yr. ($100 par 3% 5,000 shares) 15,000 30,000 Remainder $ 20,000 Preferred stock (noncumulative) Remainder Common stock Remainder

51 Dividends on Preferred Stock Total dividend declared $ 50,000 Preferred stock (cumulative) Arrearage ($100 par 3% 5,000 shares) $ 15,000 Current Yr. ($100 par 3% 5,000 shares) 15,000 30,000 Remainder $ 20,000 Preferred stock (noncumulative) Current Yr. ($50 par 6% 3,000 shares) 9,000 Remainder $ 11,000 Common stock Remainder

52 Dividends on Preferred Stock Total dividend declared $ 50,000 Preferred stock (cumulative) Arrearage ($100 par 3% 5,000 shares) $ 15,000 Current Yr. ($100 par 3% 5,000 shares) 15,000 30,000 Remainder $ 20,000 Preferred stock (noncumulative) Current Yr. ($50 par 6% 3,000 shares) 9,000 Remainder $ 11,000 Common stock Current Yr. ($11,000 Remainder) 11,000 Remainder $ 0

53 Dividends on Preferred Stock On June 1, 2008, a corporation s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry? a. Debit Retained Earnings $20,000. b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000.

54 Dividends on Preferred Stock On June 1, 2000 a corporation s board of directors declared GENERAL a dividend JOURNAL for the 2,500 shares Date Description Debit Credit of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry? July 15 Dividends Payable 20,000 Cash 20,000 $100 8% = $8 dividend per share a. Debit Retained Earnings $20,000. $8 2,500 = $20,000 total dividend b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000.

55 Restrictions on Retained Earnings If I loan you $150,000, I will want you to restrict your retained earnings. Loan agreements place restrictions on how much dividends can be, based on the balance in retained earnings. Restrictions on retained earnings are generally disclosed in the notes to the financial statements. Why would you want to do that?

56 Impact of capital stock transactions on cash flows.

57 Focus on Cash Flows Financing Activity Effect on Cash Flows Issuance of capital stock + Purchase of treasury stock - Sale of treasury stock + Payment of cash dividends - Outback

58 Assignments: See web: http// This will be updated weekly as required Update your weekly journal for the Final Journal Work weekly on your final project, do the analysis with information learned during the week Note: Use McGrawHill HOMEWORK manager to submit assignments