Stockholders

1
ACG 2021Financial Accounting

• Stockholders Equity

2
Characteristics of a Corporation

• Separate legal entity
• Exists separately from owners
• Can enter in contracts, sue or be sued
• Continuous life
• Change of ownership does not end Corporate life
• Ownership can be transferred
• Limited liability
• Only Corporate debts
• No personal obligation for corporate liabilities

3
Characteristics of a Corporation

• Separation of ownership and management
• Stockholders own the corporation
• Elect Board of Directors
• Sets Policies and appoints officers
• Elect Chairperson (CEO)
• Elect President (COO)
• In charge of day-to-day operations
• Corporate taxation
• Franchise Tax (some states)
• Corporate Taxes on Income
• Double Taxation
• Corporation is Taxed on Earnings
• Individuals are taxed on dividends from earnings
• Government regulation
• Disclosure of Information for Stakeholders
  (Investors, Creditors, Taxing Authorities, etc.)
  to make informed decisions
• Accounting

4
Advantages of a Corporation

1. Can raise more capital than a proprietorship or
   partnership can
2. Continuous life
3. Ease of transferring ownership
4. Limited liability of stockholders

5
Disadvantages of a Corporation

• 1. Separation of ownership
• 2. Corporate taxation
• 3. Government regulation

6
Authority Structure of a Corporation
7
Stockholders Rights
8
Stockholders Rights

• Unless Withheld by Agreement
• Voting
• One Vote for each share owned
• Dividends
• Right to Receive proportionate share
• Liquidation
• Right to Receive proportionate share of Net
  Assets
• Preemption
• Right to Maintain ones proportionate ownership
• Usually withheld from stockholders

9
ACG 2021Financial Accounting

• Stockholders Equity Section of the Balance Sheet

10
Stockholders Equity

• Two main components
• Paid-in capital (contributed capital)
• Amount contributed by stockholders
• Stock (At Par)
• Additional Paid in Capital
• Retained earnings
• Equity Earned but not paid in Dividends

11
What is Par Value

• The par value of a stock was the share price upon
  initial offering the issuing company promised
  not to issue further shares below par value, so
  investors could be confident that no one else was
  receiving a more favorable issue price. This was
  far more important in unregulated equity markets
  than in the regulated markets that exist today.
• Quoted from Wikipedia at http//en.wikipedia.org/w
  iki/Par_value

• Most common stocks issued today do not have par
  values those that do (usually only in
  jurisdictions where par values are required by
  law) have extremely low par values, for example a
  penny par value on a stock issue at USD25/share.

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Capital Stock

• Authorized shares
• Total of Shares available for sale
• Outstanding shares
• Total of Shares actually sold
• Represents 100 ownership
• Often Less than shares authorized

13
Types of Capital Stock

• Common Stock
• Residual Equity Holder
• Paid Dividends after Preferred Stockholders
• After Creditors Preferred Stockholders are
  satisfied, Common stockholder receives
  liquidation
• Dividends are not subject to Limit
• Voting Rights (controls the corporation)

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Types of Capital Stock

• Preferred Stock
• Rights and Privileges
• Current Dividend Preference
• May be in Arrears
• Though in Arrears is not a liability
• Dividends are still discretionary

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Dividend Example
Assumptions Preferred Stock is 6, 100 par
value, two years in arrears, 1000 Shares
outstanding common stock is 10 par, 1000 shares
outstanding
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ACG 2021Financial Accounting

• Accounting for Issuance of Common Stock and
  Re-purchase of Treasury Stock

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Common Stock at Par

• Suppose IHOPs common stock has a par value of
  10 per share. The company issues 6,200 shares of
  common stock at par. What is the entry?

Jan 8 Cash (6,200 x 10) 62,000 Common
Stock 62,000 To record issuance of stock
18
Common Stock above Par

• Suppose IHOPs common stock has a par value of
  0.01 per share. The company issues 6,200 shares
  of common stock for 10 per share. What is the
  entry?

Jul 23 Cash (6,200 x 10) 62,000 Common
Stock 62 Paid-in Capital in Excess of
Par 61,938 To record issuance of stock
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Balance SheetCommon Stock Above Par
Stockholders Equity
Common Stock, .01 par 40,000 shares
authorized, 6,200 shares issued
62 Paid-in capital n excess of par
61,938 Total paid-in capital 62,000 Retained
earnings 194,000 Total stockholders
equity 256,000
20
Common Stock at Par

• Suppose IHOPs common stock is no par value
  stock. The company issues 6,200 shares of common
  stock for 20 per share. What is the entry?

Jul 23 Cash (6,200 x 20) 124,000 Common
Stock 124,000 To record issuance of stock
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Preferred Stock

• Accounting for preferred stock follows the
  pattern illustrated for common stock.

22
Treasury Stock Transactions

• Shares that a company has issued and later
  reacquired.
• Shares needed for Employee Stock Plan
  Distribution
• Increase net assets
• Buy Low, Sell High
• Avoidance of a takeover
• Contra Stockholder Equity

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IHOP Corp. Before Purchaseof Treasury Stock
24
IHOP Corp. Purchaseof Treasury Stock

• During 2005, IHOP paid 5,170 to purchase 288
  shares of its common stock as treasury stock.

Nov 1 Treasury Stock 5,170
Cash 5,170 Purchased treasury stock
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IHOP Corp. After Purchaseof Treasury Stock
26
Sale of Treasury Stock

• Assume that on July 22, 2006, the shares of
  treasury stock are sold for 5,300.

Jul 22 Cash 5,300 Treasury Stock 5,170 Paid-i
n Capital from Treasury Stock
Transactions 130 Sold treasury stock

• (Loss would require debit of retained earnings)

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IHOP Corp. After Sale of Treasury Stock
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Retirement of Stock

• Decreases the outstanding stock of the
  corporation
• Retired shares cannot be reissued
• There is no gain or loss on retirement

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Equity Transactions on the Cash Flow Statement
During 2003, IHOP issued stock, repurchased
stock, but paid no dividends.
Cash flows from financing activities
Proceeds from issuance of common
stock 172,000 Purchase of treasury stock
(5,170,000) Net cash used by financing
activities (4,998,000)
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ACG 2021Financial Accounting

• Retained Earnings and Dividends

31
Retained Earnings

• Is Not Cash
• Is Not a Reserve held for Dividends
• Is the account used to Record
• Cash Dividends
• Stock Dividends
• Is Profits Reinvested into Corporation
• Credit Balance Earnings gt Losses Dividends
• Debit Balance (Deficit) Earnings lt Losses
  Dividends

32
Dividends and Splits

• Dividend - corporations return to its
  stockholders of some of the benefits of earnings
• Cash or Stock
• Stock split - increase in the number of
  authorized, issued, and outstanding shares

33
Dividend Dates

• Declaration date
• BOD announces dividend
• Date of record
• Stockholders who own stock by this date will
  receive dividend
• Payment date
• When dividend is paid

34
Preferred Stock Dividends

• The preferred stock of Pinecraft is cumulative.
  Suppose the company passed the 20x6 preferred
  dividend of 150,000. In 20x7, the company
  declares a 500,000 dividend.

Retained Earnings 500,000 Dividends
Payable-Preferred 300,000 Dividends
Payable-Common 200,000 Declared a cash
dividend 150,000 x 2 years
35
Stock Dividend

• IHOP declared a 10 stock dividend in 2006.
  Assume IHOP had 20,000,000 shares of common stock
  outstanding. The stock is trading for 15 per
  share. How would this stock dividend be recorded?

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Stock Dividend
Retained Earnings (20,000,000 X 10 X
15) 30,000 Common Stock (20,000,000 X 10
X 0.01) 20 Paid-in Capital in Excess of
Par Common 29,980 Distributed a 10 stock
dividend
37
Stock Splits

• Corporations like stock prices within a specific
  trading range
• Higher prices might discourage small investors
• The more widely held a stock (small and large
  investors) the less volatile the market pricing
  may be
• Thus, stock splits are used to reduce the market
  price by
• Increasing the number of authorized, issued, and
  outstanding shares of stock
• Proportionate reduction in stocks par value
• Decreasing market price

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Stock Split Example
39
ACG 2021Financial Accounting

• Stock Valuations

40
Stock Values

• Market value
• Market Price
• Redemption value
• Set price for Preferred stock
• Not Equity but a liability
• Liquidation value
• Amount paid to Preferred stockholders in case the
  company liquidates
• Book value
• Amount of Stockholders Equity per outstanding
  share

41
Book Value Per Share

• Preferred stock
• (Redemption value Dividends in arrears)
  Number of shares of preferred outstanding
• Common stock
• (Total stockholders equity Preferred equity)
  Number of shares of common stock outstanding

42
Book Value
43
Book Value Common Stock

• Suppose that four years (including the current
  year) cumulative preferred dividends are in
  arrears and that preferred stock has a redemption
  value of 130 per share.

44
Book Value Preferred Stock
Preferred equity Redemption value (400 shares
130)
52,000 Cumulative dividends (40,000 0.06 4
yrs) 9,600 Preferred equity

61,600
61,600 / 400 154.00
45
Book Value Common Stock
Preferred equity Redemption value (400 shares
130) 52,000 Cumulative dividends (40,000
0.06 4 yrs) 9,600 Preferred equity
61,600
Common equity Total stockholders
equity 241,000 Less preferred equity
61,600 Common equity 179,400 Book value per
share 179,400 5,000 shares
35.88 5,500 shares issued minus 500 treasury
shares
46
ACG 2021Financial Accounting

• Ratios Return on Assets and Return on Equity

47
Ratio Definitions

• Return on Assets
• Measure of a companys ability to generate
  profits from the use of its assets
• (Net income Interest expense) Average total
  assets
• Return on Equity
• Measure of income earned from common
  stockholders investment in the company
• (Net income Preferred dividends) Average
  common stockholders equity

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• End of Chapter 9