Accounting Chapter 10

Stock splits/ small stock dividends (record at the market value) Exp: company declares a 10% DVD on its 1,000 shares outstanding of $.01 par value C/S. After the 10% stock DVD, company will have an additional 100 shares outstanding

**Pay 10% (small) stock dividend** D: Stock Dividends $3,000 (1,ooo x 10% x $30) C: Common Stock $1 (1,000 x 10% x $.01) C: Additional Paid-in Capital $2,999 (difference) -everyone has more shares, but each share is worth proportionately less than before

Additional Paid-in Capital

The portion of the cash proceeds above par value

Venture capital firms

provide additional financing, often in the millions, for a percentage ownership in the company

Retained Earnings

represents all net income, less all DVDs, since the company began -normal credit balance, RE does not = cash

Growth stocks

stocks whose future earnings investors expect to be higher -their stock prices are high in relation to current earnings b/c investors expect future earnings to be higher

Statement of stockholders' equity

summarizes the changes in the balance in each stockholders' equity account over a period of time VS. the stockholders' equity section in the balance sheet shows the balance in each equity account at a point in time

Declaration Date

the day on which the board of directors declares the cash DVD to be paid 1) increase DVDs into RE 2) increase DVDs Payable, liability

Initial Public offering (IPO) -Seasoned Equity Offerings (SEOs): future stock issues by the company

the first time a corporation issues stock to the public (normally not until their equity financing needs exceed 20 million)

Stated Value

the legal capital assigned per share to no-par stock -treated & recorded in the same matter as par value shares

Par Value -stated value is treated in the same manner as par value

the legal capital per share of stock that's assigned when the corp is first established -no relationship to the market value of the common stock

Earnings per share (EPS)

(Net income- dividends on preferred stock)/ Average shares of common stock outstanding -measures the net income earned per share of common stock -useful in comparing earnings performance for the same company over time -not useful for comparing 1 company & another b/c of the wide difference in shares outstanding

Corporations: Articles of incorporation ("corporate charter")

-AOI are dictated by state incorporation laws -describes the nature of the firm's business activities, the shares of stock to be issued & the initial board of directors

Stock Dividends Stock Splits

-additional shares of a company's own stock given to stockholders -a large stock DVD that included a reduction in the par or stated value per share -total A, L & SE do not change as a result of stock dividend

Stock splits/ large stock dividends (record at the par value) **record 100% (large) stock dividend** (increases 1 equity account & decreases another)

-do not record a transaction when company declares stock split -Record stock split the same way as a large stock DVD D: Stock DVDs $10 (1,000 shares x .01).. temporary acct. C: Common Stock $10

Limited liability companies (LLCs) & Limited liability partnerships (LLPs)

-offer limited liability & avoid double taxation, but with no limits on the # of owners as in an S corporation

PART A: Invested Capital

-paid-in capital, the amount stockholders invest when they purchase a company's stock -the amount of money paid into a company by its owners

Example -pizza example...changing an 8-sliced pizza into 16 half slices. Not better off

-your shares are trading at $40 a share so your 100 shares are worth $4,000. After a 100% stock dividend, you will have twice as many shares but each share of stock is now worth half of what it was worth ($20 per share instead of $40)

Disadvantages of a Corporation

1) Agency Conflicts 2) Additional Taxes (double taxation on earnings & DVDs) 3) Regulatory Obligations (more paperwork)

Stockholder Rights

1) right to vote 2) right to receive DVDs 3) right to share in the distribution of assets (if the company is dissolved)

Factor (pg 466) 1. Voting rights 2. Risk to the investor 3. Expected return to the investor 4. Preference for DVDs 5. Preference in distribution of assets 6. Tax Deductibility of Payments

1. 2. 3. 4. 5. 6.

Features of Preferred Stock -if noncumulative, any DVDs in arrears are lost -some preferred stock (mandatorily redeemable) is so similar to bonds, it's included w/ bonds payable (liability)

1. Convertible: shares can be exchanged for C/S 2. Redeemable: shares can be returned to the corporation at a fixed price 3. Cumulative: shares receive priority for future DVDs, if DVDs are not paid in a given year (unpaid DVDs= dividends in arrears)

Why corps repurchase their stock:

1. To boost underpriced stock 2. To distribute surplus cash w/o paying DVDs 3. To boost earnings per share 4. To satisfy employee stock ownership plans

Return on equity (ROE)

=Net income/ average stockholders' equity measures the ability of company management to generate earnings from the resources that owners provide

Return on the market value of equity

=Net income/ market value of equity Note:market value of equity= ending stock price x #of shares outstanding

Price-earnings ratio (PE ratio)

=stock price/earnings per share -indicates how the stock is trading relative to current earnings -usually ranges btwn 15 and 20, high= high hopes for company's stock

Record Date -no journal entry

A specified date on which the company will determine the registered owners of stock & therefore, who will receive the dividend

Accounting Chapter 10: Stockholders' Equity

A=L+SE

S Corporation

Allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership -cannot have more then 100 stockholders

Common Stock

Common stockholders= "true owners" of the business -# of shares in a corp are authorized, issued or outstanding

**Reissue Treasury Stock below cost** reissue 100 shares of treasury stock for $25

D: Cash $2,500 (100 shares x $25) D: Additional Paid-in Capital $500 (100 shares x $5) C: Treasury Stock $3,000 (100 shares x $30)

**Reissue Treasury Stock above cost** reissue 100 shares of treasury stock for $35

D: Cash $3,500 (100 shares x $35) C: Additional Paid-in Capital $500 (100 shares x $5) C: Treasury Stock $3,000 (100 shares x $30)

**Issue common stock above par**

D: Cash $30,000 ($1000 shares x $30) C: Common Stock $10 (1,000 shares x $.01) C: Additional Paid-in Capital $29,990 (difference)

**Issue no-par value common stock**

D: Cash $30,000 ($1000 shares x $30) C: Common Stock $30,000

**Issue Preferred Stock** Company issues 1,000 shares of $30 par value preferred stock for $40 per share

D: Cash $40,000 (1000 shares x $40) C: Preferred Stock $30,000 (1000 shares x $30) C: Additional Paid-in Capital $10,000 (difference)

Issue shares of stock in exchange for non cash goods Exp: 1,000 shares of C/S issued to an attorney in payment for $30,000 in legal services

D: Legal Fee Expense $30,000 ($1000 shares x $30) C: Common Stock $10 (1,000 shares x $.01) C: Additional Paid-in Capital $29,990 (difference)

Type of Stock: 1) Authorized Stock 2) Issued Stock 3) Outstanding Stock

Definition: 1) shares available to sell (issued & unissued) 2) shares actually sold (included treasury stock) 3) shares held by investors (excludes treasury stock)

Privately held corporation

Does not allow investment by the general public & is regulated by the Securities & Exchange Commission

**Declare cash Dividends** Company declares a $0.25 per share DVD on its 2,000 outstanding shares-1,000 shares of C/S & 1,000 shares of preferred stock (decreases R/E and increases DVDs) (decreases DVDs Payable & decreases Cash) (Net effect= reduction in R/E & Cash

March 15 (DECLARATION DATE) D: Dividends $500 (2,000 x $0.25) C: Dividends Payable $500 March 31 (date of record, no entry) April 15 (PAYMENT DATE) D: Dividends Payable $500 (2,000 x $0.25) C: Cash $500

Organization chart -Stockholder's control the company

Traces the line of authority w/in the corporation Stockholders-->Board of directors-->CEO-->(VP manage, VP market, CFO, legal counsel, VP HR)

**Treasury Stock** Exp: company repurchase 100 shares of its own $.01 par value common stock at $30 per share -par value has no effect on entry

a corporation's own stock that it has required -decreases stockholders' equity, use contra account (debit) D: Treasury Stock $3,000 (100 shares x $30) C: Cash $3,000

Accumulated deficit

a debit balance in Retained Earnings -subtracted from total paid-in capital in the balance sheet to arrive at total SE

Publicly held corporation

allows investment by the general public & is regulated by the Securities & Exchange Commission -trades on the NYSE or NASDAQ or by over-the-counter (OTC)

No-par stock

common stock that has not been assigned a par value -most states permit corps to issue no-par stock

Dividends -temporary SE account that is closed into RE at the end of each period

distributions by a corporation to its stockholders -Automatic dividend reinvestment: instead of receiving DVDs directly as cash, a person's DVDs are directly reinvested into more shares of the company

Why don't some companies pay DVDs?

growth companies prefer to reinvest earnings in the growth of the company rather than distribute earnings back to investors in the form of cash DVDs -ppl still invest in these companies b/c they make money when a company's stock price increases

Preferred Stock BUT, does not have voting rights like common stockholders

is "preferred" over C/S in 2 ways: 1) have 1st rights to a specified amount of DVDs. If BOD declares DVDs, preferred shareholders will receive the designated DVD before common shareholders receive any 2) Receive preference over common stockholders in the distribution of assets in the even the corp is dissolved

VS Value stocks

stocks that are prices low in relation to current earnings . -low price in relation to earnings may be justified due to poor future prospects, or it might suggest an underpriced "sleeper" stock that could boom in the future

Payment date

the date of the actual cash distribution of dividends

Property Dividend

the distribution of a non cash asset to stockholders

Why declare a stock split?

to lower the trading price of the stock to a more acceptable trading range, making it attractive to a larger number of potential investors -most companies trade their stock under $100 per share

Angel Investors

wealthy individuals in the business community willing to risk investment funds on a promising business venture

Advantages of a Corporation

1) Facilitates external capital raising 2) owners/shareholders have limited liability (can't lose more than the amount they invested in the company) 3) Ownership rights are easily transferred (sell share of stock)

Stockholders' Equity 3 Components Inc. by: paid-in capital & RE Dec. by: treasury stock

1) Paid in Capital: the amount stockholders have invested in the company 2) Retained Earnings: the amount of earnings the corp. has kept or retained (earnings not paid in DVDs) 3) Treasury Stock: the corp's own stock that it has reaquired

Stages of Equity Financing

1) investment by the founders of the business 2) investment by friends & family of the founders 3) Outside investment by "angel" investors & capital firms 4) Initial Public Offering (IPO)

Transaction 1. Issue C/S or preferred stock 2. Declare cash DVDs 3. Pay cash DVDS 4. Purchase treasury stock 5. Reissue treasury stock

1. 2. 3. 4. 5.