Shareholder's Equity

outstanding (R)

# outshanding shares = # of shares issued - # of shares repurchased as treasury stock

total stock holders equity

$ from common stock+ $ from preferred stock+ APIC (from both preferred and common stock) - $ in treasury stock + retained earnings

why do companies repurchase shares?

- managers believe the stock is undervalued - as and alternative to dividends (tax reasons) - to increase ownership % for remaining shareholders - to meet option requirements (shares will be reissued wen options are excersized) - to increase EPS

why do firms issue stock dividends

-apprence that the company is giving something of value to shareholders -sometimes used by rapidly growing companies that want to retain their assets to finance growth (no cash is needed)

stock dividend impact on BS

-doesn't create a liability or reduce assets so total stockholders equity does not change! -a portion of retained earnings is reclassified as contributed capital

2 types of dividends

1. cash dividends (always assume dividends have been or will be paid in cash unless stated otherwise) 2. stock dividends (the company's own captial stock)

4 sections of shareholder equity

1. contributed capital 2. retained earnings 3. treasury stock 4. comprehensive income

2 sources of financing for firms assets

1. creditors ( debt financing, and accounts payable) 2. owners (equity financing)

requirements for cash dividends to be declared and paid

1. sufficient retained earnings is needed: state laws often limit cash dividends to the amount of retained earnings - any amount of treasury stock 2. sufficient cash is needed

contributed capital

2 parts: common stock preferred stock

issuing common stock with Par Value (R)

20k shares of common stock are authorized on december 15th. december 20th, company issues 5k of shares for $10 each, with each share having a $1 par value. no entry for authorization entry for issuance: Dr. Cash 50k Cr. Common stock at par (SE) 5k Cr. additionsal paid in capital (SE) 45k disclosure in BS: Common stock, $1.00 par value; Authorized — 20,000 shares; Issued and Outstanding — 5,000

statement of shareholders equity

<>beginning equity account balances <>shareholders equity account changes <>ending equity account balances ending balances will match the amounts shown on the balance sheet

treasury stock

a companys own stock shares that it has issued and then repurchased and holds for later use

stock dividends

a distribution of additional shares of a corporations own capital stock on a pro rata basis to its stock holders at no cost -percentage of additional shares issued are distributed equally to shareholders based on the original amount of stock they posses NO real value is paid to share holders!

issuing common stock without par value (R)

at time of issuance: Dr. cash Cr. Common stock disclosure in BS: Common stock, Authorized — 20,000 shares; Issued and Outstanding — 5,000

authorized

comes from the share holders. the amount of stocks that can be issued as stated in the corporations articles of incorperation

common stock

common stock- basic residual ownership share in the corporation -holders have the right to any residual value in the firm after the stated obligations are met and can vote on cetain corporate issues -common stock typically has a par value which is a stated value on the face of the security -some companies have shares of common stock that have no par value

stock splits

companies will occasionally split there shares -number of shares, the par value and price per share will all change in proportion to the split ratio! NO real value is paid to share holders since companies assets and liabilities are unchanged, investors ownership % is unchanged, and no cash is paid!

RE=

cumulative earnings- cumulative dividends cumulative--> the entire life of the company

cash dividends (R)

declaration date: dr. dividends (SE) cr. dividends payable (L) record date: no journal entry! payment date: dr. dividends payable (L) cr. cash (A) dividends payable = dividend amount x # of shares outstanding

impact of capital stock transaction on Cash Flows- FInancing: payment of cash dividends

decrease CFF

impact of capital stock transaction on Cash Flows- FInancing: purchase of treasury stock

decrease CFF

treasury stock resale (R)

dr. cash (A) cr. treasury stock (XSE) cr. additioal pain in capital (SE) money made off of resale or lossed off of resale of treasury stock is NEVER recorded as a loss or a gain

dividends

firms are under no obligation to pay dividends. dividends become legal obligations ONLY after the board of directors "declares" a dividend

preferred stock

have diffrent rights and or prefrences than common stock, including: 1.Bankruptcy: preference to common stock in bankruptcy 2.Dividends: a pre-specified dividend stated when shares are issued. Rights to annual dividends are typically first to preferred stock then to common stock 3. Convertible: can be converted in common shares at prespecified rate 4. Callable: can be retired by management at pre-specified price 5. Redeemable: can be retired by holder at pre-specified price however, they usually do not have shareholder voting rights

impact of capital stock transaction on Cash Flows- FInancing: issuance of captial (Common) stock

increase CFF

impact of capital stock transaction on Cash Flows- FInancing: re-sale of treasury stock

increase CFF

additional paid-in-capital (APIC)

is the capital amount in excess of par value

issued

number of shares actually SOLD to shareholders. there are often shares authorized to be issued but not issued yet.

stockholders equity

owners equity of the corporation. assets-liabilities= stockholders equity

treasury stock (R)

reduce cash and reduce shareholder equity Dr. Treasury stock (XSE)- recorded at market price per share not at par value! Cr. cash (A) treasury stock is NOT an asset, it is a CONTRA-EQUITY account!!

share holders equity

shareholders equity is a residual interest equity represents the shareholders claim on the assets after the claims of the more senior, higher-priority creditors are met

retained earnings

the cumulative owners' equity generated by income or profits not payed to shareholders as dividends

why do companies split there shares?

the eastman's board split there stock because it reduced the companies price per share into the trading range of peer companies and in line with most S&P 500 stocks

Par value

the nominal (legal) capital amount to be maintained by the corporation (not available for withdrawal by the owners before bankruptcy). - Par value has little-to-no relation to market value.

Take aways

• Equity is a residual claim on the firm's assets - after all liabilities have been satisfied. • Contributed Capital is made up of common stock and preferred stock. • Managers sometimes repurchase shares. This is called treasury stock. • Earnings per share is an important metric for common shareholders. Need to dilute EPS for possible common stock conversions and option exercises.

Changes to Equity from Shareholder-Related Transactions

• Sales or grants of stock or stock derivatives (e.g., employee stock options) • Cash dividend and corporate dividend policy • Stock repurchase programs and treasury stock transactions • Stock dividends and stock splits • Shareholders' equity changes are described in the Statement of Shareholders' equity