ACCT 312 Chapter 16

Practical limitation on cash dividends

Cash dividends are also limited by the amount of cash that a corporation can actually afford to spend when the cash is paid out.

EPS disclosures when there have been discontinued operations and/or extraordinary items during the year.

GAAP requires the disclosure of EPS before these irregular items, on the irregular items, and after irregular items

Legal limitation on dividends

In most states the amount of declared dividends may not exceed the positive (credit) balance in the retained earnings account less any debit balance in the treasury stock account.

Potential Common Stock- Does not Exist

It is called a simple capital structure because there are not potentially dilutive securities. Only one EPS disclosure is required under GAAP called earnings per share and uses: Net income available to common stock/ Weighted average number of common shares.

Potential common stock- Does Exist

It is called complex capital structure because there are potentially dilutive securities. Then Two EPS disclusoures are required under GAAP as follows: Basic EPS= Net income available to common stock/weighted average number of common shares Diluted EPS= (Net income available to C.S.) + (interest saved, net of tax, on converted securities)/ (Weighted average number of C. Shares) + (Common stock equivalents)

Contractual restrictions on dividends

Long-term bond contractual covenants may protect bondholders by limiting the amount of dividends a company can pay until the bonds have been repaid.

Dividends

Require formal approval by a simple majority of the board of directors during a regular board of directors meeting before they can be paid. Dividend decisions are recorded in the board of directors meeting minutes as a matter of state of law.

Earnings per share

Required to be calculated and disclosed on the face of the income statement (rounded to the nearest whole penny) Net income/Number of shares of common stock

Potential common stock

Some securities obligations of a company result in the creation of more common stock in the future. If this happens, the number of shares of common stock in the denominator would increase. In these situations, GAAP requires a second (worst case) calculations of EPS be calculated called "diluted EPS". This calculation assumes all securities presently existing that could be turned into common stock are in fact turned into common stock on the first day possible.

Weighted average number of shares

The denominator (number of shares of common stock) sometimes changes over the course of the year when common stock has been issued or retired during the year. In these cases, it must be computed for denominator.

Preferred stock dividends

The numerator in EPS (net income) is more precisely net income available to common stock according the GAAP. This means it (if any any have been paid) must be subtracted from net income for the numerator.

Date of record- Dividends

This is the date (and time of day) on which the set of shareholders is determined who will receive the dividend. You must own the stock on the date of record to receive the dividend.

Date of declaration- Dividends

This is the date on which the board of directors votes to have a dividend

Date of payment- Dividends

This is the date the dividend checks are written and mailed out.

Retained Earnings

-A sub-part of total stockholders' equity on the balance sheet and referred to as "earned capital" -The dollar amount in the retained earnings account represents the sum of all net incomes a company has earned since incorporation less the dollar amount of all dividends paid out since incorporation (and also adjusted for a few other minor items) -If the retained earnings account has a debit balance (negative balance) it is called Retained earnings (deficit) on the balance sheet. This occurs if the company has had net losses in its early years of operation rather than net incomes.