ACC 210 Chapter 10
Features of Preferred Stock
1) Convertible - Shares can be exchanged for common stock 2) Redeemable - Shares can be returned to the corporation at a fixed price 3) Cumulative - Shares receive priority for future dividends, if dividends are not paid in a given year
Stages of Equity Financing
1) Investment by the founders of the business 2) Investment by friends and family of the founders 3) Outside investment by "angel" investors and venture capital firms 4) Initial public offering
Accumulated Deficit
A debit balance in Retained Earnings (when losses exceed income and the retained earnings are not at its normal credit balance). Subtract an accumulated deficit from total paid-in capital in the balance sheet to arrive at total stockholders' equity
S corporation
Allows a company to enjoy limited liability as a corporation and tax treatment as a partnership. Cannot have more than 100 stockholders
Corporation
An entity that is legally separate from its owners and even pays its own income taxes. Formed in accordance with the laws of individual state.
No-par value stock
Common stock that has not been assigned a par value. Most new corporations and even some established corporations issue these.
Total stockholder's equity
Consists of total paid-in capital, retained earnings, and treasury stock. It is increased by paid-in capital and retained earnings and reduced by treasury stock.
Issues no-par value common stock ...
Debit Cash and credit Common Stock
Issues par-value stock...
Debit Cash, credit Common Stock by number of shares times par value AND credit Additional Paid-in Capital by the difference
Privately held corporation
Does not allow investment by the general public and normally has fewer stockholders than a public corporation. Do not need to file financial statements with the SEC.
Disadvantages of a corporation
Double taxation and more paperwork
Seasoned Equity Offerings (SEOs)
Future stocks issued by the company
Recording treasury stock...
Increasing treasury stock is a debit to Treasury Stock and a credit to Cash. Record treasury stock at the cost of the shares reacquired. Reduces stockholder's equity on the balance sheet. When reissuing the treasury stock, we report the difference between its cost and the cash received as an increase or decrease in additional paid-in capital.
Price-earnings ratio (PE ratio)
Indicates how the stock is trading relative to current earnings. Stock price divided by earnings per share
Preferred Stock
Is "preferred" over common stock in two ways: 1)Usually have first rights to a specific amount of dividends - receive designated dividend before common shareholders receive any 2) Preferred stockholders receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved However, most don't have voting rights
Return on the market value of equity...
Is computed as net income divided by the market value of equity
Advantages of a corporation
LImited liability and the ability to raise capital and transfer ownership
Return on Equity (ROE)
Measures the ability of company management to generate earnings from the resources that owners provide. Net income divided by average stockholders' equity.
Earnings per share (EPS)
Measures the net income earned per share of common stock. Net income minus dividends on preferred stock divided by average shares of common stock outstanding. Useful in comparing earnings performance for the same company over time.
Stockholder Rights
Owners of the corporation and have certain rights: the right to vote (including electing the board of directors), the right to receive dividends, and the right to share in the distribution of assets if the company is dissolved.
Venture Capital Firms
Provide additional financing, often in the millions, for a percentage of ownership in the company.
Small Stock Dividends
Recorded at market value, not par value per share
SE Section on Balance Sheet vs. Statement of SE
SE section on balance sheet presents the balance of each equity account at a point in time while the statement of stockholders' equity shows the change in equity account balance over time.
Value Stocks
Stocks that are priced low in relation to current earnings
Growth Stocks
Stocks whose future earnings investors expect to be higher.
Invested Capital
The amount of money paid into a company by its owners.
Paid-in capital
The amount stockholders have invested in the company
Treasury Stock
The corporation's own stock that it has reacquired
Declaring/Paying Cash Dividends....
The declaration of cash dividends decreases Retained Earnings and increases Dividends Payable. The payment of cash dividends decreases Dividends Payable and decreases Cash. The net effect, then, is a reduction in both Retained Earnings and Cash.
Retained Earnings
The earnings NOT paid out in dividends
Initial Public Offerings (IPOs)
The first time a corporation issues stock to the public
Par Value
The legal capital per share of stock that's assigned when the corporation is first established. Today it has no relationship to the market value of the common stock.
Issued Stock
The number of shares that have been sold to investors. A company usually does not issue all its authorized stock.
Articles of incorporation
The state incorporation laws guide corporations as they write these. (Sometimes called corporate charter). Describe a) the nature of the firm's business activities b) the shares of stock to be issued c) the initial board of directors - establishes corporate policies and appoints officers who manage the corporation
Publicly held corporation
The stock that trades on NYSE or NASDAQ, or by the OTC trading. Regulated by SEC
Why corporations repurchase their stock:
To boost underpriced stock, to distribute surplus cash without paying dividends, to boost earnings per share, to satisfy employee stock ownership plans
Stock Dividend/Stock Split
Total assets, total liabilities, and total stockholders' equity do not change as a result of a stock dividend. Doing this lowers the trading price of the stock to a more acceptable trading range, making it attractive to a larger number of potential investors. Like cutting a pizza into more slices, everyone has more shares, but each share is worth proportionately less than before.
Organization chart
Traces line of authority for a typical corporation. Stockholders to Board of Directors to CEO to all the VPs.
Stated Value
Treated and recorded in the same manner as par value shares
Dividends in arrears
Unpaid dividends
Angel Investors
Wealthy individuals in the business community (like the people on Shark Tank!) willing to risk investment funds on a promising business venture
Property Dividend
When a noncash asset is distributed to stockholders. Most often these are securities held as investments
Allocating Dividends Between Preferred and Common Stock
pg. 467
Treasury Stock
repurchased shares that are included as part of shares issued, but excluded from shares outstanding
Outstanding Stock
the number of shares held by investors. Issued and outstanding shares are the same as long as the corporation has not repurchased any of its own shares.
Authorized Stock
the total number of shares available to sell, stated in the company's articles of incorporation. Not recorded in the accounting records, but the corporation is required to disclose in the financial statements the number of shares authorized.