Busi 407 Chapter 10
dividends in arrears
If the specified dividend is not paid in a given year, unpaid dividends (called dividends in arrears) accumulate, and the firm must pay them in a later year before paying
the Stock Dividends account
Similar to cash dividends, the Stock Dividends account is a temporary stockholders' equity account that is closed into Retained Earnings. The debit to Stock Dividends reduces Retained Earnings.
• Repurchased shares, called treasury stock
included as part of shares issued, but excluded from shares outstanding.
o Convertible
o Convertible Shares can be converted into common stock
o Cumulative
o Cumulative Shares receive priority for future dividends, if dividends are not paid in a given year. If the specified dividend is not paid in a given year, unpaid dividends (called dividends in arrears) accumulate, and the firm must pay them in a later year before paying
How do Stock div
After a 2-for-1 stock split, the Common Stock account balance (total par value) represents twice as many shares. • For instance, assume Canadian Falcon declares a 2-for-1 stock split on its 1,000 shares of $0.01 par value common stock. o The balance in the Common Stock account is 1,000 shares times $0.01 par value per share, which equals $10. o With no journal entry, the balance remains $10 despite the number of shares doubling. o As a result, the par value per share is reduced by one-half to $0.005 (2,000 shares times $0.005 par per share still equals $10). • To avoid changing the par value per share, most companies report stock splits in the same way as a large stock dividend.
An S corporation
enjoy the limited liability of a corporation and the tax benefits of a sole proprietorship or partnership? o An S corporation allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership.
retained earnings
o In other words, the balance in retained earnings equals all net income, less all dividends, since the company began operations. o Just as net income increases retained earnings, a net loss decreases retained earnings. A debit balance in Retained Earnings is called an accumulated deficit o We subtract an accumulated deficit from total paid-in capital in the balance sheet to arrive at total stockholders' equity.
o Redeemable
o Redeemable Shares can be returned to (or redeemed by) to the corporation at a fixed price.
• Whether public or private, stockholders are the owners of the corporation and have certain rights:
o the right to vote (including electing the board of directors), o the right to receive dividends, o and the right to share in the distribution of assets if the company is dissolved.
Additional Paid-in Capital
o we credit Additional Paid-in Capital for the portion of the cash proceeds above par value.
Stockholders' equity consists of three primary classifications:
paid-in capital, retained earnings, and treasury stock.
two primary disadvantages
• A corporation has two primary disadvantages relative to sole proprietorships and partnerships: additional taxes and more paperwork.
A corporation offers two primary advantages
• A corporation offers two primary advantages over sole proprietorships and partnerships: limited liability and the ability to raise capital and transfer ownership.
Angel investors
• Angel investors are wealthy individuals in the business community, like those featured in the television show Shark Tank, willing to risk investment funds on a promising business venture.
Common Terms
• Common Terms Additional paid-in capital is simply the amount paid for stock over par value.
• Dividends are distributions by a corporation to its stockholders.
• Dividends are distributions by a corporation to its stockholders. o Investors pay careful attention to cash dividends. o A change in the quarterly or annual cash dividend paid by a company can provide useful information about its future prospects. o For instance, an increase in dividends often is perceived as good news. o Companies tend to increase dividends when the company is doing well and future prospects look bright
Earnings
• Earnings are the key to a company's long-run survival
Earnings per share (EPS)
• Earnings per share (EPS) measures the net income earned per share of common stock. • We calculate earnings per share as net income minus preferred stock dividends divided by the average shares outstanding during the period: • Earnings per share is useful in comparing earnings performance for the same company over time. o If reported earnings per share fall short of analysts' forecasts, this is considered negative news, usually resulting in a decline in a company's stock price.
• For instance, preferred stock might be
• For instance, preferred stock might be convertible, redeemable, and/or cumulative:
• Growth stocks
• Growth stocks are stocks whose future earnings investors expect to be higher. o Their stock prices are high in relation to current earnings because investors expect future earnings to be higher.
• Has it benefited from the treasury stock repurchase?
• Has it benefited from the treasury stock repurchase? o Dividing the treasury stock balance of $965,566 by the 55,050 shares repurchased, we can estimate an average purchase cost of $17.54 per share. o That average purchase price is higher than the trading price of $14.04 per share at January 31, 2015. o Thus, at this point in time, it looks like American Eagle has not benefited from the treasury stock repurchase. o However, if stock prices should again rise above $17.54 per share, the company could sell the treasury shares for more than the average purchase price.
Stated value
• In some cases, a corporation assigns a stated value to the shares. Stated value is treated and recorded in the same manner as par value shares.
Invested capital
• Invested capital is the amount of money paid into a company by its owners.
dividend yield
• Investors are also interested in knowing how much a company pays out in dividends relative to its share price. The dividend yield is computed as dividends per share divided by the stock price.
• Investors in common stock are the owners of the corporation because
• Investors in common stock are the owners of the corporation because they have voting rights. o Investors in bonds are creditors who have loaned money to the corporation. o Preferred stockholders have characteristics of both.
Issued stock
• Issued stock is the number of shares that have been sold to investors.
price-earnings ratio (PE ratio).
• It indicates how the stock is trading relative to current earnings. o Investors willing to pay 12 times the current year's earnings per share of stock • We calculate the PE ratio as the stock price divided by earnings per share, so that both stock price and earnings are expressed on a per share basis: • Price-earnings ratios commonly are in the range of 15 to 20. • A high PE ratio indicates that the market has high hopes for a company's stock and has bid up the price.
what happen with small div
• Note that the above entry still does not change total assets, total liabilities, or total stockholders' equity. o The debit to Stock Dividends simply decreases one equity account, Retained Earnings, while the credits increase two other equity accounts, Common Stock and Additional Paid-in Capital.
value stocks
• On the other hand, value stocks are stocks that are priced low in relation to current earnings. o The low price in relation to earnings may be justified due to poor future prospects, or it might suggest an underpriced stock that could boom in the future.
• Outstanding stock
• Outstanding stock is the number of shares held by investors.
Paid-in capital
• Paid-in capital is the amount stockholders have invested in the company.
• Par value
• Par value is the legal capital per share of stock that's assigned when the corporation is first established.
Preferred stock
• Preferred stock is "preferred" over common stock in two ways: o Right to dividends o Preferred stockholders receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved. o However, unlike common stock, most preferred stock does not have voting rights, leaving control of the company to common stockholders. • We record the issuance of preferred stock similar to the way we did for the issue of common stock.
Retained earnings
• Retained earnings is the amount of earnings the corporation has kept or retained—that is, the earnings not paid out in dividends.
stock dividends or stock splits
• Sometimes corporations distribute to shareholders additional shares of the companies' own stock rather than cash. o These are known as stock dividends or stock splits depending on the size of the stock distribution. o Suppose you own 100 shares of stock. Assuming a 10% stock dividend, you'll get 10 additional shares. A 100% stock dividend, equivalent to a 2-for-1 stock split, means 100 more shares.
declaration of cash dividend
• The declaration of cash dividends decreases Retained Earnings and increases Dividends Payable. o The payment of cash dividends decreases Dividends Payable and decreases Cash. o The net effect, then, is a reduction in both Retained Earnings and Cash.
initial public offering (IPO).
• The first time a corporation issues stock to the public is called an initial public offering (IPO).
The market value of equity
• The market value of equity is the price investors are willing to pay for a company's stock. • The market value of equity equals the stock price times the number of shares outstanding. • On the other hand, the book value of equity equals total stockholders' equity reported in the balance sheet.
The return on equity (ROE)
• The return on equity (ROE) measures the ability of company management to generate earnings from the resources that owners provide. o We compute the ratio by dividing net income by average stockholders' equity.
The stockholders' equity section BS vs statement of stockholders' equity
• The stockholders' equity section of the balance sheet, like the one we just examined for American Eagle, shows the balance in each equity account at a point in time. • In contrast, the statement of stockholders' equity summarizes the changes in the balance in each stockholders' equity account over a period of time.
Treasury stock
• Treasury stock is the corporation's own stock that it has reacquired.
• Treasury stock
• Treasury stock is the name given to a corporation's own stock that it has acquired. • What would motivate a company to buy back its own stock? Companies buy back their own stock for various reasons. • Just as issuing shares increases stockholders' equity, buying back those shares decreases stockholders' equity. • Rather than reducing the stock accounts directly, though, we record treasury stock as a "negative" or "contra" account. o So, treasury stock is included in the stockholders' equity section of the balance sheet with an opposite, or debit, balance. o When a corporation repurchases its own stock, it increases (debits) Treasury Stock, while it decreases (credits) Cash.
Venture capital firms
• Venture capital firms provide additional financing, often in the millions, for a percentage ownership in the company.
common stockholders
• We can think of the common stockholders as the "true owners" of the business. The number of shares of common stock in a corporation are described as being authorized, issued, or outstanding.
small div
• We record small stock dividends at the market value, rather than the par value per share. • Recall that we record large stock dividends at the par value per share.
reissue treasury stock
• When we reissue treasury stock, we report the difference between its cost and the cash received as an increase or decrease in additional paid-in capital.
• retained earnings
• retained earnings represent the earnings retained in the corporation—earnings not paid out as dividends to stockholders.