Accounting for Managers - Ch. 8 PP

Large stock divdend

a stock dividend comprised of more than 25 percent of the outstanding shares, is recorded at par or stated value of the stock.

unissued shares of common stock

have never been issued.

FASB defined the term comprehensive income (loss) as....

including all non-shareholder changes in equity.

Reverse Stock Split

is unusual but may occur when the market price of a firm's common stock has settled at a lower level than management thinks appropriate. - No accounting entries are required for this event. - The use of these is extremely uncommon in practice, although this method of price adjustment has been used in the technology, insurance, and banking sectors from time to time. - sometimes called a share consolidation

Paid-In Capital

represents the difference between the par (or stated) value of common stock issued and the total amount paid in to the corporation when the stock was issued. - If the no-par-value common stock has no stated value, the total amount paid in to the corporation when the stock was issued is reported as the dollar amount of the common stock.

Additional Paid-In Capital

represents the excess of the amount received from the sale of preferred or common stock over the par (or stated) value.

Issued Shares of common stock

shares that have been acquired by stockholders. - include outstanding and treasury shares.

Common Stock

stock represents the basic ownership of the corporation. - Common stock may have a par value or may have no par value. - The principal right and obligation of the common stockholders is to elect the board of directors of the corporation. ---> Voting for directors can be on either a cumulative basis or a slate basis.

Not-for-Profit and Governmental Organizations

Owners' equity in not-for-profit and governmental organizations are referred to as fund balances. - Because individual resource providers do not have specific claims against an organization's assets, capital accounts are inappropriate and net income is not reported for most funds. - There is usually an operating (or current) fund, and there are frequently several restricted funds for enhancing accountability for certain assets. ---> The statement of owners' equity is called the statement of changes in fund balances, which summarizes the activities of each fund. ---> Changes during the year include the excess (or deficiency) of operating revenues over (under) operating expenditures; increases from contributions, grants, or other support; decreases from nonoperating transactions; and transfers to and from other funds.

Stockholders' Equity

comprised of paid-in capital and retained earnings less treasury stock. - Paid-in capital includes preferred and common stock, at par or stated value, and additional paid-in capital.

small stock dividend

consists of less than 25 percent of the outstanding shares and is recorded at current market value.

Stock split

involves issuing additional shares to existing stockholders, and, if the stock has a par value, the par value is typically reduced proportionately.

Noncontrolling Interest

is also known as minority interest. - It is the portion of equity in a subsidiary not attributable to the parent company. - The balance sheet model can be expanded as follows: ---> ASSETS = LIABILITIES + (STOCKHOLDERS' EQUITY + NONSTOCKHOLDERS' EQUITY) - shown as the very end of the equity section of the balance sheet.

Stock Dividends

the issuance of additional shares of common stock to the existing stockholders in proportion to the number of shares each currently owns. - There is no change in the par value of the stock or in the total stockholders' equity. - Stockholders retain the same percentage of ownership in the company (preemptive right - that the stock dividend affects only the stockholders' equity of the firm. - Capitalizing retained earnings is the term sometimes used to refer to the effect of a stock dividend transaction because the dividend permanently transfers some retained earnings to paid-in capital. ---> The income statement is not affected because the transaction is between the corporation and its stockholders (who own the corporation); no gain or loss can result from a capital transaction. ---> If the stock dividend percentage is more than 20 to 25 percent, only the par value or stated value of the additional common shares issued is transferred from retained earnings to common stock.

Reasons for stock dividends:

- helps companies preserve cash - decreases the market value per share - reduces retained earnings

Preferred Stock and Bonds Payable Differences

- preferred stock dividends may be skipped from time to time, even though they usually must be caught up before dividends can be paid on the common stock, but bond interest must be paid or the firm could face legal bankruptcy. - Preferred stock has no maturity date, but a bond's principal must be paid at maturity. - preferred stock dividends are not an expense and are not tax deductible; whereas, interest on bonds payable is a tax-deductible expense.

2 kinds of stock dividends:

- small stock dividend - large stock dividend

Preferred Stock and Bonds Payable Similarities

- that both provide fixed claims to income; preferred stock offers a dividend and bonds payable require an interest payment to the bondholders. - preferred stock's redemption value and a bond's maturity value are fixed claims to income upon disposal. - Preferred stock and bonds are both usually callable and may be convertible to common stock.

A new category of stockholders' equity, referred to as accumulated other comprehensive income (loss), was established to include the following items, each reported net of related income taxes:

1. Cumulative foreign currency translation adjustments 2. Unrealized gains or losses on available-for-sale investments 3. Changes during the period in certain pension or other post retirement benefit items 4. Gains or losses on certain derivative instruments

Retained Earnings

represent the cumulative earnings of a corporation less the cumulative dividends paid since the business started operations. - Retained earnings are not cash.

outstanding shares of common stock

the shares owned by stockholders

Authorized shares of common stock

the total number of shares of stock a company has been authorized to issue. - include issued, outstanding, unissued, and treasury shares.

Cash Dividends

A company is not legally required to pay dividends, but once declared, a legal liability is created. - must be declared by the board of directors before they can be legally paid. - The company must have sufficient cash and retained earnings to pay the dividend. - Note that dividends are not an expense and do not appear on the income statement. - Dividends are a distribution of the earnings of the corporation to its stockholders and are treated as a direct reduction of retained earnings. - If a balance sheet is dated between the date the dividend is declared and the date it is paid, the Dividends Payable account will be included in the current liability section of the balance sheet.

Proprietorships and Partnerships

Sole proprietorships (single owner) and partnerships (two or more owners) do not issue stock. - Capital accounts record investments by owners, and drawing accounts record distributions to owners (similar to dividends). - Net income and drawing accounts are transferred to capital accounts at the end of the period. - The statement of changes in owners' equity for the year reports the beginning capital balance, additional capital investments, net income or loss for the year, and capital withdrawals (drawings) to arrive at the ending capital balance.

treasury shares of common stock

issued shares that have been reacquired by the company. - Any class of stock that is outstanding can be acquired as treasury stock. - Sometimes acquired as a defensive move to thwart a takeover by another company, and frequently, treasury shares are purchased with excess cash because the market price is low and the company wants to shrink the supply of its own stock in the market. ---> Whatever the motivation, the purchase of treasury stock is in effect a partial liquidation of the firm because the firm's assets are used to reduce the number of shares of stock outstanding. ---> For this reason, treasury stock is not reflected in the balance sheet as an asset; it is instead reported as a contra stockholders' equity account. - Cash dividends are not paid on treasury stock. ---> However, stock dividends are issued on treasury stock, and stock splits also affect treasury stock.

Preferred Stock

normally has no voting rights but receive priority over common stock on dividend payment. - has a par or stated value with the dividend expressed as a percent of par. - Callable stock is redeemable, and convertible stock can be exchanged for common shares. - Preferred stock issues a cumulative dividend, which means that if any dividend payments are not made to preferred stockholders, then the dividends in arrears must be paid subsequently before paying the common stockholders. - Preferred stock issues have participating dividends, which means that after the common stockholders have received a specified dividend, any further dividends are shared by the preferred and common stockholders in a specified ratio. - If dividends are not paid on noncumulative stock, the company is not required to make up the missed dividends. - A preferred stock issue's claim on the assets in the event of liquidation (liquidating value) or redemption (redemption value) is an amount specified when the preferred stock is issued. ---> If the preferred stock has a par value, the liquidating value or redemption value usually is equal to the par value or the par value plus a slight premium. ---> If the preferred stock has no par value, the liquidating value or redemption value is a stated amount.