CH. 10 Stockholders' Equity (550-580)

the corporation distributes stock dividends to stockholders in proportion to the number of shares they already own

so all common stockholders' proportionate ownership is unchanged

stated value

some no-par stock has a stated value, which makes it similar to par-value stock; it is also arbitrary

the dividend rate on no-par preferred stock is

stated in a dollar amount per share

limited liability

stockholders have limited liability for the corporation's debts; they have no personal obligation for corporate liabilities, unlike proprietorships/partnerships (who are personally liable for the debts of their business - unless they are LLC or LLP)

separation of ownership AND management

stockholders own the corporation, but the board of directors - elected by the stockholders - appoints officers to manage the business there may be problems with this: corporate officers may run the business for their own benefit and not for the stockholders

treasury stock is recorded at cost

(the market value of the stock on the date of the purchase), without regard t o the stock's par value

book value per share of common stock =

(total stockholders' equity - preferred equity) / number of shares of common stock outstanding

there are three relevant dates for dividends:

-DECLARATION DATE -DATE OF RECORD -PAYMENT DATE

When reporting SE on the B/S, a corporation lists its accounts in this order:

-Preferred stock -Common stock -Additional paid-in capital -Retained earnings

treasury stock is:

-a contra SE account -carries a debit balance, the opposite of the other equity accounts -it is reported beneath the RE account on the balance sheet as a negative amount

dividend

-a distribution by a corporation to its stockholders, usually based on earnings

GAAP identifies stock dividends

-above 25% of outstanding common shares as large and permits large stock dividends to be recorded at par value

preferred stock is a hybrid

-between common stock and long-term debt -like interest on debt, preferred stock pays a fixed dividend -unlike interest on debt, the dividend is not required to be paid unless the board of directors declares the dividend... also, they don't have to pay the full amount back to the stockholder

advantages of a corporation

-can raise more capital than a proprietorship or partnership can -continuous life -ease of transferring ownership -limited liability of stockholders

dividends usually take one of three forms:

-cash -stock -noncash assets

different types of stock issued (to appeal to a variety of investors)

-common or preferred, and -par or no-par

board of directors

-elected by stockholders -they set company policy and appoint officers

chairperson

-elected by the board -usually the most powerful person in the organization -titled CEO "chief executive officer"

accounting tells a company if it can pay a dividend. to do so, a company must have BOTH:

-enough retained earnings to declare the dividend AND -enough cash to pay the dividend

preferred stock

-gives its owners certain advantages over common stockholders -receive dividends and assets during liquidation before common stockholders -companies may issue different classes of preferred stock (Class A/B or Series A/B)

No-par common stock with a stated value

-is identical to accounting for par-value stock -the excess over stated value is credited to Additional Paid-In Capital, or Paid-In Capital in Excess of Stated Value - Common

financing transactions that affect both cash and equity fall into three main categories:

-issuance of stock -treasury stock -dividends

STOCK VALUES include:

-market value -redemption value -liquidation value -book value

CFO "chief financial officer"

-most corporations have this vice president in charge of sales, manufacturing, accounting, and finance

legal capital

-most states require companies to maintain a minimum amount of SE for the protection of creditors, and this minimum is often called the corporation's legal capital

GAAP identifies stock dividends...

-of 25% or less of outstanding common shares as small and suggest that the dividend be recorded at the market value of the shares distributed

corporations report SE by source

-paid in capital is reported separately from RE because most states prohibit the declaration of cash dividends from paid-in capital

stockholders' equity is divided into two main parts:

-paid-in capital/contributed capital -retained earnings

incorporators have to

-pay fees -sign the charter -file documents with the state -agree to a set of bylaws, which act as the constitution for governing the company

dividends on preferred stock are stated either as a

-percent of par value OR -dollar amount per share

disadvantages of a corporation

-separation of ownership and management -double taxation of distributed profits -government regulation

outstanding stock

-stock in the hands of a stockholder; the total number of shares outstanding at any time represents 100% ownership of the corporation

president

-the COO "chief operating officer" -in charge of day-to-day operations

retained earnings

-the amount of SE the corporation has earned through profitable operations and has not used for dividends

paid-in capital/contributed capital

-the amount of SE the stockholders have contributed to the corporation -Paid-in capital includes the stock accounts and any additional paid-in capital

declaration date

-the board of directors has the authority to declare a dividend -declaration is recorded by debiting RE and crediting Dividends Payable

corporations purchase their own stock for several reasons:

-the company has issued all its authorized stock and needs some stock for distributions to employees under stock purchase plans or compensation plans -the business wants to increase net assets by buying its stock low and hoping to resell it for a higher price -management wants to avoid a takeover by an outside party -management wants to increase its reported earnings per share (EPS) of common stock (net income/number of common shares outstanding) -management uses a share repurchase program as a way to return excess cash to shareholders, in a manner similar to a dividend

companies also issue convertible preferred stock

-the preferred stock is usually convertible into the company's common stock at the discretion of the preferred stockholders, as the price of the common stock, and its dividend, rise to an attractive level in the future

a corporation may choose to distribute stock dividends for these reasons:

-to continue dividends but conserve cash -to reduce the per-share market price of its stock so that the stork is less expensive and therefore attractive to more investors

stockholders' rights

-vote -dividends -liquidation -preemption

PASSING THE DIVIDEND

-when corporations fail to pay a dividend to cumulative preferred stockholders -the dividends are said to be in arrears

once the shares are repurchased,

NEITHER TOTAL ASSETS OR TOTAL LIABILITIES ARE AFFECTED, and a memorandum entry is made decreasing the number of shares issued in SE

a company with true no-par stock has...

NO Additional Paid-In Capital account

rather, amounts received in excess of amounts originally paid for treasury stock are recorded as...

Paid-In Capital from Treasury Stock Transactions, thus bypassing the I/S if amounts received from resale of treasury stock were less than amounts originally paid, the difference would be debited to Paid-In Capital form Treasury Stock Transactions to the extent of that balance, and after that, to RE

treasury stock

a company's own stock that it has issued and later reacquired. in effect, the corporation holds this stock in its treasury many public companies spend millions of dollars each year to buy back their own stock

only the board of directors has the authority to declare a dividend

a corporation declares a dividend before paying it

deficit

a debit balance in RE arises when a corporation's lifetime losses and dividends exceed lifetime earnings this amount is subtracted to determine total SE

stock split

an increase in the number of shares of stock issued and outstanding, coupled with a proportionate reduction in the stock's par value e.g. if the company splits its stock 2 for 1, the number of outstanding shares is doubled and each share's par value is halved total equity doesn't change, nor do any assets or liabilities

stock dividend

a proportional distribution by a corporation of its own stock to its stockholders

par value

an arbitrary amount assigned by a company to a share of its stock upon original issuance

Corporations/Companies

are separate legal entities

date of record

as part of the declaration, the corporation announces the record date, which follows the declaration date by a few weeks. the stockholders on the record date will receive the dividend. there is no journal entry for the date of record

a corporation may issue a stock certificate for any number of shares...

but the total number of authorized shares is limited by charter

stock =

capital stock

bylaws

constitution for governing the company

double taxation

corporate earnings are subject to double taxation on their income to the extent they are distributed to shareholders in the form of dividends

no-par stock

does not have a par value per share; this is rare

equity transactions are

financing activities on the statement of cash flows because the company is dealing with its owners

legal capital is the par value of the shares issued

for corporations with par-value stock

reselling treasury stock for cash --->

grows assets and equity exactly as issuing new stock does

preferred stock is cumulative unless it is specifically labeled as noncumulative

in most states

each class of stock

is reported in a separate account

when a company issues preferred stock...

it credits Preferred Stock at its par value, with any excess credited to Paid-In Capital In Excess of Par - Preferred

a company neither earns a profit nor incurs a loss when...

it sells its stock to, or buys stock from, its own stockholders

market value =

market capitalization (market cap)

PRICE-EARNINGS RATIO =

market price of one share of common stock / earnings per share of common stock

cumulative preferred stock

must receive all dividends in arrears plus the current year's dividend before any dividends go to the common stockholders

incorporators

organizers of a corporation who create the corporation by obtaining a charter from the state; the charter includes the authorization for the corporation to issue a certain number of shares of stock

both the par value of the stock and the additional amount are part of:

paid-in capital

payment date

payment of the dividend usually follows the record date by a week or two. payment is recorded by debiting Dividends Payable and crediting Cash

some companies combine paid-in capital in excess of par from both

preferred and common stock transactions into one account

redeemable preferred stock

preferred stock that requires the company to redeem the stock at a set price the company is obligated to redeem (pay to retire) the preferred stock. therefore, redeemable preferred stock isn't actually SE. instead, it's a liability

corporations have continuous life and transferability of ownership, unlike...

proprietorships and partnerships, who terminate when their ownership changes

a company NEVER

records gains or losses on transactions involving its own treasury stock

a corporation may purchase its own stack and retire it by cancelling the stock certificates -->

retired stock cannot be reissued

book value per share of common stock

the amount of common stockholders' equity on the company's books for each share of its stock

liquidation value

the amount that a company must pay a preferred stockholder in the event the company liquidates

common stock

the basic form of capital stock

share

the basic unit of capital stock

Paid-In Capital/Additional Paid-In Capital/Paid-In Capital in Excess of Par

the difference between issue price and par value

the corporation has no obligation to pay a dividend until the board declares one, BUT, once declared,

the dividend becomes a LEGAL LIABILITY of the corporation

initial public offering (IPO)

the first time a private company issues stock to the public

market value/market capitalization

the market price of the common stock at a given date, multiplied by the number of shares of common stock outstanding in almost all cases, stockholders are more concerned about the market value of a stock than any other value

authorized stock

the maximum number of shares the company can issue under its charter e.g. Home Depot 10 Billion

outstanding stock definition

the number of shares that the stockholders own (that is, the number of shares outstanding in the hands of the stockholders). Outstanding stock is issued stock - treasury stock

issued stock

the number of shares the company has issued to its stockholders. this is a cumulative total from the company's beginning up through the current date, less any shares permanently retired

stockholders/shareholders

the owners of a corporation

redemption value

the price the corporation agrees to pay for the stock, set when the stock is issued

the overall market assessment of the worth of a share of common stock is reflected in

the price-earnings ratio

preemption

the right to maintain one's proportionate ownership in the corporation - this right, called preemptive right, is usually withheld from the stockholders

although cumulative dividends must be paid before other dividends,

they must still be declared by the company's board of directors

corporations are separate taxable entities

they pay several taxes not borne by proprietorships/partnerships, they also pay federal and state income taxes

corporations may sell stock directly to the stockholders or...

use the service of an underwriter