Chapter 15: Stockholders' Equity
how do firms separate the total cash proceeds received on issuance of preferred stock?
between par value and APIC in Excess of Par-Preferred
how do firms allocate total proceeds received from issuing equity?
between the par/stated value and the APIC
participating preferred shares
contain a provision requiring that preferred shareholders share ratable in distributions with common shareholders
declaration date
declared by the Board, record liability for cash dividend
property dividends
distributions in any asset other than cash (ex: inventory or investments in shares of other entities)
stock dividends
distributions in the form of the firm's own equity shares
cash dividends
distributions to shareholders in cash
how do preferred shares have a tax disadvantage?
dividends are not tax-deductible, while interest on debt is tax-deductible
participation (or preferred shares) occurs most often when...
dividends to common shareholders exceed the percentage stated for the preferred shares
par value
face or stated value on a share certificate
what is outstanding shares used for?
financial statistics, such as earnings per share and book value per share, and determines those with voting rights
record date
firm determines stockholders entities to dividend
payment date
firm distributes the dividend
ex-dividend date
generally two business days before the record date. investors purchasing the stock on or after this date will NOT receive the dividend
what can companies do with repurchased shares?
hold or retire
what is including in accumulated other comprehensive income (AOCI)?
includes items such as: - unrealized gains and losses on AFS debt securities - foreign currency translation adjustments - certain pension cost adjustments
residual claimants
individuals, other corporations, and institutional investors who buy shares of a company
how is outstanding shares computed?
issued shares - treasury shares
what type of preferred stock is classified as a liability?
mandatorily redeemable preferred stock
what is a downside of preferred shares?
nonvoting
unissued shares
number of shares authorized but not issued
issued shares
number of shares sold or otherwise distributed to shareholders
outstanding shares
number of shares still in the hands of the stockholders
where do firms report AOCI?
on the balance sheet in the stockholders' equity section, along with contributed capital and retained earnings
what par value is usually higher, preferred or common?
preferred because firms usually pay preferred dividends as a fixed percentage of par value
who has preferential rights over common shareholders?
preferred shareholders
if there are stock issue costs, how do you change your journal entry?
reduce cash and APIC by the amount of stock issue costs
dividends
represent a return to shareholders on their investment in a corporation
stock split
results in a proportionate increase in the number of equity shares and a proportion decrease in the share's par value, if the shares have a par value
shareholders can only assert their claims after the company has...
satisfied the senior claims of creditors
retired shares
shares are no longer considered issued (classified as unissued authorized shares)
types of stock dividends
small and large (room for judgment)
contributed capital
the amounts paid in by common and preferred shareholders which includes: - par value - additional paid in capital
if the shares have no par or stated value, firms record total proceeds in...
the common stock account
treasury shares
the corporation's own shares repurchased by the corporation and held for future use - still considered issued shares
additional paid-in capital
the excess of amounts paid in over the par or stated value
what does stockholders' equity represent?
the interest held by the investors
stock dividend is considered "small" if...
the number of shares issued does not exceed 20% to 25% of the previously outstanding shares
a stock dividends is considered a "large" stock dividend if...
the number of shares issued is more than 20% to 25% of the previously outstanding shares
what do treasury shares reduce?
the number of shares outstanding - recorded in a contra-stockholders' equity account and reported as a reduction of total stockholders' equity on the balance sheet
stockholders' equity
the sum of all residual claims against the assets of the firm, measured as assets - liabilities
authorized shares
total number of shares a firm can legally issue. - typically in the company's articles of incorporation
cost method
used to account for treasury stock transactions
what do treasury shares generally not have?
voting rights and cannot receive dividends
where did the concept of par value come from?
when all firms were required to maintain a minimum amount of capital that they could not distribute to shareholders - these minimum capital requirements generally no longer exist, and firms can now issue no part stock
retained earnings
a firm's cumulative earnings or losses that it has not distributed as dividends
comprehensive income
a measure of changes in a company's equity that result from recognized transactions and all economic events of the period other than transactions with owners
liquidating dividends
any distribution that the firm pays for contributed capital instead of retained earnings
how is a small stock dividend valued?
at the fair market value of the shares
how is a large stock dividend valued?
at the par value of the stock
what is AOCI?
(accumulated other comprehensive income) - the aggregation of OCI over the years, and is the third component of stockholders' equity
reissuance of treasury stock (accounts involved)
- *above cost:* excess over cost is APIC-Treasury Stock - *below cost:* reduce APIC-Treasury Stock for the amount below cost if possible. if not, reduce Retained Earnings
companies repurchase outstanding shares for a number of reasons:
- because of stock-based compensation (to offset the effect when workers sell shares back into the market) - to make an acquisition - to support the market price of the stock - to distribute cash to shareholders - to increase per-share earnings
components of contributed capital
- common stock - preferred stock
components of common stock
- common stock issuance - stock splits - stock repurchases, reissuances, and repayments
components of AOCI
- components - reporting
types of preferred stock
- cumulative - participating - convertible - callable - redeemable - fixed dividend
acquisition of treasury stock (journal entry)
- debit treasury stock for the cost of the repurchased shares - credit cash for the amount paid
key dates for dividends
- declaration date - record date - ex-dividend date - payment date
components of retained earnings
- dividends - prior period adjustments
components of comprehensive income
- net income - other comprehensive income
items affecting retained earnings include:
- net income (loss) - dividends - the sale of treasury stock below cost - prior-period adjustments (e.g. make correction by adjusting R/E)
how do preferred shares typically have more priority?
- priority over receiving dividends - priority claim to assets in liquidation
what accounts do stock dividends affect?
- retained earnings decreases - contributed capital increases (the amount depends on the size of the dividend)
what are other names for stockholders' equity?
- shareholders' equity - owners' equity - net assets - net book value
preferred stock provides certain advantages over debt and common equity financing for a corporation:
- used to raise private equity capital without giving up control of the corporation - preferred stock is less risky than debt because, unlike interest on debt, dividends are not mandatory
components of stockholders' equity
1. contributed capital 2. retained earnings 3. accumulated other comprehensive income (AOCI)
accounting steps for small stock dividends
1. dividend value = market price at the declaration date 2. on declaration date: increase the dividends account by the dividend at market value, which will ultimately be closed to retained earnings. 3. increase the common stock dividend distributable account for the par value of the stock. this account is a capital stock account 4. increase APIC for the difference between the market value and the par value of the stock to be distributed. when the dividend is distributed, remove the common stock dividend distributable account with a debit and credit the common stock account
two options for reporting OCI:
1. include components of OCI after net income on one continuous statement summing to comprehensive income 2. present a separate statement of other comprehensive income that begins with net income on the first line and details the components of OCI. this approach results in presenting two statements: one displaying the details of net income and the other displaying the details of other comprehensive income
earned capital
1. retained earnings (RE) 2. AOCI
accounting steps for large stock dividends
1. when declaring a large stock dividend, debit dividends for the par value of the stock 2. credit stock dividend distributable, an equity account, for the par value of the stock 3. when distributing the stock dividend, reduce the stock dividend distributable and increase common stock at par