Chapter 11 Stockholders Equity

Accumulated Other Comprehensive Income (Loss)

-reports unrealized gains and losses, which are temporary changes in the value of certain assets and liabilities the company holds

what is no-par value common stock?

-some states do not require a par value to be stated in the charter.

what do accounting rules require due to restrictions on retained earnings that severely limit dividends?

-that companies disclose any restrictions in their financial statement notes. -ex) Nat. Bev. reported in its financial statement notes that "$1,320,000 of retained earnings were restricted from distribution."

what is return on equity?

-the amount earned for each dollar invested by common stockholders -ROE= (net income-preferred dividends)/average common stockholders' equity)

what do retained earnings represent?

-the company's total earnings that have been retained in the business (rather than being distributed to stockholders). -the balance in this account increases when the company reports net income and decreases when the company reports net loss (expenses greater than revenues) or declares cash or stock dividends to stockholders)

what is current dividend preference?

-the current preferred dividends must be paid before paying any dividends to common stock

what are issued shares?

authorized shares are authorized shares of stock that have been distributed to stockholders

what part of the financial statements do all transactions between a company and its stockholders affect?

balance sheet accounts only, do not affect the company's income statements

what happens if preferred stock is noncumulative?

dividends can never be in arrears, any preferred dividends that are not declared are permanently lost

transactions between two investors ______ the corporation's accounting records

do not affect

what is cumulative dividend preference?

-any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid

how do most companies record shares repurchased and held as treasury stock?

-at the cost incurred to acquire the shares, an approach called the cost method.

How are cash dividends on common stock declared?

-by the board of directors -no legal obligation to declare a cash dividend, but once declared, there is a legal obligation to pay the dividend -most corporations pay cash dividends quarterly

preferred stock differences

-different voting rights: anywhere from no voting rights to super-voting rights. -usually has a stated dividend that is expressed as a percentage of its par value. -has priority over common stock in dividend distributions and distribution of assets in a liquidation and is therefore less risky.

Advantages Equity Financing

-doesn't have to be repaid like a loan does -dividends are optional

What is the very first issuance of a company's stock to the public called?

-initial public offering (IPO)

Advantages of Debt Financing

-interest on debt is tax deductible -debt does not change stockholder control

How is treasury stock recorded?

-is a contra equity account that is reported as a reduction in stockholders equity

what are outstanding shares?

-issued shares that are owned by stockholders

what are treasury shares?

-issued shares that have been reacquired by the corporation

what happens when a company accumulates more net losses than net income over its life?

-it will report a negative (debit) balance in the Retained Earnings account. -the amount is typically called Accumulated Deficit rather than Retained Earnings and is: 1. shown in parentheses in the stockholders' equity section of the balance sheet 2. deducted when computing total stockholders' equity

what are authorized shares?

-maximum total number of shares that can be issued to the public. -identified in the corporate charter of the corporation that is issued by the state -can be classified as either issued or unissued

what does retained earnings report?

-net income minus dividends -represent earned capital

Issued shares can be classified as either ____ or _____

-outstanding shares -treasury shares

Common stock normally has a _____, which is usually a very small amount, such as one cent per share.

-par value: an arbitrary amount assigned to each share of stock when it is authorized.

what is the reacquisition of preferred stock referred to as?

-redemption, because rather than being held in treasury, the preferred stock is formally retired as if it were never issued. -to account for redemption of preferred stock, a company reverses the original issuance.

what is treasury stock?

-reports shares previously owned by stockholders but have been reacquired and are now held by the corporation.

why might a corporation want to repurchase its stock from existing stockholders?

1) send a signal to investors that the company itself believes its own stock is worth acquiring 2) obtain shares that can be reissued as payment for purchases of other comapnies 3) obtain shares to reissue to employees as part of employee stock purchase plans 4) reduce the number of outstanding shares to increase per-share measures of earnings and stock value.

Four main elements of the stockholders equity section of the balance sheet

1. Contributed capital 2. Retained earnings 3. Treasury Stock 4. Accumulated Other Comprehensive Income (loss)

What are the four important dividend dates?

1. Declaration date: date the directors declare the dividend. 2. Date of record: date when the corporation determines the owners of record who will receive the dividend. no entry is required. 3. Date of payment: date the corporation pays the dividend to the stockholders who owned the stock on the record date. 4. Year end: all temporary accounts, included dividends, are closed into retained earnings.

What two things must a corporation have to pay a cash dividend?

1. Sufficient Retained Earnings to absorb the dividend without going negative 2. Sufficient cash

what two financial requirements must be considered when deciding whether to declare a cash dividend?

1. Sufficient retained earnings- company must have accumulated a sufficient amount of Retained Earnings to cover the amount of the dividend. 2. Sufficient cash- the corporation must have sufficient cash to pay the dividend. Retained earnings is not cash.

What are the benefits that the owners of common stock enjoy?

1. Voting rights- for each share you own, you get a set number of votes on a major issues. 2. Dividends- stockholders receive a share of the corporations profits when distributed as dividends. 3. Residual claim- if the company ceases operations, stockholders share in any assets remaining after creditors have been paid. 4. Preemptive rights- to retain their ownership percentages, existing stockholders may be given the first chance to buy newly issued stock before it is offered to others.

Four Categories of Stockholders Equity

1. contributed capital 2. retained earnings 3. treasury stock 4. Accumulated other comprehensive income (loss)

what four important dates does a cash dividend involve?

1. declaration date: date the directors declare the dividend. At this time, a liability is created and must be recorded. 2. the date of record: the date when the corporation determines the owners of record who will receive the dividend. No entry is required in the accounting records on this date. 3. the date of payment: date the corporation pays the dividend to the stockholders who owned the stock on the record date. 4. year end: all temporary accounts, including dividends, are closed into retained earnings.

why do corporations repurchase stock

1. send a signal that the company believes that the stock is worth acquiring 2. obtain shares to reissue for the purpose of getting more cash 3. obtain shares to reissue to employees as part of stock option plans 4. reduce the number of outstanding shares to increase per-share measures of earnings

What one type of stock must a corporation have?

Common stock- the basic voting stock issued by a corporation to stockholders

What two forms can investors return on investment come in?

Dividends and increases in stock price -growth investment: stocks that pay little to no dividends -income investment: stocks known to consistently pay dividends

is treasury stock an asset?

No. It is is a permanent account that is reported as contra-equity, subtracted from total stockholders' equity.

IF A COMPANY HAS ISSUED STOCK PREVIOUSLY, ADDITIONAL ISSUANCES OF NEW STOCK BY THE COMPANY ARE CALLED

Seasoned new issues

dividend in arrears

Unpaid dividend on cumulative preferred stock; must be paid before any regular dividends on preferred stock and before any dividends on common stock.

what are stock options?

a part of an employees pay package, give employees the option of acquiring the company's stock at a predetermined price, often equal to the then-current market price. -if employees work hard and meet corporations goals, the company's stock price will increase

what are the two dividend preferences preferred stock offers?

current dividend preference and cumulative dividend preference

what happens when a company reissues shares previously reported as treasury stock?

it does not report a gain or loss, even if it issues shares for more or less than the company to reacquire the,. -GAAP does not permit a corporation to report income or losses from investments in its own stock because transactions with the owners are not considered profit-making activities. -this transaction only affects the balance sheet, like other stock issuances.

if the preferred stock is noncumulative, any dividends not declared in previous years are ______

lost permanently

par value is not equal to _____

market price: the amount that each share of stock will sell for in the market.

equity financing

obtaining money from issuing new stock to investors

debt financing

obtaining money through borrowing from lenders

Shares owned by stockholders (not the corporation itself) are called _______

outstanding shares

what do corporations issue in addition to common stock?

preferred stock: stock that has special rights over common stock in the following ways: 1. Preferred stock allows different voting rights: can carry anywhere from no voting rights to super voting rights. Flexibility allows a corporation to separate stock ownership from voting control. 2. Dividends on preferred stock, if any, must be paid at a fixed rate, specified as either a dollar amount or a percentage per share. 3. Preferred stock carries priority over common stock: preferred stockholders have higher priority than common stockholders if a corporation distributes assets to its owners through dividends or at liquidation.

what does contributed capital report?

reports the amount of capital the company received from investors' contributions, in exchange for company's stock. Represents paid-in capital

current dividend preference

requires that preferred dividends be paid before paying any dividends to holders of common stock -feature of all preferred stock -after the current dividend preference has been met, and if no other preference exists, dividends may be paid to the common stockholders

the amount of equity the company itself has generated for stockholders (through profitable operations) but not yet distributed to them

retained earnings

cumulative dividend preference

states that if all or a part of the current dividend is not paid in full, the cumulative unpaid amount, known as dividend in arrears, must be paid before any future common dividends can be paid

What is a seasoned new issue?

subsequent issues of new stock to the public

Dividends is a ____ account closed to ______ at the end of the year

temporary, closed to retained earnings

what does a return on equity of 34.5% tell us?

that the corporation earned 34.5 cents for each dollar of its stockholders' equity

Issued shares will be owned forever by one stockholder or another, unless ______

the company repurchases them

What is Initial public offering (IPO)?

the first time a corporation issues stock to the public

calculating preferred stock dividends

total dividends declared= $x.xx per share x shares outstanding or % x par value x shares outstanding (fixed amount each year)

Shares that have been repurchased by a corporation are called ______

treasury stock

what are unissued shares?

unissued shares of stock are shares that have never been distributed to stockholders