Stockholders

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Chapter 11
Stockholders Equity Capital Stock and Dividends
Electronic Presentation by Douglas Cloud
Pepperdine University
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Learning Goals
1. Describe the nature of the corporate form of
organization. 2. List the major sources of
paid-in capital, including the various classes of
stock. 3. Describe the financial statement
effects of issuing stock. 4. Describe the
financial statement effects of treasury stock
transactions.
After studying this chapter, you should be able
to
Continued
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Learning Goals
5. Describe the effect of stock splits on the
financial statements. 6. Analyze the impact of
issuing common stock on bonds. 7. Describe the
financial statement effects of cash dividends and
stock dividends. 8. Compute and interpret the
dividend yield and dividend payout ratio on
common stock.
9. Describe financial statement presentations
of stockholders equity.
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Learning Goal
1
Describe the nature of the corporate form of
organization.
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Characteristics of a Corporation
Advantages

• Separate legal existence
• Continuous life
• An ability to raise large amounts of capital
• Owners can transfer ownership rights without
  affecting the corporation
• Limited liability

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Characteristics of a Corporation
Disadvantages

• Owner is separate from management
• Double taxation of dividends

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Organizational Structure of a Corporation
Stockholders (owners of corporation stock)
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Forming a Corporation

• First step is to file an application of
  incorporation with the state.
• Because state laws differ, corporations often
  organize in states with more favorable laws.
• More than half of the largest companies are
  incorporated in Delaware.
• State grants a charter or articles of
  incorporation which formally create the
  corporation.
• Management and board of directors prepare bylaws
  which are operation rules and procedures.

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Learning Goal
2
List the major sources of paid-in capital,
including the various classes of stock.
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Major Rights that Accompany Ownership of a Share
of Stock
1. The right to vote in matters concerning the
corporation. 2. The right to share in
distribution of earnings. 3. The right to share
in assets on liquidation.
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Sources of Paid-In Capital
Authorized
Issued
Outstanding
Number of Shares
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Market for Common Stock
Types of stock market transactions

• An initial public offering (IPO)
• Additional shares sold by an established public
  company
• Market exchanges between owners of a publicly
  held company

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Classes of Stockholders
The two primary classes of paid-in capital are
common stock and preferred stock. The primary
attractiveness of preferred stocks is that they
are preferred over common as to dividends.
Preferred stockholder
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Classes of Stockholders

• Common Stock the basic ownership of stock with
  rights to vote in election of directors, share in
  distribution of earnings, and purchase additional
  shares.
• Preferred Stock A class of stock with
  preferential rights over common stock in payment
  of dividends and company liquidation.

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Cumulative Preferred Stock
So, preferred dividends are two years in arrears.
Assume 1,000 shares of 4 cumulative preferred
stock and 4,000 shares of common stock. No
dividends have been paid in the preceding two
years.
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Cumulative Preferred Stock
On March 7, 2005, the board of directors declares
dividends of 22,000.
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Cumulative Preferred Stock
Preferred Stock Dividends
Dividends Paid in 2005
Total dividends paid, 22,000
4,000
4,000
4,000
Preferred Stock
Common Stock
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Learning Goal
3
Describe the financial statement effects of
issuing stock.
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Issuing Stock
A corporation issues 5,000 shares of preferred
stock, 100 par, and 50,000 shares of common
stock, 20 par.
Cash 1,500,000 Preferred Stock 500,000 Common
Stock 1,000,000
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Premium on Stock
Stock issued for assets other than cash should be
recorded at the fair market value of the asset or
fair market value of the stock, whichever can be
more clearly determined.
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Premium on Stock
Caldwell Company issues 2,000 shares of 1 par
common stock for cash at 55.
Cash 110,000 Common Stock 2,000 Paid-in
Capital in Excess of ParCommon Stock 108,000
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Premium on Stock
Archer Company issues 10,000 shares of its 10
par preferred stock for land. The lands fair
market value cannot be determined and the stock
has a current market value of 12 per share.
10,000 x 12
Land 120,000 Preferred Stock 100,000 Paid-in
Capital in Excess of ParPreferred
Stock 20,000
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No-Par Common Stock
Also, no-par stock may be assigned a stated value
per share. The stated value is recorded like a
par value.
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No-Par Common Stock
Fargo Company issues 10,000 shares of its no-par
common stock at 40 a share, and at a later date
issues 1,000 additional shares at 36.
Cash 400,000 Common Stock 400,000
Cash 36,000 Common Stock 36,000
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No-Par Common Stock
Some states require that the entire proceeds from
the sale of no-par stock be treated as legal
capital.
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No-Par Common Stock
Fargo Company issues 10,000 shares of its no-par
common stock at 40 a share, and at a later date
issues 1,000 addition shares at 36. The stated
value is 25 per share.
Cash 400,000 Common Stock 250,000 Paid-In
Capital in Excess of Stated Value 150,000
Cash 36,000 Common Stock 25,000 Paid-In
Capital in Excess of Stated Value 11,000
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Learning Goal
4
Describe the financial statement effects of
treasury stock transactions.
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Treasury Stock Transactions
Occasionally, a corporation buys back its own
stock for the purpose of later reissuing it.
This stock is referred to as treasury stock.
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Treasury Stock Transactions
Earlier, Elrod Corporation issued 20,000 shares
of its 25 par common stock at 32.50 a share.
Elrod repurchased 1,000 shares as treasury stock
at 45 per share.
Treasury Stock 45,000 Cash 450,000
Continued
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Treasury Stock Transactions
Later, 200 shares of the treasury stock were
resold for 60 per share.
Cash 12,000 Treasury Stock 9,000 Paid-In
Capital from Sale of Treasury Stock 3,000
Continued
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Treasury Stock Transactions
Later, another 200 shares of the treasury stock
are for 40 per share.
Cash 8,000 Paid-In Capital from Treasury
Stock 1,000 Treasury Stock 9,000
Remember Treasury stock is not an asset!
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Treasury Stock Transactions
Stockholders Equity
Paid-in capital Common stock, 25 par
(20,000 shares authorized and issued)
500,000 Excess of issue price over
par 150,000 From sale of treasury stock 2,000
Total paid-in capital 652,000 Retained
earnings 130,000 Total 782,000 Deduct
treasury stock (600 shares at cost) 27,000 Total
stockholders equity 755,000
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Learning Goal
5
Describe the effect of stock splits on the
financial statements.
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Stock Splits
A corporation sometimes reduces the par or stated
value of their common stock and issues a
proportionate number of additional shares. This
is called a stock split.
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Stock Splits
BEFORE STOCK SPLIT
4 shares, 100 par
400 total par value
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Learning Goal
6
Analyze the impact of issuing common stock or
bonds.
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Common Stock Financing
Earnings per share (EPS) 1.40
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Bond Financing
Earnings per share (EPS) 1.50
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No Financing
Earnings per share (EPS) 1.464
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Learning Goal
7
Describe the financial statement effects of cash
dividends and stock dividends.
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Accounting for Cash Dividends
Cash dividends are declared and paid on shares
outstanding with three conditions 1.
Sufficient retained earnings
2. Sufficient cash
3. Formal action by the board of directors
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Accounting for Cash Dividends
There are three important dates relating to
dividends.
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Accounting for Cash Dividends
First is the date of declaration. Assume that on
December 1, Hiber Corporation declares a 42,500
dividend.
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Accounting for Cash Dividends
Date of Declaration
Dec. 1 Retained Earnings 42,500 Cash
Dividends Payable 42,500
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Accounting for Cash Dividends
The second important date is the date of record.
For Hiber Corporation, this would be December 11.

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Accounting for Cash Dividends
On this date, ownership of shares determines who
receives the dividend. No entry is required.
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Accounting for Cash Dividends
Date of Record
No entry
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Accounting for Cash Dividends
The third important date is the date of payment.
On January 2, Hiber issues dividend checks.
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Accounting for Cash Dividends
Date of Declaration
Jan. 2 Cash Dividends Payable 42,500 Cash
42,500
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Accounting for Stock Dividends
A distribution of shares to stockholders is
called a stock dividend.
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Accounting for Stock Dividends
Stock dividends transfer pro rata shares of stock
to stockholders. On December 15, Hendrix
Corporation issues a 5 stock dividend on common
stock, 20 par, 2,000,000 shares issued.
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Accounting for Stock Dividends
Dec. 15 Retained Earnings 3,100,000 Stock
Dividend Distributable 2,000,000 Paid-I
n Capital in Excess of Par Common
Stock 1,100,000
100,000 shares x 31 market price
100,000 shares x 20 par value
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Accounting for Stock Dividends
On January 10, Hendix Corporation issues the
stock. This action increases the number of
shares outstanding by 100,000.
Jan. 10 Stock Dividends
Distributable 2,000,000 Common Stock 2,000,000
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Accounting for Stock Dividends
Hendrix Corporation, December 15 (before dividend)
Common Stock, 20 par 40,000,000 Paid-in Capital
in Excess of ParCommon Stock 9,000,000 Retained
Earnings 26,600,000 75,600,000
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Learning Goal
8
Compute and interpret the dividend yield and
dividend payout ratio on common stock.
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Profitability Measures The Common
Stockholder
2005 2004
Dividends per share of common 0.80
0.60 Market price per share of common 20.50 13.5
0
Cash Dividends per Share of Common Stock Market
Price per Share of Common Stock
Dividend Yield
Dividend Yield, 2004
4.4
3.9
Dividend Yield, 2005
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Profitability Measures The Common
Stockholder
The purpose of the dividend yield ratio is to
indicate the rate of return to common
stockholders in terms of dividends
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Profitability Measures The Common
Stockholder
2005 2004
Cash dividends per share 0.80 0.60 Annual
earnings per share 7.50 5.80
Annual Cash Dividend per Share Annual Earnings
per Share
Dividend Payout Ratio
Dividend Payout Ratio, 2004
10.3
Dividend Payout Ratio, 2005
10.7
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Profitability Measures The Common
Stockholder
The dividend payout ratios indicate that the firm
paid out slightly more than 10 percent of its
annual earnings in dividends.
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Learning Goal
9
Describe financial statement presentations of
stockholders equity.
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Most corporations report changes in retained
earnings by preparing a separate retained
earnings column in the statement of
stockholders equity.
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Make a note to examine Exhibit 8 in the textbook.
It shows the statement of stockholders equity
for Outback Steakhouse, Inc.
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Chapter 11
The End
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