Financial Accounting, Second Canadian Edition

1
Chapter 12
Reporting and Interpreting Owners
Equity Corporations are not the only form of
business.
2
Business Background
3
Business Background

• Because a corporation is a separate legal
  entity, it can . . .
• Own Assets.
• Incur Liabilities
• Sue and be sued
• Enter into contracts

4
Ownership of a Corporation
Rights
Shareholders
5
Ownership of a Corporation
Shareholders
(Owners of voting shares)
Board of Directors
Elected byshareholders
Internal (managers) and
External (non-managers)
President
VP
VP
VP
VP
(Production)
(Marketing)
(Finance)
(Controller)
6
Authorized, Issued, and Outstanding Shares
The maximum number of shares that can be sold to
the public. This is frequently set to an
unlimited amount to provide maximum flexibility
to the corporation.
7
Authorized Shares
Issued shares are authorized shares that have
been sold.
Unissued shares are authorized shares that never
have been sold.
8
Authorized, Issued, and Outstanding Shares
Outstanding shares are issued shares that are
owned by shareholders.
Outstanding Shares
Unissued Shares
Issued Shares
Treasury Shares
Treasury shares are issued shares that have been
reacquired by the corporation. In Canada,
reacquired shares are usually cancelled.
9
Types of Share Capital
Common Shares
Preferred Shares
10
Common Shares

• Basic voting shares
• Ranks after preferred shares
• Dividend set by board of directors
• (you have largest voting voice, but last access
  to assets in a liquidation. There is no legal
  requirement that you be paid dividends or be
  reimbursed at all)

11
Par Value and No-par Value Shares
Par Value
Nominal value
Legal capital
Legal capital is the amount of capital that must
remain invested in the business until it is
liquidated.
12
Par Value and No-par Value Shares
?
Par Value
Market Value
13
No-par Value Shares
The Canada Business Corporations Act, and most
Provincial Charters do not require a par value to
be stated in the charter.
14
Preferred Shares

• Preference over common shares
• Usually has no voting rights
• Usually has a fixed dividend rate
• (rarely stops once regular dividends start,
  rarely decrease also)

15
Special Features of Preferred Shares
Convertible preferred shares may be exchanged for
common shares.
Callable preferred shares may be repurchased by
the corporation at a predetermined price.
16
Accounting for Share Capital
Two primary sources of shareholders equity
2) Retained earnings
1) Share capital
17
Accounting for Share Capital
The shareholders equity section of BCEs balance
sheet reports five different accounts. These
accounts represent the two primary sources of
shareholders equity

• Contributed capital reflects the amount
  invested by shareholders. Contributed capital has
  two distinct components
• Amounts initially received from the sale of
  shares
• Contributed surplus that reflects contributions
  made by shareholders in excess of the amounts
  credited to share capital accounts

18
Accounting for Share Capital

1. Retained earnings generated by the profit-making
   activities of the company. This is the cumulative
   amounts of net income earned since the
   organization of the corporation less the
   cumulative amount of dividends paid by the
   corporation since organization.

19
Sale and Issuance of Capital Shares
Initial public offering (IPO)
Seasoned new issue
The first time a corporation sells shares to the
public
Subsequent sales of new shares to the public
20
Secondary Markets

• Transactions between two investors that do not
  affect the corporations accounting records.
  Because of our separate entity assumption. There
  is simply a new owner now

21
Sale and Issuance of Shares

• On July 6, BCE issued 100,000 common shares for
  22 per share.

22
Shares Sold for Non-cash Assets and/or Services
If the company cant pay for services, they
could issue common shares. This is a non-cash
exchange of services and is recorded
differently. 1. Record assets or services
received at the market value of the shares at the
date of the transaction.
2. If the market value of the shares cannot be
determined, then the market value of the assets
or services received should be used.
23
Capital Stock Sold for Noncash Assets and/or
Services

• On March 14, BCE issued 10,000 common shares to
  the Rose Law firm. The share was selling for 15.

24
Stock Options (Shared Issued For Employee
Compensation)

• If BCE does not have new shares to issue when the
  stock options are exercised, then . .
• BCE buys its own stock in the secondary market
  (Treasury stock)
• Go to the open market and buy them, or create
  more shares
• Management compensation package includes salary
  and stock options.
• Stock options allow management to purchase shares
  from the corporation at a fraction of the share
  price in the secondary market.

25
Accounting for Cash Dividends
Declared by board of directors (Not legally
required to declare, but once declared they must
pay) Creates liability at declaration(There is
now a legal liability to pay) Requires sufficient
retained earnings and cash(accumulated income
must be positive)
26
Dividend Dates

• 1) Declaration date
• Board of directors declares the dividend.
• Record a liability.

27
Dividend Dates

• 2) Date of Record
• Shareholders holding shares on this date will
  receive the dividend. (No entry)

X
28
Dividend Dates

• 3) Date of Payment
• Record the payment of the dividend to
  shareholders.

29
Dividend Yield
The 2004 dividend per common share for BCE is
1.20. The market price is 28.92
This ratio is often used to compare the
dividend-paying performance of different
investment alternatives.
30
Dividends on Preferred Shares

• Current Dividend Preference The current
  preferred dividends must be paid before paying
  any dividends on common shares.
• Cumulative Dividend Preference Any unpaid
  dividends from previous years (dividends in
  arrears) must be paid before dividends on common
  shares are paid.

31
Dividends on Preferred Shares
If the preferred share is noncumulative, any
dividends not declared in previous years are lost
permanently.
www.bce.ca/data/documents/bce_2003annual_en.pdf
32
Dividends on Preferred Shares

• Kites, Inc. has the following types of shares
  outstanding
• Common shares 40,000 shares
• Preferred shares 1.20, 5,000 shares
• Dividends were not paid last year. In the current
  year, the board of directors declared dividends
  of 50,000.
• How much will each class of shares receive?

33
Dividends on Preferred Shares
34
DividendsQuestion
On November 1, 2005 a corporations board of
directors declared a dividend for its 10,000
outstanding shares. The dividend is 2 per share,
and will be paid on December 1. Which of the
following will be included in the December 1
entry? a. Debit Retained Earnings, 20,000. b.
Debit Dividends Payable, 20,000. ltlt c. Credit
Dividends Payable, 20,000. d. Credit Preferred
Shares, 20,000.
35
Focus on Cash Flows
36
Accounting for Stock Dividends
Distribution of additional sharesto shareholders
No change in total shareholders equity
Retained earnings decrease
All shareholders retain the same percentage
ownership
37
Stock Dividends
Small
Large
Stock dividend lt 25
Stock dividend gt 25
Record at currentmarket valueper share
Record ataverage issue priceper share
38
Stock Splits

• Distributions of 100 or more of outstanding
  shares to shareholders

39
Stock Splits
Assume that a corporation had 5,000 shares
outstanding with a book value of 5,000 before a
2for1 stock split.
Increase
No Change
Decrease
40
Dividend Payout Ratio
In 2004, BCE earned 1,593 and paid 1,180 in
dividends.
Dividend Payout
74
This ratio indicates the portion of current
earnings paid to shareholders in the form of
dividends.
41
Accounting and Reporting for Unincorporated
Businesses
42
Chapter Supplement A

• Repurchase of Shares

43
Repurchase of Shares
BCE buysits own shares in
Shareholders
the secondary market.
Management compensation package includes salary
and stock options.
Stock options allow management to purchase stock
from the corporation at a fraction of the share
price in the secondary market.
Management
44
Treasury Stock
No voting or dividend rights
Contra equity account
When stock is reacquired, the corporation records
the treasury stock at cost.
45
Repurchased Shares
Most Canadian corporations cancel repurchased
shares. For example, if BCE reacquired 100,000
common shares at 22 per share on August 1, the
journal entry would be . . . .