CHAPTER 11

REPORTING AND ANALYZING STOCKHOLDER EQUITY

What is a corporation?

Legal entity

Classified by purpose and ownership

Created by law
Most rights and privileges of a person could be for profit or not for
profit

Ownership

Publicly held
Privately held

Characteristics of a corporation

Separate legal entity

Limited liability of stockholders

Transferable ownership

Ability to raise capital

Continuous life

Corporation management

Government regulations

Taxes

FORMING A CORPORATION

Charter
Bylaws
license

ISSUANCE OF STOCK

Authorized shares
Issued shares
Outstanding shares

PAR AND NO-PAR VALUE STOCK

Par
No-Par value

Stated value

STOCKHOLDERS EQUITY SECTION

1. Paid-in (contributed capital)

Retained earnings

ACCOUNTING FOR COMMON STOCK ISSUES

Common stock issued at a premium

OCC issued 1,000 shares of $2.00 par common at

$20.00 per share.
Common stock issued with a par value

Common stock issued at stated value

Common stock issued at no par

Preferred stock issued at a premium

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OCC issued 1,000 shares of preferred $10.00 par value 5%, at

$40.00 per share.

The 5% factor on the preferred

Treasury stock
Reacquired stock of the company
Treasury stock has:

No voting rights
Does not share in dividends
Company plans to reissue at a later date
Treasury stock has a debit balance
Considered a contra equity account

Assets

Stockholders Equity

Uses of treasury stock

Bonus for management

Cover stock options
Could increase the EPS of outstanding shares
Increase trading activity of the stock

Accounting for treasury stock

Value of the stock is what the company pays for it

Disregard the par value

GM purchased 2000 of $2.00 par common at a market price of $20.00.

STOCKHOLDERS EQUITY
Paid-in capital:

The amount contributed by the shareholders

Preferred Stock (show par value, dividend rate, shares

authorized and issued)

Paid-in Capital in Excess of ParPreferred

Common Stock (show par value, shares authorized, and

shares issued)

Paid-In Capital in Excess of ParCommon

Paid-in Capital from Treasury Stock

Donated Capital

Forsyth Corporation
Partial Balance Sheet
December 31, 2XXX
Stockholders Equity
Contributed Capital
Preferred stock ($50 par, 10%, 5000)
Shares authorized, 1,000 shares
Issued and outstanding..................................................... $50,000

Common stock ($15 par, 100,000 shares

Authorized, 5,500 shares issued,
5,200 shares outstanding).................................................. 82.500

Paid-in capital in excess of par, preferred stock...............................2000

Paid-in capital in excess of par, common stock.............................25,000

Paid-in capital, treasury stock........................................................... 100

Total contributed capital..................................................$159,600

Retained earnings.......................................................................110,000

Total contributed capital and retained

Earnings....................................................................................$269,600
Less treasury stock (300 shares of common stock at $20 cost)(6,000)

Total stockholders equity..........................................................$263,600

TWO CLASSES OF STOCK:

Preferred

least offered stock

Right in liquidation

Right to dividends only when declared. Often limited to a

specific amount
No voting rights

Preferred features

Cumulative- Preferred must be paid the current dividend and any

dividend that have been missed (IN ARREARS) before common
receives any dividends.

Non-Cumulative- Company not responsible to pay preferred any

dividends in arrears.

Common
Most Popular class offered. If only one class of stock offered it will be
common.

Voting rights

No limitation on the amount of the dividend.

Right in liquidation

TO ISSUE A DIVIDEND THE COMPANY MUST HAVE:

Board of directors approval

Cash if it is a cash dividend
A balance in the retained earnings to cover the dividend

What is the effect of a cash dividend on stockholders equity?

Assets

Liabilities

Stockholders Equity

What is the effect of a stock dividend on stockholders equity?

Assets = Liabilities +

Stockholders Equity
Paid-in capital

retained earnings

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COMPUTING AND DISTRIBUTING A CASH DIVIDEND

Ford Company has two classes of stock

Cumulative preferred 10%, $10 par common.
20,000 a shares authorized 10,000 shares issued and
outstanding.
Common- $2.00 par 100,000 shares authorized 50,000
shares issued and outstanding.
A) Ford declares a $100,000 dividend. There are no dividends in
arrears.
B) Ford is 3 years in arrears.

What is the amount of the dividend paid to the preferred and

common?

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Entries for Cash dividends Three dates are important in

connection with dividends:
Assume that on December 1, 2001, the directors of Media General
declare a $.50 per share cash dividend on 100,000 shares of $10
par value common stock. The dividend is $50,000, and the entry
to record the declaration
(1) The declaration date

(2) The record date

(3) The payment date

ASSETS
EARNINGS

= LIABILITIES + PAID-IN + RETAINED

(1)
(3)

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STOCK DIVIDENDS
Reason

Conserve cash

Possible reduction of the market value of the share.

Small stock dividend less than 25% of the outstanding

shares.

Stock dividends affect only the retained earnings.

Stock dividends do not affect cash.

The value of the stock dividends is based on the

MARKET VALUE of the shares.

STOCK SPLITS
Involves the issuance of additional shares of stock
Its purpose is to is to reduce the market value of the existing
shares thus making it easier for the company to issue new
shares
A stock split does not have any effect on total paid-in-capital,
retained earnings, and total stockholders equity.
No accounting entry is necessary

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COMPUTING AND RECORDING A STOCK DIVIDEND

Ford originally issued 100,000 shares of $1.00 par common at $10.00 per
share.
Ford declared a 10% stock dividend based on 100,000 shares of $1.00 par
common. The current market price of Ford stock is $40.00.
How many new shares were issued?
What was the value of the issue?

The Accounting Entry

Retained earnings
Common stock dividends distributable
Paid-in capital in excess of par value

Stockholders Equity section

Before

Stock dividend
After

Common stock
Paid-in capital in excess of par
Total paid-in capital
Retained earnings
Total paid-in capital & retained earnings

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STOCK SPLITS
Increases the number of shares
No accounting entry is required
Has no effect on the stockholders equity
Will it affect the par value?
Will it affect the market value?
You own 100 shares of Ford $2.00 par common with a market value of $50
per share. Ford issues a 2 for 1 stock split.
How many shares of Ford will you own after the split?

What is the total value of your investment after the split?

What is the new par value after the split?

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Divide and Conquer

How does $2,100 become more than $1 million? An investor who bought
100 shares of Microsoft Corp. at the $21 offering price in March 1986 and
held them would now have 7,200 shares worth nearly $1.2 million, adjusted
for seven stock splits. By comparison, a $2,100 investment in the Standard
& Poors 500 index in March 1986 would now be worth about $10,805, not
counting dividends. And Microsoft marches on: The worlds largest software
maker said Monday that it will split its stock 2 for 1 on March 26, its eighth
split in 13 years, for holders of record March 12. The shares, which have
more than doubled in the last year on record revenue surged $5.63 on
Monday to close at $161.88. Companies generally split their shares when
they reach high levels, to make them more affordable to smaller investors.
Microsofts quarterly closes and latest:

March 13, 1986, stock price adjusted

for seven subsequent splits: 39 cents.

Sept. 21, 1987

2-for-1 stock split

May 23, 1994

2-for-1 stock split

June 15, 1992

3-for-2 stock split

Feb. 29, 1998

2-for-1 stock split
Dec. 9, 1996
2-for-1 stock split

June 27, 1991

3-for-2 stock split

April 16, 1990

2-for-1 stock split

16

Ex-Dividend
Q

What does it mean when a company has gone ex-dividend?

It means if you buy the companys stock, you wont get its recently declared
dividend. Ex-dividend borrows from Latin, without dividend.
Companies that pay dividends give the money to the stock holders who held
the stock at the end of a record data. The payments are usually made a few
weeks after the record date.
You might think it would be a neat trick to buy such stocks just before they go
ex-dividend so that you can quickly profit from the dividend amount. But if a stock
price moves because of a dividend, it will be weeks earlier when the dividends are
announced. All else being equal a stock will go down in price by the value of the
dividend on the day it goes ex-dividend. However, because this reflects the
dividend payout, that fall in price is not a genuine change and so most stock data
trackers do not include the value of the dividend in daily price change data.
To alert readers to the previous days record date, a stock that goes exdividend will have an x next to its listing in the Los Angeles Times and other
newspapers.

Power of Dividend Growth

You make think of venerable
blue chip companies such as Ford, Bell
Atlantic, J.P. Morgan and Chevron as
stodgy and old-fangled, but they offer
something that smaller firms dont:
generous and growing dividends.
Lets say you bought Ford in
early 1994. The company at the point
paid an annual dividend of 80 cents a
share. The stock was priced around
$20 a share then. So your annualized
dividend yield at that point was 4%.
Now look at Ford today. The
stock price is about $50 a share. The
annual dividend is $1.84 a share. So
the current dividend yield on the stock
is about 3.7%.
The yield has gone down but
only for new purchasers. If youve
owned the stock since 1994, heres
what has happened: the annual
dividend has been raised 130% since
then. With the current annual
dividend payout of $1.84 a share, the
dividend yield on shares you bought at
$20 in 1994 is a whopping 9.2% which is higher than any yield you can
get today on a high-quality bond.

The point is, because blue-chip

companies generally raise their
dividend payouts regularly, theyre
providing shareholders with a steady
income return to complement any
appreciation in the share price. Over
time, that dividend income can
become very lucrative indeed. And
unlike with a bond investment, which
pays a set rate of interest, your
dividend yield can actually go up from
one year to the next, as a company
raises the dividend amount.
Now, its also true that dividend
income doesnt always grow forever.
Some companies will cut dividends in
times of recession, if profits decline.
But many high-quality companies try
like heck not to cut or eliminate their
dividends, because it looks really bad.
So before you pass up a blue chip
stock because a smaller company has
greater growth potential, consider the
power of dividends over time.
Heres a famous example: One
share of Coca-Cola bought in its first
year has become more than 97,860

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shares through stock splits and

dividend reinvestments.
The investment is now earning
an annual dividend of more than
$58,000.

18

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enrolling. You can buy your very first shares from the company.
With DRIPs, you can dollar-cost average, building a position in a stock by
regularly plunking a certain amount of money into it. DRIPs will even purchase
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Evaluate a corporations dividend and earnings performance from

a stockholders perspective
PAYOUT RATIO
Cash dividends declared on common stock
Net income

DIVIDEND YIELDS
Annual dividend
Market price per share

EARNINGS PER SHARE (EPS)

Net income- preferred stock dividend
Average common shares outstanding

RETURN ON STOCKHOLDERS EQUITY

Net income-preferred stock dividend
Average stockholders equity

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