Chap 11 Stockholders’ Equity

 The role of capital stock, # shares authorized, outstanding,

& issued

 Earnings per share, Dividend Yield Ratios

 Stockholders’Equity transactions (Treasury Stocks, Cash

& Stock Dividends, Splits)

 Preferred Stock vs. Common Stock

 Read p 560-574
 11-3

Understanding The Business

Advantages of
a corporation

Simple to Easy to Provides

become an transfer limited
owner ownership liability
 11-6

Ownership of a Corporation

S to c k h o ld e r s
(O w n e r s o f v o tin g s h a r e s )

B o a r d o f D ir e c to r s
Elected by
In te r n a l (m a n a g e r s ) a n d
E x te rn a l (n o n -m a n a g e rs )
shareholders
Appointed
by directors
P r e s id e n t

V ic e P r e s id e n t V ic e P r e s id e n t V ic e P r e s id e n t V ic e P r e s id e n t
(P r o d u c tio n ) (M a r k e tin g ) (F in a n c e ) (C o n tr o lle r )
 11-8

Authorized, Issued, and Outstanding

Capital Stock

Authorized
Shares
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
stock that stock that
have been never have
sold. been sold.
 11-9

Authorized, Issued, and Outstanding

Capital Stock

Outstanding shares are

Authorized issued shares that are
Shares owned by stockholders.

Outstanding
Unissued
Issued Shares
Shares
Shares
Treasury shares are
Treasury
issued shares that have
Shares been reacquired by the
corporation.
 11-11

Earnings per share (EPS)

Net Income
EPS =
Average Number of Shares Outstanding

Outback’s
Outback’s income
income for
for 2003
2003 is
is
$170,000,000
$170,000,000 and
and the
the average
average number
number of
of
shares
shares outstanding
outstanding isis 75,260,000.
75,260,000.

Earnings
Earnings per
per share
share is
is probably
probably
the
the single
single most
most widely
widely watched
watched
financial
financial ratio.
ratio.
 11-12

Earnings per share (EPS)

Net Income
EPS =
Average Number of Shares Outstanding

$170,000,000
EPS = = $2.26 per share
75,260,000 Shares

Earnings
Earnings perper share
share is
is probably
probably
the
the single
single most
most widely
widely watched
watched
financial
financial ratio.
ratio.
 11-17

Par Value and No-par Value Stock

Par Value

Nominal Legal
value capital
Legal capital is the amount of capital,
required by the state, that must remain
invested in the business.
 11-18

Par Value and No-par Value Stock

Par
Value ≠ Market
Value
I get it!
 11-20

Accounting for Capital Stock

Two primary sources of

stockholders’ equity

Contributed Retained
capital earnings

Common Capital in
stock, par excess of
value par value
 11-24

Sale and Issuance of Capital Stock

On July 6, Outback issued 100,000

shares of $0.01 par value common
stock for $22 per share.
100,000 shares × $0.01 par value = $1,000

100,000 shares × $22 per share = $2,200,000

GENERAL JOURNAL
Date Description Debit Credit
July 6 Cash 2,200,000
Common Stock 1,000
Capital In Excess of Par Value 2,199,000
 11-25

Stock Options

Outback If Outback does not have new

stock to issue when the stock
options are exercised, then . .

Employee
Stock options allow
compensation
employees to purchase
package includes
stock from the corporation
salary and stock
at a fraction of the stock’s
options.
value in the secondary
market.

Employee
 11-26

Treasury Stock

Outback buys
Outback
its own stock in
the secondary
market.
(Treasury stock) Stockholders
Management
Stock options allow
compensation
management to purchase
package includes
stock from the corporation
salary and stock
at a fraction of the stock’s
options.
value in the secondary
market.
Management
 11-27

Treasury Stock

No voting
Contra
or
equity
dividend
account
rights

When stock is reacquired, the corporation

records the treasury stock at cost.
 11-28

Treasury Stock

On May 1, Outback reacquired 100,000

shares of its common stock at $20 per share.
The journal entry for May 1 is . . . .

GENERAL JOURNAL
Date Description Debit Credit
May 1 Treasury Stock 2,000,000
Cash 2,000,000
100,000 shares × $20 = $2,000,000
 11-29

Treasury Stock

On December 3, Outback reissued 10,000

shares of the treasury stock at $30 per share.
The journal entry for December 3 is . . .
10,000 shares × $20 cost = $200,000

10,000 shares × $30 = $300,000

GENERAL JOURNAL
Date Description Debit Credit
Dec. 3 Cash 300,000
Treasury Stock 200,000
Capital in Excess of Par Value 100,000
 11-31

Accounting for Cash Dividends

Declared by board Not legally

of directors. required.

Requires sufficient
Creates liability
Retained Earnings
at declaration.
and Cash.
 11-32

Dividend Dates

Declaration date
 Boardof directors declares the dividend.
 Record a liability.

GENERAL JOURNAL
Date Description Debit Credit
Retained Earnings XXX
Dividends Payable XXX
 11-33

Dividend Dates

Date of Record
 Stockholders holding shares on this date will
receive the dividend. (No entry)

X
 11-34

Dividend Dates

Date of Payment
 Recordthe dividend payment to
stockholders.

GENERAL JOURNAL
Date Description Debit Credit
Dividends Payable XXX
Cash XXX
 11-36

Dividend Yield Ratio

Dividend Dividends Per Share

=
Yield Market Price Per Share

Outback
Outback paid
paid aa dividend
dividend of
of $0.12
$0.12 per
per
share
share in
in 2003
2003 and
and thethe market
market price
price was
was
$40
$40 per
per share.
share.

This
This ratio
ratio is
is often
often used
used to
to compare
compare thethe
dividend-paying
dividend-paying performance
performance of
of different
different
investment
investment alternatives.
alternatives.
 11-40

Accounting for Stock Dividends

Distribution of additional shares

of stock to stockholders.

No change in total No change in par

stockholders’ equity. values.

All stockholders
retain same
percentage
ownership.
 11-41

Accounting for Stock Dividends

Small Large
Stock
Stock dividend
dividend << 25%
25% Stock
Stock dividend
dividend >> 25%
25%

Record
Record at
at current
current Record
Record atat
market
market value
value par
par value
value
of
of stock.
stock. of
of stock.
stock.
 11-42

Stock Splits

Ice Cream Parlor

Stock splits change the
par value per share, Banana Splits
but the total par value On Sale Now
is unchanged.
 11-44

Stock Splits

Assume that a corporation had 3,000

shares of $2 par value common stock
outstanding before a 2–for–1 stock split.
Before After
Split Split
Common Stock Shares 3,000 6,000 Increase

Par Value per Share $ 2.00 $ 1.00 Decrease

No
Total Par Value $ 6,000 $ 6,000 Change
 11-46

Preferred Stock

Preference
over common
stock

Usually has Usually has a

no voting fixed dividend
rights rate
 11-47

Dividends on Preferred Stock

Current Dividend
Current Dividend Preference:
Preference: The
The current
current
preferred
preferred dividends
dividends must
must be
be paid
paid before
before
paying
paying any
any dividends
dividends to
to common
common stock.
stock.
Cumulative Dividend
Cumulative Dividend Preference:
Preference: Any
Any
unpaid
unpaid dividends
dividends from
from previous
previous years
years
(dividends
(dividends in
in arrears)
arrears) must
must be
be paid
paid before
before
common
common dividends
dividends are
are paid.
paid.
 11-58

Focus on Cash Flows

Effect on
Financing Activity
Cash Flows
Issuance of capital stock +
Purchase of treasury stock -
Sale of treasury stock +
Payment of cash dividends -
Outback
 Back of Chapter MC Qs

 ANSWERS TO MULTIPLE CHOICE


 1. a)
 2. d)
 3. b)
 4. a)
 5. a)
 6. b)
 7. c)
 8. c)
 9. d)
 10. a)
 Homework Manager Assignment

E 11-6
 E 11-9
 E 11-11
 E 11-25