Reporting Stockholders Equity

 Reporting and Analyzing Stockholders

• Limited liability of stockholders; limited to investment
• Transferable ownership rights
• Ability to acquire capital
• Continuous life
• Corporation management: Shareholders Shareholders
• Voting rights
• Profit sharing
• Preemptive right
• Residual claim
• Controller
• Government regulations
• File application with the state government
• Corporate charter by-law
• Additional taxes

Double taxation II.

Stock Issue.

1. Basics of Stock Issue:

1. Authorized Stock: The maximum amount of stock that a corporation is authorized to sell by corporate charter.
2. Outstanding Stock: Capital stock that has been issued and is being held by stockholders. Legal capital= # of issued shares x par value per share.
3. Par Value Stock: Capital stock that has been assigned an arbitrary value per share in the corporate charter.
4. No-par value Stock: Capital stock that has not been assigned a value in the corporate charter.
5. Stated Value of No-par value Stock: Value per share assigned by the board of directors to no-par value stock. Authorized Issued Outstanding.
6. Paid-in Capital: Amount paid to corporation by stockholders for shares of ownership.
7. Retained Earnings: Earned capital held for future use in the business.

2. Accounting for Common Stock Issues:

1. Issuing Stock at Par Example 1: On March 1, 2002, XYZ Company issued 10,000 shares of $10 par value common stock at par.
2. Issuing Stock above Par

Example 2: On June 10, XYZ Company issued 5,000 shares of $10 par value common stock at $12 per share. Cash 60,000(=5,000×12) Common Stock50,000 Additional paid in capital14,000 (Paid-in capital in excess of par) What if the common stock issued on June 10 is no-par stock with a stated value of $10? Cash60,000 Common Stock50,000 Additional Paid in capital10,000

3. Treasury Stock:

A corporation’s own stock that has been issued, fully paid for, and reacquired by the corporation but not retired.  Issued but not outstanding:

• Corporations acquire treasury stock to … reissue shares to employees under bonus and stock compensation plans;
• increase trading of the company’s stock in securities market to enhance market value;
• reduce the number of shares outstanding, and therefore increase earnings per share (EPS);
• prevent a hostile takeover.

Purchasing Treasury Stock:

Cost method: Treasury stock is increased by the amount paid to reacquire the shares, and is decreased by the same amount when the shares are later sold.

Example 3: On October 15, 2002, XYZ Company acquired 2,000 shares of the stock issued on June 10 in Example 2 at $9 per share.

On the balance sheet: Stockholders equity Paid in capital Common stock (par) Additional paid-in capital Retained earnings Less:

• Treasury stock (a contra equity account).

Effect of purchasing treasury stock on common stock:

• Preferred stock has contractual provisions that give it preferences over common stock in dividends and assets in the event of a liquidation.
• Preferred stockholders do not have voting rights.

Example 4: On November 5, 2002, XYZ Company issued 5,000 shares of $10 par value preferred stock for $13 per share. Cash65,000 Preferred Stock50,000 Additional Paid in capital15,000

Dividend Preference:

• Preferred stockholders have the right to share in the distribution of corporate income before common stockholders;
• The first claim to dividends does not guarantee dividends;
• Cumulative Dividends: Preferred stockholders receive current and unpaid prior-year dividends before common stockholders receive any dividends. When dividends are cumulative, preferred dividends that were not declared in a given period are called dividends in arrears.

Example 5:

XYZ Company issued 10,000 shares of 10%, $5 par value cumulative preferred stock On January 1, 1999. XYZ had not declared any dividends until December 31, 2002. 1999: 10,000x 5 x 10% = 5,000 2000: 5,000 2001: 5,000 2002:5,000 Dec 31, 02: $20,000 in cash. Dividends in arrears are not a liability. They should be disclosed in the notes to financial statements. Liquidation Preference- Creditors Prefered stock holders common stockholders. Distribution by the corporation to the stockholders on a pro-rata basis.

Cash Dividends:

To pay a cash dividend, a company must have:

• retained earnings
• adequate cash
• declared dividends

Some Important Dates:

• Declaration date: the date the board of directors formally authorizes the cash dividends and announces it to stockholders.
• Retained earnings Dividends payable

Record date: The date ownership of outstanding shares is determined for dividend purposes.

Payment date:

• Companies pay stock dividends to …
• Satisfy stockholders’ dividend expectations without paying cash;
• Increase the marketability of its stock;
• Emphasize that a portion of stockholders’ equity has been permanently reinvested in the business.
• Small Stock Dividend: If the stock dividend is less than 20%-25% of the corporation’s issued stock, it is recorded at the fair market value per share.

Large Stock Dividend: If the stock dividend is greater than 20%-25% of the corporation’s issued stock, it is recorded at par or stated value per share.

Example 6: On February 1, 2003, the balance of XYZ Company’s retained earnings was $2,500,000. XYZ Company declared a 15% stock dividend on its 100,000 shares of $10 par value common stock. The current fair market value of XYZ Company’s stock is $13 per share. Retained earnings195,000 Stock dividend Distributable150,000 Additional paid in capital45,000 On March 1, 2003, XYZ Company issued the dividend shares. Stock dividend distributable 150,000 Common Stock150,000 – Effect of stock dividends on stockholders’ equity and its components: S/E Retained earnings195,000 (Decrease)

Stock Splits:

• The issuance of additional shares of stock to stockholders accompanied
• A reduction in the par or stated value
• An increase in number of shares.

Return on common stockholders’ equity ratio:

• (NI-Prefered stockholders dividends)
• Average common stockholders equity