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Week of April 25-29

by: Callisa Ruschmeyer

Week of April 25-29 ACCT 2110 - 002

Callisa Ruschmeyer
GPA 4.0

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About this Document

Chapter 10 Stockholders' Equity Preferred Stock Common Stock
Principles of Financial Accounting
Elizabeth G Miller
Class Notes
financial accounting, Miller, Auburn University, Stockholders', equity
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This 11 page Class Notes was uploaded by Callisa Ruschmeyer on Friday April 29, 2016. The Class Notes belongs to ACCT 2110 - 002 at Auburn University taught by Elizabeth G Miller in Fall 2015. Since its upload, it has received 20 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.


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Date Created: 04/29/16
th th April 25 -29 Stockholder's Equity  Equity represents the owners' claims against the assets of a corporation (after all liabilities have been deducted)  The stockholders' equity section on a balance sheet clearly identifies the various elements of equity that companies deal with  Most common sources of equity are: o Capital stock- the amount raised by issuing capital stock  Made up of both preferred and common stock  Common stock- the most common type of capital  And the associated additional paid-in capital o Retained earnings or deficit o Accumulated other comprehensive income o Treasury stock  Stockholders- investors who become owners of the corporation by purchasing stock  Note- dividends can be in the form of stock as well- they do not just have to be in the form of cash Types of Stocks and Descriptions  Authorized shares- the maximum number of shares of stock that a company can legally issue  Issued shares- the number of shares a company has distributed to owners to date  Outstanding shares- the number of shares that have been issued and are still held by someone other than the issuing company o When a company buys back shares, the outstanding shares go down Common Stockholders' Rights  When corporations issue common stock, they usually grant four rights to stockholders 1. The right to vote  Stockholders get the right to vote on board of directors and amend company charter  Charters increase the shares that were once an authorized amount  Only common stockholders receive the right to vote- preferred stockholders do not 2. The right to participate proportionally in dividends 3. The right to participate proportionally in residual assets  Residual assets occur if the company shuts down or liquidates  If the company liquidates, in which they could not pay their bills and debts, the creditors receive their shares first…so stockholders may not get anything because assets may not be left 4. The right of preemption  Stockholders get first grabs on any stocks up for sale so that selling them doesn't decrease their percentage of ownership  Stockholders want to keep their stock shares at the same percentage Preferred Stock  Form of capital stock that receives one or more priorities over common stock  Stockholders get preference to dividends and preference to assets upon liquidation of the company o They get these, but relinquish their right to vote  Stockholders receive their dividends before common stockholders receive any  Stock usually sells at a higher price than common stock  Preferred stock is separate from common stock- therefore, they have two different t- accounts Accounting for Issuance of Common and Preferred Stock  Par value- arbitrary monetary amount printed on each share of stock o Establishes a minimum price for the stock when issued o Does not determine its market value  Par value is multiplied by the number of shares sold is recorded in an account that describes the type of stock  Additional paid-in capital- the amount received in excess of the par value recorded in an account  Capital stock- stockholders' equity section of the balance sheet  Useful facts you definitely need to know o Always credit shares at par o If there is a difference in the value of the stock and the par value, it is made up in the "additional paid in capital-common stock" account Treasury Stock  The common stock that a company reacquires from stockholders  Because shares of treasury stock are no longer held by an external investor, they are no longer outstanding- but they are issued stock still  One of the most common reasons to reacquire shares is to issue it to employees under the company's stock compensation plans  Treasury shares are not entitled to dividends  When you buy back your own shares, it decreases the number of outstanding shares as well as total equity o You pay whatever it is in circulation for = (shares X cost)  When you buy back shares, you debit the contra equity account- "Treasury Stock" o This decreases total equity  Always leave stock accounts at the number originally issued at par value  Balance Sheet Stockholders' Equity o Contributing Capital  Common stock  Add P/C o Retained Earnings o Less: Treasury Stock Dividends  What profits are distributed to owners  Factors o Financial condition of the company o Cash available for dividends o Company's past history of dividends  Cash dividends distribute cash to stockholders o What happens when the corporate board decides that a cash dividend is warranted a. Date of declaration- board declares the dividend and a liability is created b. Date of record- date on which those who receive the dividends are identified c. Payment date- when the dividend will be distributed  Stock dividends distribute additional shares to stockholders o No cash is exchanged- just stocks o Why stock and not cash  A company may not have enough cash on hand, but wants to maintain a long and uninterrupted streak of declaring dividends  OR, a company may want to reduce the market price of its stock to keep its stock price in an "affordable" range for the average investor o A 10% stock dividend means that the company will issue additional shares equal to 10% of the current outstanding shares  So, investors owning 10,000 shares will receive 1,000 additional shares (10,000 X 10%) o Decrease Retained Earnings; Increase Contributing Capital o Do not affect assets, liabilities, or equity- equity money is just moved around o Small vs. Large Stock Dividends Size Percentage Value Small < 25% Market Value > 25% Par Value Large  Stock splits transfer additional shares to stockholders without changing equity o Basically just an increase in a company's shares of stock according to a specified ration o Used in place of stock dividend when the company wants to decrease the market price of its stock to make it more affordable o 2-for-1 split: shares from existing stockholders gets split into two- doubles the shares outstanding and, therefore, cuts the per share par value in half o No journal entry is needed: you only change the number of shares issued  Values never change, just each share's par value is divided  As you split the stock, the par value is proportionally affected o No effect on Retained Earnings or Contributing Capital  All dividends decrease retained earnings  Dividends affect stocks that are owned- which are labeled as outstanding shares  Always credit common stock at par Comparison of Stock Dividend vs. Stock Split What Is Affected Stock Stock Split Dividend Number of shares Increases Increases outstanding Par value per share No effect Decreases Total Contributed Capital Increases No Effect Retained Earnings Decreases No Effect Total Stockholders' Equity No Effect No Effect Market price per share Decrease Decrease  Stock dividend has no effect on par value- but it does affect the balance sheet --> decreases retained earnings and increases contributing capital o But no effect on stockholders' equity- just moves money around Cash Dividends on Preferred Stock  Cash dividends are allocated to both preferred and common stock holders o Of outstanding stock  Cumulative preferred stock- receives current-year dividends and all unpaid dividends form prior years o All before the common stockholders!  Dividends in arrears- the accumulated value of unpaid prior-year dividends  Noncumulative preferred stock- carries the right to receive current-year dividends only Stockholder Profitability Ratios  Return on Common Equity o Return on common equity = (net income - preferred dividends) / average common stockholders' equity  Earnings per Share (EPS) o EPS = (net income - preferred dividends) / average common shares outstanding  What can decrease the number of outstanding shares- treasury shares  When you look at investing in a company, do not just look at the EPS, but recalculate and add back the treasury shares to the already calculated outstanding shares  More accurate to divided by the number of total shares issued Stockholder Payout Ratios  Do not need to know either of these o Dividend Yield o Dividend Payout


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