11 REPORTING AND ANALYZING STOCKHOLDER’S EQUITY 11-1 Accounting, Fourth Edition Study Study Objectives Objectives 11-2 Identify and discuss the major characteristics of a corporation Record the issuance of common stock Explain the accounting for the purchase of treasury stock Differentiate preferred stock from common stock Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits Identify the items that affect retained earnings Prepare a comprehensive stockholders’ equity section Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective Reporting Reporting and andAnalyzing Analyzing Stockholders’ Stockholders’Equity Equity The Corporate Form of Organization Characteristics Formation Stockholder rights Stock Issue Considerations Authorized stock Issuance Par and no-par value Accounting for common stock issues 11-3 Accounting for Treasury Stock Purchase of treasury stock Preferred Stock Dividends and Retained Earnings Dividend preferences Cash dividends Liquidation preference Stock dividends Stock splits Retained earnings restrictions Financial Statement Presentation and Corporate Performance Balance sheet Statement of cash flows Dividend record Earnings performance Debt vs equity decision The The Corporate Corporate Form Form of of Organization Organization An entity separate and distinct from its owners Classified by Ownership Classified by Purpose Not-for-Profit Publicly held For Profit Privately held ► Salvation Army ► Nike ► American Cancer Society ► General Motors ► IBM Gates Foundation ► General Electric ► 11-4 ► Cargill Inc The The Corporate Corporate Form Form of of Organization Organization Characteristics of a Corporation 11-5  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes Advantages Disadvantages SO Identify and discuss the major characteristics of a corporation The The Corporate Corporate Form Form of of Organization Organization Characteristics of a Corporation 11-6  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes Corporation acts under its own name rather than in the name of its stockholders SO Identify and discuss the major characteristics of a corporation The The Corporate Corporate Form Form of of Organization Organization Characteristics of a Corporation 11-7  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes Limited to their investment SO Identify and discuss the major characteristics of a corporation The The Corporate Corporate Form Form of of Organization Organization Characteristics of a Corporation 11-8  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes Shareholders may sell their stock SO Identify and discuss the major characteristics of a corporation The The Corporate Corporate Form Form of of Organization Organization Characteristics of a Corporation 11-9  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes Corporation can obtain capital through the issuance of stock SO Identify and discuss the major characteristics of a corporation The The Corporate Corporate Form Form of of Organization Organization Characteristics of a Corporation 11-10  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer SO Identify and discuss the major characteristics of a corporation Measuring Measuring Corporate Corporate Performance Performance Debt Versus Equity Decision Illustration 11-21 11-60 SO Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective Measuring Measuring Corporate Corporate Performance Performance Debt Versus Equity Decision Illustration 11-22 11-61 SO Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective Measuring Measuring Corporate Corporate Performance Performance Illustration: Microsystems Inc currently has 100,000 shares of common stock outstanding issued at $25 per share and no debt It is considering two alternatives for raising an additional $5 million: Plan A involves issuing 200,000 shares of common stock at the current market price of $25 per share Plan B involves issuing $5 million of 12% bonds at face value Income before interest and taxes will be $1.5 million; income taxes are expected to be 30% Illustration 11-23 11-62 SO Entries for Stock Dividends appendix 11A Illustration: Medland Corporation declares a 10% stock dividend on its 50,000 shares of $10 par value common stock The current fair market value of its stock is $15 per share Record the entry on the declaration date: Retained earnings (50,000 x 10% x $15) Common stock dividends distributable Paid-in capital in excess of par 75,000 50,000 25,000 Illustration 11A-1 11-63 SO Prepare entries for stock dividends Entries for Stock Dividends appendix 11A Illustration: Record the journal entry when Medland issues the dividend shares Common stock dividends distributable Common stock 11-64 50,000 50,000 SO Prepare entries for stock dividends Key Points 11-65  Under IFRS, the term reserves is used to describe all equity accounts other than those arising from contributed capital This would include, for example, reserves related to retained earnings, asset revaluations, and fair value differences  Many countries have a different mix of investor groups than in the United States For example, in Germany, financial institutions like banks are not only major creditors of corporations but often are the largest corporate stockholders as well In the United States, Asia, and the United Kingdom, many companies rely on substantial investment from private investors Key Points  11-66 There are often terminology differences for equity accounts The following summarizes some of the common differences in terminology Key Points  11-67 The accounting for treasury stock differs somewhat between IFRS and GAAP (However, many of the differences are beyond the scope of this course.) Like GAAP, IFRS does not allow a company to record gains or losses on purchases of its own shares One difference worth noting is that, when a company purchases its own shares, IFRS treats it as a reduction of stockholders’ equity, but it does not specify which particular stockholders’ equity accounts are to be affected Therefore, it could be shown as an increase to a contra equity account (Treasury Stock) or a decrease to retained earnings or share capital IFRS requires that the number of treasury shares held be disclosed Key Points 11-68  A major difference between IFRS and GAAP relates to the account Revaluation Surplus Revaluation surplus arises under IFRS because companies are permitted to revalue their property, plant, and equipment to fair value under certain circumstances This account is part of general reserves under IFRS and is not considered contributed capital  As indicated earlier, the term reserves is used in IFRS to indicate all noncontributed (non–paid-in) capital Reserves include retained earnings and other comprehensive income items, such as revaluation surplus and unrealized gains or losses on available-for-sale securities Key Points 11-69  IFRS often uses terms such as retained profits or accumulated profit or loss to describe retained earnings The term retained earnings is also often used  The accounting related to prior period adjustments is essentially the same under IFRS and GAAP  Equity is given various descriptions under IFRS, such as shareholders’ equity, owners’ equity, capital and reserves, and shareholders’ funds Looking into the Future The IASB and the FASB are currently working on a project related to financial statement presentation An important part of this study is to determine whether certain line items, subtotals, and totals should be clearly defined and required to be displayed in the financial statements The options of how to present other comprehensive income under GAAP will change in any converged standard Also, the FASB has been working on a standard that will likely converge to IFRS in the area of hybrid financial instruments, such as bonds that are convertible to common stock 11-70 Under IFRS, a purchase by a company of its own shares is recorded by: a) an increase in Treasury Stock b) a decrease in contributed capital c) a decrease in share capital d) All of these are acceptable treatments 11-71 The term reserves is used under IFRS with reference to all of the following except: a) gains and losses on revaluation of property, plant, and equipment b) capital received in excess of the par value of issued shares c) retained earnings d) fair value differences 11-72 Under IFRS, the amount of capital received in excess of par value would be credited to: a) Retained Earnings b) Contributed Capital c) Share Premium d) Par value is not used under IFRS 11-73 Copyright Copyright “Copyright © 2011 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” 11-74 ... Gates Foundation ► General Electric ► 11- 4 ► Cargill Inc The The Corporate Corporate Form Form of of Organization Organization Characteristics of a Corporation 11- 5  Separate Legal Existence ... Corporate Corporate Form Form of of Organization Organization Characteristics of a Corporation 11- 11  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights... Illustration 11- 1 Corporation organization chart Chairman and Board of Directors President and Chief Executive Officer General Counsel and Secretary Vice President Marketing Treasurer 11- 14 Vice