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After completing this chapter you should be able to: Identify characteristics of corporations and their organization; explain characteristics of, and distribute dividends between, common and preferred stock; explain the items reported in retained earnings; compute earnings per share and describe its use; compute price-earnings ratio and describe its use in analysis.
Chapter 13 Accounting for Corporations PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA McGrawHill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights reserved 13 2 C 1 Corporate Form of Organization An An entity entity created created by by law law Existence Existence is is separate separate from from owners owners Has Has rights rights and and privileges privileges Ownership can be Privately Held Publicly Held 13 3 C 1 Characteristics of Corporations Advantages Separate legal entity Limited liability of shareholders Transferable ownership rights Continuous life Lack of mutual agency for shareholders Ease of capital accumulation Disadvantages Governmental regulation Corporate taxation 13 4 C 1 Corporate Organization and Management Shareholders Board of Directors President, Vice-President, and Other Officers Employees of the Corporation 13 5 C 1 Rights of Shareholders Vote at shareholders’ meetings Sell shares Purchase additional shares Receive dividends, if any Share equally in any assets remaining after creditors are paid in a liquidation 13 6 C 1 Basics of Share Capital Total number of shares that a corporation is authorized to sell or issue Total number of shares that has been sold or issued to shareholders 13 7 C 1 Basics of Share Capital Par value is an arbitrary amount assigned to each share when it is authorized Classes of Shares Par Value No-Par Value Stated Value Market price is the amount that each share will sell for in the market 13 8 P 1 Issuing Par Value Share Par Value Share On September 1, Matrix, Inc issued 100,000 shares of $2 par value for $25 per share Let’s record this transaction Sept Dr 2,500,000 Cash Share Capital-Ordinary, $2 par value Share Premium-Ordinary Issued 100,000 ordinary shares Cr 200,000 2,300,000 13 9 P 1 Issuing Par Value Shares 13 10 P 1 Issuing Shares for Noncash Assets Par Value Shares On September 1, Matrix, Inc issued 100,000 shares of $2 par value for land valued at $2,500,000 Let’s record this transaction Sept Dr 2,500,000 Land Share Capital-Ordinary, $2 par value Share Premium-Ordinary Exchanged 100,000 ordinary shares for land Cr 200,000 2,300,000 13 19 C2 preference shares If Preference Shares Are Noncumulative: Year 2010: No dividends paid Year 2011: Pay 2011 preference dividend Remainder goes to ordinary Preference $ - If Preference Share Are Cumulative: Year 2010: No dividends paid Year 2011: Pay 2010 preference dividend in arrears Pay 2011 preference dividend Remainder goes to ordinary Totals Preference $ - $ Ordinary $ - 9,000 $ $ $ 33,000 Ordinary $ - 9,000 9,000 18,000 $ $ 24,000 24,000 13 20 C2 Preference Shares Participating Dividends may exceed a stated amount once common shareholders receive a dividend equal to the preferred stated rate vs Nonparticipating Dividends are limited to a maximum amount each year The maximum is usually the stated dividend rate (Normal case) Reasons for Issuing Preference Shares To raise capital without sacrificing control To boost the return earned by ordinary shareholders through financial leverage To appeal to investors who may believe the ordinary shares are too risky or that the expected return on common stock is too low 13 21 P 3 Treasury Shares Treasury shares are a company’s own shares that have been acquired Corporations might acquire its own shares to: Use their shares to buy other companies Avoid a hostile takeover Reissue to employees as compensation Support the market price 13 22 P 3 Purchasing Treasury Shares On May 8, Whitt, Inc purchased 2,000 of its own shares in the open market for $4 per share May Treasury Shares-Ordinary Cash Dr 8,000 Cr 8,000 Purchase 2,000 treasury shares at $4 per share Treasury Treasury shares shares are are shown shown as as aa reduction reduction in in total total shareholders shareholders’’ equity equity on on the the balance balance sheet sheet 13 23 P 3 Selling Treasury Shares at Cost On June 30, Whitt sold 100 shares of its treasury shares for $4 per share June 30 Dr 400 Cash Treasury Shares-Ordinary Sold 100 treasury shares for $4 per share Cr 400 13 24 P 3 Selling Treasury Shares Above Cost On July 19, Whitt, Inc sold an additional 500 treasury shares for $8 per share July 19 Cash Treasury Shares-Ordinary Share Premium-Treasury Shares Dr 4,000 Sold 500 treasury shares for $8 per share Cr 2,000 2,000 13 25 Selling Treasury Shares Below Cost P 3 On August 27, Whitt sold an additional 400 treasury shares for $1.50 per share Aug 27 Cash Share Premium-Treasury Shares Treasury Shares-Ordinary Dr 600 1,000 Sold 500 treasury shares for $1.50 per share Cr 1,600 13 26 C3 Statement of Comprehensive Income 13 27 C3 Statement of Changes in Equity 13 28 C3 Reserves Most reserves result from accounting standards to reflect certain measurement changes in equity rather than the income statement, e.g asset revaluation reserve, foreign currency translation reserve and other statutory reserves Retained earnings also called revenue reserves Ending Retained Earnings = Beginning Retained Earnings + Net Income – Dividends A company’s cumulative net income less any net losses and dividends declared since its inception 13 29 A 1 Earnings Per Share Earnings per share is one of the most widely cited accounting statistics Basic earnings = per share Net income - Preference dividends Weighted-average ordinary shares outstanding 13 30 A 2 PRICE–EARNINGS RATIO This ratio reveals information about the stock market’s expectations for a company’s future growth in earnings, dividends, and opportunities Price– Earnings Ratio = Market value per share Earnings per share 13 31 A 3 Dividend Yield Tells us the annual amount of cash dividends distributed to ordinary shareholders relative to the share’s market price Dividend Yield Annual cash dividends per share = Market value per share 13 32 A 4 BOOK VALUE PER ORDINARY SHARE Reflects the amount of shareholders’ equity applicable to ordinary shares on a per share basis Shareholders’ equity applicable Book value per to ordinary shares = ordinary share Number of ordinary shares outstanding 13 33 End of Chapter 13 ... Characteristics of Corporations Advantages Separate legal entity Limited liability of shareholders Transferable ownership rights Continuous life Lack of mutual agency for shareholders Ease of. .. Shareholders % of? ?Corporations? ?Paying Divends 100% 80% 75% 60% 40% 22% 20% 0% Common Preferred 13 12 P 2 Accounting for Cash Dividends Three important dates ds n e id Div Date of Declaration Date of Record... Organization and Management Shareholders Board of Directors President, Vice-President, and Other Officers Employees of the Corporation 13 5 C 1 Rights of Shareholders Vote at shareholders’ meetings