Principles of Accounting II
Chapter 17: Plan Equity Financing
Short Answer
Accounting facilitates _______________ ________________.
_______ _____ _______________ is a company’s cost to obtain financing.
Dollar amount received back in excess of initial investment is _______ ____ _________.
Need for Financing
Why do businesses need funds?
1.
2.
Sources of Capital
1.
2.
3.
1
Characteristics of Equity Financing
•
Expected rate of return
•
Actual rate of return
Choice of Business Form: Proprietorship
•
Not separate ____________ ________________
•
Equity financing limited to ________________ ________________
_____________
•
Proprietor’s capital account includes:
Choice of Business Form: Partnership
•
Not separate ____________ ________________
•
Equity financing limited to ________________ ________________
_____________
•
Each partner’s capital account includes:
Choice of Business Form: Corporation
•
Separate _____________ _________________
•
Raise large amounts of _________________
•
No separate _________________ ________________
2
New Partner: External Buyout
•
Partnership not directly __________________.
•
Partnership ___________ and ____________ are unaffected.
•
New partner acquires leaving partner’s _______________.
New Partner: Direct Contribution
•
Direct contribution increases partnership’s _____________ and ____________.
•
Partnership ________________ determines new partner’s _______________.
•
If investment > capital account, ____________ to __________ _____________.
•
If investment < capital account, ____________ to __________ _____________.
3
New Partner: An Example
Existing partners:
Capital accounts
Jane
Jack
$50,000
$60,000
John
$100,000
Randy
$5,000
New partner:
Bobbi
Pay $120,000 for a 20% interest
Pre-admittance equity
Post-admittance equity
Bobbi’s interest
Bonus
New Partner: Second Example
Existing partners:
Capital accounts
Jane
Jack
$50,000
$60,000
John
$100,000
New partner:
Bobbi
Pay $15,000 for a 20% interest
Pre-admittance equity
Post-admittance equity
Bobbi’s interest
Bonus
4
Randy
$5,000
Dividing Partnership Earnings
•
Based on ___________________ _________________
•
Common methods:
1.
2.
3.
Partnership Earnings: An Example
Beginning Capital
Jane
Jack
John
Randy
$30,000
$10,000
$40,000
$20,000
Partnership earns
1. Equal sharing
2. Based on capital
3. Salary $24,000
Then equal sharing
4. Interest at 10%
Then equal sharing
5. Salary $24,000
Then interest at 10%
Then equal sharing
5
Total
$100,000
Equity Financing for Corporations
•
Preferred stock
o Right to ______________ ________________
o If ___________________, owner entitled to _____________ in
______________
o Claim to ____________ assets in _________________ after
_______________
•
Common stock
o Right to ______________ ________________ after ___________
____________
o Claim to ____________ assets in _________________
Counting Shares
•
Authorized shares
•
Issued shares
•
Treasury shares
•
Outstanding shares
6
Test Your Comprehension
Skeeter, Inc. receives authorization to issue ________________ common shares.
Skeeter sells ________________ shares for $____ each.
Skeeter buys ________________ of its own shares for $____ each.
1. How many shares are outstanding?
2. What is Skeeter’s total equity before earnings?
Par Value of Capital Stock
•
Par value
o _______________ amount that protects _____________________
o _______ amount unrelated to _________________
____________________
o Dollar amount of ____________ or ____________ ____________ on
balance sheet
•
Paid in excess
o ___________ price less ________ _______________
o _______________ account from common or preferred stock
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•
No-par stock
o Issued in states not requiring ____________ _____________
______________
o ___________ ______ _____________ account unnecessary
Market Value of Capital Stock
•
_____________ or ____________ price
•
Not related to _______________ ________________
•
Corporation participates in market only when:
o _________________ authorized shares
o _________________ treasury shares
o __________________ treasury shares
•
Existing shareholders selling to new shareholders
o Does not involve _______________
o May occur over an __________________
o Does not affect corporation’s ______________
8
Chronology of a Dividend
•
Declaration date
•
Record date
•
Ex-dividend date
•
Payment date
Calculating the Total Dividend
•
Dividends are paid on ___________________ shares
•
Preferred dividends calculated as:
•
Common dividends paid only if:
Total Preferred Dividend
“10,000 shares of $30 par value 5% preferred stock”
“20,000 shares of 8%, $40 par value preferred stock”
“5,000 shares of $1.60 non-cumulative preferred stock”
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Stock Splits
•
Corporations call in _______________ shares and issue ______ shares
•
General ratios
•
100 shares worth $2 might be replaced with
•
Percentage of corporation owned does not _______________
•
Corporate ________ and ____________ do not _____________.
•
Why split?
1.
2.
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