CHAPTER 11
REPORTING AND INTERPRETING
OWNERS’ EQUITY
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
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
UNDERSTANDING THE BUSINESS
Advantages of a corporation
Simple to
become an
owner
Easy to
transfer
ownership
Provides
limited
liability
Because a corporation is a separate legal entity, it can . . .
Own assets.
Incur liabilities.
Sue and be sued.
Enter into contracts.
11-2
OWNERSHIP OF A CORPORATION
Voting (in person
or by proxy).
Stockholders’
Rights
 Proportionate
distributions of
profits (dividends).
 Proportionate
distributions of
assets in a
liquidation.
11-3
OWNERSHIP OF A CORPORATION
Stockholders
(Owners of voting shares)
Board of Directors
Internal (managers) and
External (non-managers)
Appointed
by directors
Vice President
(Production)
Elected by
shareholders
President
Vice President
(Marketing)
Vice President
(Finance)
Vice President
(Controller)
11-4
AUTHORIZED, ISSUED, AND
OUTSTANDING SHARES
Authorized shares are the maximum
number of shares of capital stock that
can be sold to the public.
Issued
shares are
authorized
shares of
stock that
have been
sold.
Unissued
shares are
authorized
shares of
stock that
never have
been sold.
11-5
AUTHORIZED, ISSUED, AND
OUTSTANDING SHARES
Outstanding shares are
issued shares that are
owned by stockholders.
Issued
Shares
Outstanding
Shares
Treasury
Shares
Unissued
Shares
Treasury shares are
issued shares that have
been reacquired by the
corporation.
11-6
EARNINGS PER SHARE (EPS)
EPS
=
Net Income*
Average Number of Shares
Outstanding for the Period
*If there are preferred dividends, the amount is subtracted from net income.
Earnings per share is probably the single
most widely watched financial ratio.
Kroger’s income for 2012 is $602,000,000 and the
average number of shares outstanding is 597,000,000.
EPS
=
$602,000,000
597,000,000 Shares
=
$1.01 per share
11-7
EARNINGS PER SHARE (EPS)
11-8
COMMON STOCK TRANSACTIONS
Two primary sources of
stockholders’ equity
Contributed
capital
Common
stock, par
value
Retained
earnings
Capital in
excess of
par value
11-9
COMMON STOCK TRANSACTIONS
Basic
voting
stock
Ranks after
preferred
stock
Dividend set
by board
of directors
11-10
COMMON STOCK TRANSACTIONS
Par Value
Nominal
value
Legal
capital
Legal capital is the amount of capital, required by
the state, that must remain invested in the
business.
11-11
COMMON STOCK TRANSACTIONS
Par
Value

Market
Some states do
Some
states
not
require
that a
par
value
do
notbe
stated inathe
require
par
charter.
value to be
stated in the
charter.
Value
11-12
INITIAL SALE OF STOCK
Initial public offering
(IPO)
Seasoned new issue
The first time a
corporation sells
stock to the public.
Subsequent sales of
new stock to the
public.
Kroger
issues new
stock.
11-13
INITIAL SALE OF STOCK
Kroger issued 100,000 shares of $1 par value
common stock for $20 per share.
The journal entry to record this
transaction is:
11-14
SALE OF STOCK IN SECONDARY
MARKETS
Transactions between two investors
that do not affect the corporation’s
accounting records.
I’d like to sell
some of my
Kroger stock.
I’d like to buy
some of your
Kroger stock.
11-15
STOCK ISSUED FOR EMPLOYEE
COMPENSATION
If Kroger does not have new
stock to issue when the stock
options are exercised, then...
Employee
compensation
package includes
salary and stock
options.
Stock options allow
employees to purchase
stock from the corporation
at a predetermined, fixed
price.
Employee
11-16
REPURCHASE OF STOCK
Kroger buys
its own stock in
the secondary
market.
(Treasury Stock)
Stockholders
Repurchased stock is called treasury stock. A corporation
records treasury stock at cost. Treasury stock has no voting or
dividend rights. Treasury stock is not an asset. It is a contra
equity account.
11-17
REPURCHASE OF STOCK
Kroger reacquired 100,000 shares of its
common stock at $20 per share.
The journal entry to record this
transaction is:
11-18
REISSUANCE OF TREASURY STOCK
Kroger reissued 10,000 shares
of the treasury stock at $30 per share.
The journal entry to record this
transaction is:
11-19
DIVIDENDS ON COMMON STOCK
Declared by board of
directors.
Not legally
required.
Creates liability at
declaration.
Requires sufficient
Retained Earnings and
Cash.
Declaration date
•
•
Board of directors declares the dividend.
Record a liability.
GENERAL JOURNAL
Date
Description
Retained earnings (-SE)
Dividends payable (+L)
Debit
Credit
XXX
XXX
11-20
DIVIDEND DATES
Date of Record
• Stockholders holding shares on this date will
receive the dividend. (No entry)
Date of Payment
• Record the dividend payment to stockholders.
GENERAL JOURNAL
Date
Description
Dividends payable (-L)
Cash (-A)
Debit
Credit
XXX
XXX
11-21
DIVIDEND YIELD RATIO
Dividend
Yield
=
Dividends Per Share
Market Price Per Share
This ratio is often used to compare the dividend-paying
performance of different investment alternatives.
In 2012, Kroger paid a dividend of $0.36 per share and
the market price of a share of Kroger stock was $22.
Dividend
Yield
=
$0.36 per share
$22 per share
=
1.6%
11-22
STOCK DIVIDENDS
Distribution of additional shares of stock to owners.
No change in total
stockholders’ equity.
No change in par values.
All stockholders retain same
percentage ownership.
Small
Large
Stock dividend < 20-25%
Stock dividend > 20-25%
Record at current market
value of stock.
Record at par value
of stock.
11-23
STOCK DIVIDENDS
Assume The Kroger Co. issued a large stock dividend. The
company issued 400,000,000 shares of its $1 par value
stock. The journal entry to record the stock dividend is:
The stock dividend did not change total stockholders’ equity.
It changed only the balances of two accounts within
stockholders’ equity.
11-24
STOCK SPLITS
Stock splits change the par value per share,
but the total par value is unchanged.
Assume that a corporation had 3,000 shares of $2 par value
common stock outstanding before a 2–for–1 stock split.
Before
Split
Common Stock Shares
After
Split
3,000
Par Value per Share
$
2.00
Total Par Value
$ 6,000
6,000
$
1.00
$ 6,000
Increase
Decrease
No
Change
11-25
STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY
11-26
PREFERRED STOCK
Preference
over common
stock
Usually has
no voting
rights
Usually has a
fixed dividend
rate
11-27
INTERNATIONAL PERSPECTIVE—
WHAT’S IN A NAME?
US GAAP and IFRS use different words to describe
the same corporate equity accounts.
11-28
DIVIDENDS ON PREFERRED STOCK
Current Dividend Preference: The current
preferred dividends must be paid before paying any
dividends to common stock stockholders.
Cumulative Dividend Preference: Any unpaid
dividends from previous years (dividends in arrears)
must be paid before common dividends are paid.
If the preferred stock is noncumulative, any dividends
not declared in previous years are lost permanently.
11-29
DIVIDENDS ON PREFERRED STOCK
Kites, Inc. has the following stock outstanding:
Common stock: $1 par, 100,000 shares
Preferred stock: 3%, $100 par, cumulative, 5,000
shares
Preferred stock: 6%, $50 par, noncumulative, 3,000
shares
Dividends were not paid last year. In the current year,
the board of directors declared dividends of $50,000.
How much will each class of stock receive?
11-30
DIVIDENDS ON PREFERRED STOCK
Total dividend declared
Preferred stock (cumulative)
Dividends in arrears ($100 par × 3% × 5,000 shares)
Current Year
($100 par × 3% × 5,000 shares)
Remainder
Preferred stock (noncumulative)
Current Year
($50 par × 6% × 3,000 shares)
Remainder
Common stock
Current Year
($11,000 Remainder)
Remainder
$ 50,000
$ 15,000
15,000
30,000
$ 20,000
9,000
$ 11,000
11,000
$
0
11-31
RESTRICTIONS ON THE PAYMENT OF
DIVIDENDS
If I loan you $150,000, I will
want you to restrict your
retained earnings.
Why would you
want to do that?
Retained earnings restrictions often limit borrowing
and limit the amount of dividends that can be paid.
11-32
EFFECT ON STATEMENT OF CASH
FLOWS
11-33
CHAPTER SUPPLEMENT ─ ACCOUNTING
FOR OWNERS’ EQUITY FOR SOLE
PROPRIETORSHIPS AND PARTNERSHIPS
A sole proprietorship is
owned by a one person.
Two equity accounts
Capital
Drawings
11-34
SOLE PROPRIETORSHIPS
J. Doe started a retail store by investing $150,000 of his own
money. The journal entry to record this business formation is:
Each month, J. Doe withdraws $1,000 for personal living expenses.
The January 30 journal entry to record the first withdrawal is:
11-35
SOLE PROPRIETORSHIPS
During the first year, J. Doe’s income totaled
$18,000, and his withdrawals totaled $12,000.
The equity section of J. Doe’s balance sheet at
the end of the first year is:
J. Doe, Capital, Beginning Balance
Add: Net Income
Total
Less: Drawings
J. Doe, Capital, Ending Balance
$
$
150,000
18,000
168,000
12,000
156,000
11-36
PARTNERSHIPS
A partnership is owned by
two or more individuals.
Partnerships require clear
agreements about authority, risks,
and the sharing of profits and losses.
Separate capital and drawings
accounts are maintained
for each partner.
Partnership income is divided
among the partners according
to the partnership agreement.
Advantages
Ease of
formation
Complete
control by
partners
No income
taxes on business
itself
Primary
disadvantage
Unlimited
liability
11-37
PARTNERSHIPS
Able and Baker formed a partnership. Able contributed $60,000 cash.
Baker contributed $40,000 cash. The partners agreed to divide partnership
income in the ratio of their contributions (60:40). The journal entry to record
this business formation is:
11-38
PARTNERSHIPS
The partners agreed that each month Able would withdraw
$1,000 and Baker would withdraw $650. The January 30
journal entry to record the first withdrawal is:
11-39
PARTNERSHIPS
During the first year, partnership income totaled $30,000.
Withdrawals totaled $12,000 for Able and $7,800 for Baker.
The equity section of the partnership balance sheet at the
end of the first year is:
Able and Baker Partnership
Partners' Equity
Able
Baker
Total
Beginning capital balances $
$
$
Investments by owners
60,000
40,000
100,000
Add Net income
18,000
12,000
30,000
Total
$ 78,000
52,000
130,000
Less partners' withdrawals
(12,000)
(7,800)
(19,800)
Ending capital balances
$ 66,000 $ 44,200 $ 110,200
11-40
ACCOUNTING AND REPORTING FOR
THREE TYPES OF BUSINESSES
11-41
END OF CHAPTER 11
11-42