3
Tools of the Trade, Part I
The Balance Sheet: Initial Financing –
Investments by Owners
Discussion Questions
3-1. NOTE TO INSTRUCTOR: Discussion Question 3-1 is a
great one to revisit later in the semester. Consider having
your students submit their lists of questions and then
redistribute the lists later in the semester and have them
analyze how their lists would change, based on their
increased knowledge of how to use accounting information.
If students truly seem stumped on how to approach this
question, suggest that they envision a specific company with
which they have some experience (e.g., the local bike shop,
gas station, fast food restaurant). One object of the question
is to help your students understand that the purpose of the
balance sheet is to address very logical information needs.
The other object is to convey to your students an
understanding that not all the information needed by
economic decision makers can be found in the financial
statements.
A good way to approach the discussion is to have the
students provide questions from their lists while you record
the questions on the board or an overhead. Record the
questions under four groups as follows (but don=t title them
or explain what they represent):
a. Questions about assets.
b. Questions about liabilities.
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-1
c. Questions about owners= equity.
d. Questions not fitting any of the first three groups.
An interesting thing will happen as you record the questions.
Most of the questions your students ask will be requesting
balance sheet information. For example, they may ask if the
company owes anybody anything, but they may not know
they are referring to liabilities. They may ask whether the
company has any cash, not knowing they are asking about
assets. They may ask whether the company has been
profitable, not knowing they are asking about retained
earnings. They may ask if anybody is suing the company,
which you would record under the fourth group. With very
little guidance from you, your students will come up with
questions regarding the major sections of the balance sheet,
plus some questions that do not fit in the balance sheet.
When you have enough questions recorded to drive home
the point of the exercise, label the four headings. This can
be a powerful way for your students to learn why the balance
sheet is organized as it is. They will also learn that there are
important items of information about a company that cannot
be learned from the balance sheet (or any other financial
statement, for that matter).
F3-2
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
3-2. The purpose of this question is twofold. First, it is designed
to help your students understand that the best way to solve
any problem is to locate and use the best tool available.
This assumes that the real problem and the most
appropriate tool have been identified. Second, it should help
your students understand that in order to use any tool
effectively, you must understand both what it can do and
what it cannot do.
How does one decide what kind of tool is needed in the
situation described in the question? An expert escape artist
would very likely request a different tool than someone who
had never been in this situation before because of his or her
knowledge of the problem and potential solutions. Some of
your students may want a screwdriver to remove the hinges
of the door or the doorknob (including the lock mechanism).
Some may want an axe and just chop their way out. The
specific answers they come up with are not as important as
the thought they put into their answers. This analogy is very
powerful in helping students think about thinking, and can be
revisited as they add more tools to their kits.
3-3. A stock=s market price for a publicly traded company is
quoted in business newspapers such as the Wall Street
Journal, the business section of most local papers, on-line
computer services, and even business programs on
television. You could also contact a stockbroker.
3-4. One argument that could be made for issuing par value
stock, is to remain Acomparable@ to other corporations
already in existence. Certain states= corporate laws require
a corporation to have a par value. Another is that by
establishing a low par value and then selling the stock for
more than the par value, a company will show Additional
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-3
Paid-in Capital on its balance sheet, which sounds
impressive (even though, as the text explains, is
meaningless).
The argument against establishing a par value on
common stock is that such data no longer provide relevant
information and par value is only an accounting device that
clutters the equity section of the balance sheet presentation
and confuses readers. The statements could be simplified
with no-par stock.
3-5. The balance between investment and speculation involves
an awareness of the philosophy of motivating a person=s
actions. Investment usually connotes a long-term philosophy
of buying into the industry, management and corporate
character of the investment, which is more company-driven.
Speculation usually connotes a short-term philosophy of
buying the investment only as a means to receive quick
profits, which is more market-driven.
The long-term concern for the U.S. economy is that
speculation is encroaching on investment, thereby causing
corporate management to run their companies with a very
short-term, quick-profit perspective. This appears to have a
long-term detrimental effect on the economic health of our
country.
F3-4
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
Review the Facts
A.
Assets are the probable future economic benefits obtained
or controlled by an entity as a result of past transactions or
events; things of value owned by a company. Liabilities are
probable future sacrifices of economic benefits arising from
present obligations of the entity to transfer assets or provide
services in the future as a result of past transactions or
events. Equity is the residual interest in the assets of an
entity that remains after deducting its liabilities. Equity is
also called net assets, owners’ equity, or net worth.
B.
The two sources of equity are the investments by owners
which result from transfers from other entities of something
valuable and earned equity which is the total amount the
entity has earned since its inception reduced by any
distributions to owners.
C.
Assets = Liabilities + Owners’ Equity
D.
The balance sheet is also referred to as the Statement of
Financial Condition or the Statement of Financial Position.
E.
The formats applied to the balance sheet are the account
form which lists assets in the left column and the liabilities
and equity in the right column; and the report form which lists
all the elements in one vertical column.
F.
A proprietorship has one owner and therefore only one
capital account and one drawing account. A partnership has
multiple owners and each owner is represented with one
capital and one drawing account which allow the tracking of
each individual partner’s capital.
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-5
G.
The ownership of a corporation by a stockholder is
evidenced by shares of stock. The stockholder may receive
distributions from the corporation in the form of dividends
and if the stockholder is involved in the day to day
operations of the business he becomes an employee of the
corporation.
H.
Authorized shares of stock are the maximum number of
shares that can be legally issued under the corporate
charter. Issued shares of stock represent the number of
shares already distributed to shareholders. Outstanding
shares of stock are the shares being held by stockholders;
calculated as the issued shares minus the treasury stock.
I.
Treasury stock is the stock reacquired by the corporation
that have been issued but are no longer outstanding.
J.
The two major components of stockholders equity are
contributed capital and retained earnings.
Contributed
capital is the total amount of capital invested by the
shareholders. Retained earnings are the sum of all earnings
of a corporation since inception minus the dividends
declared. The retained earnings account is the portion of
earnings retained for internal financing.
K.
The two major classes of stock are the common stock and
the preferred stock. Common stock has voting privileges
whereas; preferred stock contains certain preferences over
common stock but has no voting privileges. The common
shareholders elect board members and vote on major
corporate issues. The preferred stock is entitled to dividends
before the common shareholders and they have a
preference in the event of liquidation.
F3-6
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
L.
Par value is an optional, arbitrary dollar amount placed on
the stock by the incorporators when the corporate charter is
created. The stock is listed on the balance sheet at a figure
that represents the par value per share multiplied by the
number of shares issued. The par value of the stock has no
relationship to the market value of the stock.
M.
A stock offering is the offer of stock of a corporation to the
public for the first time. A stock exchange is a place which
provides the ability for willing buyers and sellers of stock to
come together to exchange shares in the secondary market.
The most famous stock exchange is the New York Stock
Exchange.
N.
Investment bankers or underwriters serve as intermediaries
between a corporation issuing stock and the investors who
ultimately purchase the shares.
O.
The primary stock market is the business activity involved in
the initial issue of stock from a corporation. The secondary
stock market is the business activity that focuses on the
trades of stock among investors subsequent to the initial
issue.
P.
The SEC is a government organization created by Congress
in 1933 that regulates the reporting by public companies and
the trading of securities in the market.
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-7
Apply What You Have Learned
3-6.
a. Assets = Liabilities + Equity
b. Assets – Probable future economic benefits controlled by an
entity as a result of prior transactions. What a company
has.
Liabilities – Probable future sacrifices of assets arising from
present obligations of an entity as a result of past
transactions. What a company owes.
Equity – The residual interest in the assets of an entity that
remains after deducting liabilities.
c. Assets – Cash, Accounts Receivable, Supplies, Inventory
Liabilities – Accounts Payable, Notes Payable, Bonds
Payable
Equity – Capital, Withdrawals, Common Stock, Preferred
Stock, Retained Earnings
3-7.
1. b
2. a
3. a
4. c
5.
6.
7.
8.
F3-8
b
b
c
c
Debts of the company
Probable future economic benefits
Things of value a company has
The residual interest in the assets of an entity that
remains after deducting its liabilities
Probable future sacrifices of economic benefits
What the company owes
What the company has less what it owes
The owner’s interest in the company
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
3-8.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
a
c
b
a
c
c
b
c
c
c
3-9.
a. 1.
2.
3.
4.
5.
Cash
Additional Paid-in Capital
Bonds Payable
Land
Common Stock
Retained Earnings
Notes Payable
Withdrawals
Partners’ Capital
Preferred Stock
The date of the balance sheet should not be for the
year ended, but as of December 31, 2007.
The heading and total for the right side of the balance
sheet should be Liabilities and Stockholders’ Equity.
Notes Payable is a liability, not an asset.
Cash is an asset, not a liability.
The balance sheet does not balance. Each item must
verified to determine which one is incorrectly stated or if
an item is missing. For this scenario, we assumed that
Retained Earnings is understated by $20,000.
b.
Karen Bean Enterprises
Balance Sheet
December 31, 2007
Assets
Liabilities and Stockholders’ Equity
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-9
Cash
$ 20,000
Land
120,000
Notes Payable
$ 20,000
Common Stock
40,000
Additional Paid-in Capital 50,000
Retained Earnings
30,000
Total Liabilities and
Stockholders’ Equity
$140,000
Total Assets $140,000
3-10.
a. 1.
2.
3.
4.
There are only 30 days in November.
The heading and total for the right side of the balance
sheet should be Stockholders’ Equity instead of
Owner’s Equity.
Treasury Stock is a reduction in equity, not an asset.
Stallworth’s Capital account should be Common Stock
because this is a corporation.
b.
L. Stallworth, Inc.
Balance Sheet
November 30, 2007
Cash
Assets
$50,000
Total Assets
F3-10
$50,000
Liabilities and
Notes Payable
Common Stock
Retained Earnings
Less: Treasury Stock
Total Liabilities and
Stockholders’ Equity
Equity
$ 20,000
40,000
10,000
<20,000>
$ 50,000
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
3-11.
There are two possible interpretations of this problem.
First Interpretation:
a. 1. The Balance sheet should not be for the year ended but
as of December 31, 2007.
2. Sweet and Barnes Capital accounts should be
Common Stock because this is a corporation.
Contributed capital is not an asset, but an equity item.
3. Liabilities and Owner’s Equity should be labeled
Stockholders’ Equity because this is a corporation.
b.
Sweet Corporation
Balance Sheet
December 31, 2007
Assets
Cash
$120,000
Total Assets
$120,000
Liabilities and Stockholders’ Equity
Notes Payable
$ 30,000
Common Stock
60,000
Retained Earnings
30,000
Total Liabilities and
Stockholders’ Equity $120,000
Second Interpretation:
1.
2.
3.
The Balance sheet should not be for the year ended but as
of December 31, 2007.
Sweet is not a corporation, but a partnership.
Sweet and Barnes Capital accounts should be equity
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-11
accounts, not asset accounts.
4. Liabilities and Owner’s Equity should be labeled Partners’
Equity because this is a partnership.
5
The Retained Earnings is the net income earned to date. In
the absence of additional information, we will split it between
the two partners.
3-11. (Continued)
b.
Sweet Corporation
Balance Sheet
December 31, 2007
Assets
Cash
$120,000
Total Assets
$120,000
Liabilities and Partners’ Capital
Notes Payable
$ 30,000
Sweet Capital
35,000
Barnes Capital
55,000
Total Liabilities and
Partners’ Capital
$120,000
3-12.
a. It appears that Gerner contributed assets to the business
and borrowed funds from the bank. Gerner may have
contributed $100,000 in cash and bought land with money
borrowed from the bank, or he may have contributed the
Land and borrowed $50,000 from the bank.
b. It appears that the business is organized as a sole
proprietorship based on the presentation of Gerner’s Capital
account on the balance sheet.
F3-12
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
3-13.
a. Susan Pate and Associates has assets of $60,000,
consisting of Cash (of $40,000) and Land (that cost
$20,000).The entity has two partners, Susan Pate and Julie
Pham. The partnership owes a note payable to the bank for
$10,000 and each partner has a capital balance of $25,000.
b. Because there are two Capital accounts, this entity appears
to be a partnership.
c. Without additional information, it is not possible to determine
the profit for the year because we do not know the original
capital contributions.
d. Without additional information, it is not possible to determine
the profit sharing ratio because we do not know the original
capital contributions.
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-13
3-14.
a. The Balance Sheet reports Total Assets of $120,000. The
Liabilities reported indicate that the business owes a note
payable of $20,000 to the bank and has 4,000 shares of
common stock that were sold above the par value. The
company has earned a profit in the first year based on the
Retained Earnings balance.
b. Vu Enterprises appears to be a corporation.
c. Because we do not know if any dividends were paid out, we
cannot determine the amount of profit for the first year from
this information.
d. Based upon the way the word stockholder’s is written, we
can assume that there is only one stockholder.
e. Quynh Vu Enterprises issued 4,000 shares of common stock
at a price of $22.50 per share, using information from the
Common Stock account and the Additional Paid-in Capital
account as follows:
Common Stock Account / Par Value = Number of Shares
$40,000 /
$10
= 4,000 shares
Sales price of stock / Number of shares = Price per share
$90,000 /
4,000 shares = $22.50 per share
F3-14
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
3-15.
a.
Randy Peoples Enterprises
Balance Sheet
January 2, 2007
Assets
Cash
$5,000
Total Assets
$5,000
Liabilities and Owner’s Equity
Liabilities
$ -0Owner’s Equity:
Randy Peoples, Capital
5,000
Total Liabilities and
Owner’s Equity
$5,000
b.
R & S Enterprises
Balance Sheet
January 2, 2007
Assets
Cash
$5,000
Total Assets $5,000
Liabilities and Partners’ Capital
Liabilities
$ -0Partner’s Capital:
Randy Peoples, Capital
2,000
Sandy Peoples, Capital
3,000
Total Liabilities and
Partners’ Capital
$5,000
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-15
3-15. (Continued)
c.
R & S Enterprises, Inc.
Balance Sheet
January 2, 2007
Assets
Cash
$5,000
Total Assets $5,000
Liabilities and Stockholders’ Equity
Liabilities
$ -0Stockholders’ Equity:
Common Stock
$1,000
Additional Paid-in
Capital
4,000
Total Stockholders’ Equity
5,000
Total Liabilities and
Stockholders’ Equity
$5,000
d.
R & S Enterprises Inc.
Balance Sheet
January 2, 2007
Assets
Cash
$5,000
Total Assets $5,000
e.
F3-16
Liabilities and Stockholders’ Equity
Liabilities
$ -0No-Par Common Stock
5,000
Total Liabilities and
Stockholders’ Equity
$5,000
Randy might wish to form a partnership instead of a soleChapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
proprietorship for several reasons. Partnerships provide:
1. Increased management expertise
2. Access to more capital than a sole proprietorship
3. No special income taxes
4. Greater business continuity than the proprietorship.
3-16.
a.
Arthur Johnson Enterprises
Balance Sheet
June 2, 2007
Assets
Cash
Total Assets
Liabilities and Owner’s Equity
$50,000 Liabilities
$ -0Owner’s Equity:
Arthur Johnson, Capital
50,000
Total Liabilities and
$50,000
Owner’s Equity
$50,000
b.
A & C Enterprises
Balance Sheet
June 2, 2007
Assets
Cash
$80,000
Total Assets $80,000
Liabilities and Partners’ Capital
Liabilities
$ -0Partner’s Capital:
Arthur Johnson, Capital
50,000
Charles Smith, Capital
30,000
Total Liabilities and
Partners’ Capital
$80,000
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-17
3-16. (Continued)
c.
A & C Enterprises, Inc.
Balance Sheet
June 2, 2007
Assets
Cash
$80,000
Total Assets $80,000
Liabilities and Stockholders’ Equity
Liabilities
$ -0Stockholders’ Equity:
Common Stock
$ 8,000
Additional Paid-in
Capital
72,000
Total Stockholders’ Equity
80,000
Total Liabilities and
Stockholders’ Equity
$80,000
d.
A & C Enterprises, Inc.
Balance Sheet
June 2,2007
Assets
Cash
$80,000
Total Assets $80,000
e.
F3-18
Liabilities and Stockholders’ Equity
Liabilities
$ -0No-Par Common Stock
80,000
Total Liabilities and
Stockholders’ Equity
$80,000
The balance sheet is a “financial snapshot “that reports the
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
financial position (assets, liabilities, and equity) of a business
as of a point in time.
3-17.
a.
Fred Berfel Enterprises
Balance Sheet
July 1, 2007
Assets
Cash
Total Assets
Liabilities and Owner’s Equity
$90,000 Liabilities
$ -0Owner’s Equity:
Fred Berfel, Capital
90,000
Total Liabilities and
$90,000
Owner’s Equity
$90,000
b.
F & D Enterprises
Balance Sheet
July 1, 2007
Assets
Cash
$90,000
Total Assets $90,000
Liabilities and Partners’ Capital
Liabilities
$ -0Partner’s Capital:
Fred Berfel, Capital
40,000
Dan Berfel, Capital
50,000
Total Liabilities and
Partners’ Capital
$90,000
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-19
3-17. (Continued)
c.
F & D Enterprises Inc.
Balance Sheet
July 1, 2007
Assets
Cash
$90,000
Total Assets $90,000
Liabilities and Stockholders’ Equity
Liabilities
$ -0Stockholders’ Equity:
Common Stock
$18,000
Additional Paid-in
Capital
72,000
Total Stockholders’ Equity
90,000
Total Liabilities and
Stockholders’ Equity
$90,000
d.
F & D Enterprises Inc.
Balance Sheet
July 1, 2007
Assets
Cash
$90,000
Total Assets $90,000
F3-20
Liabilities and Stockholders’ Equity
Liabilities
$ -0No-Par Common Stock
90,000
Total Liabilities and
Stockholders’ Equity
$90,000
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
e.
Some advantages of the corporate form over a partnership
include:
1. Limited liability of the owners
2. Even greater access to capital
3. Ease of transfer of ownership
4. Continuity of life.
3-18.
a.
Sandy Sanders Enterprises
Balance Sheet
March 1, 2007
Assets
Cash
Land
Total Assets
Liabilities and Owner’s Equity
$40,000 Liabilities
$ -05,000 Owner’s Equity:
Sandy Sanders, Capital
45,000
Total Liabilities and
$45,000
Owner’s Equity
$45,000
b.
S & D Enterprises
Balance Sheet
March 1, 2007
Assets
Cash
Land
$70,000
10,000
Total Assets $80,000
Liabilities and Partners’ Capital
Liabilities
$ -0Partner’s Capital:
Sandy Sanders, Capital
50,000
Daryl Sanders, Capital
30,000
Total Liabilities and
Partners’ Capital
$80,000
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-21
3-18. (Continued)
c.
S & D Enterprises, Inc.
Balance Sheet
March 1, 2007
Assets
Cash
Land
$70,000
10,000
Total Assets $80,000
Liabilities and Stockholders’ Equity
Liabilities
$ -0Stockholders’ Equity:
Common Stock
$ 8,000
Additional Paid-in
Capital
72,000
Total Stockholders’ Equity
80,000
Total Liabilities and
Stockholders’ Equity
$80,000
d.
S & D Enterprises Inc.
Balance Sheet
March 1, 2007
Assets
Cash
Land
$70,000
10,000
Total Assets $80,000
e.
F3-22
Liabilities and Stockholders’ Equity
Liabilities
$ -0No-Par Common Stock
80,000
Total Liabilities and
Stockholders’ Equity
$80,000
Some advantages of the corporate form are:
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
1.
2.
3.
4.
Limited liability of the owners
Even greater access to capital
Ease of transfer of ownership
Continuity of life.
3-19.
On the asset side, there are no differences among the balance
sheets of proprietorships, partnerships, and corporations. Except
for bonds payable, which are generally issued by corporations,
and income taxes payable, there are no differences in the
presentation of liabilities. The differences are found in the equity
section of the balance sheet.
Neither proprietorships nor partnerships differentiate
between amounts invested by their owner or owners and amounts
earned by the company. Both owner investments and amounts
earned by the company are lumped together as capital. A
proprietorship has only one capital account, representing the
equity of a single owner. Partnerships have a separate capital
account for each of the owners or partners.
Corporations are required to report owner investments and
amounts the company has earned separately. Stock accounts
and Additional Paid-in Capital accounts reflect investments by
owners and make up the equity section called “contributed
capital”. Retained Earnings reflects amounts earned throughout
the life of the corporation, but not distributed to owners.
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-23
3-20.
1. h
2.
f
3.
4.
d
i
5.
b
6.
g
7.
a
8.
e
9.
c
10.
j
F3-24
An arbitrary value placed on either common stock or
preferred stock at the time a corporation is formed.
The group of men and women who have the ultimate
responsibility for managing a corporation.
The owners of the corporation.
Any amount received by a corporation when it issues
stock at a price greater than the par value of the stock
issued.
The formal document that legally allows a corporation
to begin operations.
The group of men and women who manage the day-today operations of a corporation.
The person or persons who submit a formal application
with the appropriate government agencies to form a
corporation.
A legal document providing evidence of ownership in a
corporation.
Rules established to conduct the business of the
corporation.
The amount at which common stock sells.
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
3-21.
a. The key officers of the corporation usually consist of the
following:
1. Chief Executive Officer: Duties include responsibility for
all activities of the corporation. This person is usually
the president.
2. Chief Operating Officer: This is the person who directs
the daily operations of the corporation.
3. Chief Financial Officer: The person who is responsible
for the financial affairs of the corporation.
4. Controller: The person in charge of all accounting
functions of the corporation.
5. Treasurer: The person responsible for the management
of the cash of a corporation.
6. Corporate Secretary: The person who maintains
minutes of meetings of the board of directors and the
stockholders.
b. Authorized shares of stock are the maximum number of
shares a corporation has been given permission to issue
under its corporate charter. Issued shares of stock are the
shares that have been distributed to the owners of the
corporation in exchange for cash or other assets.
Outstanding shares are the shares of stock actually held by
the shareholders, while Treasury Stock is stock that has
been issued and reacquired by the corporation.
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-25
3-22.
a. Ramona Rahill, Inc. could issue up to a maximum of
1,000,000 shares of stock as this is the amount of stock
authorized. This means that they currently have an
additional 200,000 shares that they may sell.
b. The average price at which the corporation sold its stock is
found by totaling the Common Stock and Additional Paid-in
Capital accounts (contributed capital) and dividing the total
by the shares issued.
$8,800,000/800,000 shares = $11 per share.
c. Dividends are paid based on the outstanding shares,
therefore the corporation would need:
800,000 shares x $1.25 = $1,000,000
d. If the corporation has distributed $3,500,000 in dividends, it
has earned a total of $5,500,000 in profits.
3-23.
a. The Juliette Richard Corporation has 1,000,000 shares of
authorized stock. The corporation has 200,000 shares of
unissued stock and 50,000 shares in the Treasury for a total
of 250,000 shares available to sell.
b. The average price at which the corporation sold its stock is
found by totaling the Common Stock and Additional Paid-in
Capital accounts (contributed capital) and dividing the total
by the shares issued.
$16,000,000 / 800,000 shares = $20 per share.
c. Dividends are paid based on the outstanding shares,
therefore the corporation would need:
F3-26
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
750,000 shares x $2.00 = $1,500,000.
d. If the corporation has distributed $5,500,000 in dividends
then the corporation has earned a total of $15,000,000 of
net profit.
e. $4,100,000 / 50,000 shares = $82 per share.
f.
$5,000,000 / 250,000 shares = $20 per share.
3-24.
a. David Luza Corporation has 1,000,000 shares of authorized
stock. The corporation has no shares of unissued stock and
50,000 shares in the Treasury, for a total of 50,000 shares
available to sell.
b. The average price at which the corporation sold its stock is
found by totaling the Common Stock and Additional Paid-in
Capital accounts (contributed capital) and dividing the total
by the issued shares.
$18,000,000 / 1,000,000 shares = $18 per share.
c. Dividends are paid based on the outstanding shares,
therefore the corporation would need:
950,000 shares x $1.50 = $1,425,000.
d. Because the Retained Earnings account contains
$9,500,000, the corporation has paid no dividends.
e. $2,500,000 / 50,000 shares = $50 per share.
f.
All of the treasury stock could be sold.
50,000 shares x $60 per share = $3,000,000
3-25.
The preferred stockholders will receive a liquidation distribution
before the common stockholders. Preferred stockholders have
certain preferences over common stockholders. One of the
preferences is a priority claim over common shareholders to
assets in the event of the company’s liquidation. Because
common shareholders are the residual owners of the firm, they
receive what is left after all creditors and the preferred
shareholders receive their liquidation payout.
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-27
3-26.
a. Investors will choose preferred stock as an investment
because preferred stock has
1. preference to dividends ahead of Common Stock;
2. less risk than Common Stock; and
3. preference in liquidation over Common Stock.
b. Investors will choose common stock as an investment
because common stock has
1. voting rights;
2. greater possibility of stock appreciation if the company
performs well; and
3. the residual ownership of the corporation.
3-27.
1. B
2. N
3. B
4. P
5. C
6. P
7. P
8. P
9. N
10. C
F3-28
Often has a par value.
Must have a par value.
Can legally pay a dividend.
Pays a pre-established dividend amount.
Usually has voting rights.
Usually does not have voting rights.
Has preference in dividends.
Has preference in liquidation.
Is preferred by all investors.
Represents the residual ownership in the corporation.
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
3-28.
a. Investors who choose common stock are willing to take risk
and are more interested in the long-term profitability of the
entity. Those who invest in common stock frequently look
more to stock appreciation than to annual dividends.
Although common stocks pay dividends, the return rate on
the investment is normally very low in comparison to other
investments.
b.
Investors who select preferred stock are generally risk
averse and frequently require regular dividend income.
Fixed annual dividends, that often pay higher returns than
certificate of deposits, entice many investors to choose
preferred stocks to achieve a guaranteed rate of return on
the investment. Unlike common stocks, preferred stocks
seldom achieve significant market value appreciation.
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-29
3-29.
a. The 20,000 shares of stock issued in 1972 and the 50,000
shares issued in 1992 indicate primary stock market
transactions. The transactions that have occurred in item #2
describe secondary market transactions. Items #3 and #4
describe results of activity in the secondary stock market, but
are not actual transactions.
b.
The company received:
1972 (20,000 x $5 per share)
1992 (50,000 x $15 per share)
Secondary stock transactions
Total
$100,000
750,000
-0$850,000
c.
Common stock will show a total of $850,000 as determined
in requirement b above. Balance sheet figures for common
stock reflect what the corporation received when the
corporation originally issued it, not its current market value.
d.
The obvious answer is the company must have performed
well in 2006 and 2007 because the stock price increased
substantially. But, this response may be too simplistic. An
increase in the market value of common stock tells us that
investors gained confidence in the corporation during this
period.
This could be explained by new technology
developed by the company, new markets announced by the
company, or any number of other factors. In addition, the
increased market price per share indicates that the investors
F3-30
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
believe the company will perform well in the future.
3-30.
a. The 35,000 shares of stock issued in 1988 and the 80,000
shares issued in 1992 indicate primary stock market
transactions. The transactions that occurred in item #2
describe secondary market transactions. Items #3 and #4
describe results of activity in the secondary stock market, but
are not actual transactions.
b.
The company received:
1988 (35,000 x $10 per share)
1992 (80,000 x $15 per share)
Secondary stock transactions
Total
$ 350,000
1,200,000
-0$1,550,000
c.
Common stock will show a total of $1,550,000 as determined
in requirement b above. Balance sheet figures for common
stock reflect what the corporation received when the
corporation originally issued it, not its current market value.
d.
The obvious answer is the company performed poorly in
2006 because the stock price declined substantially. But,
this response may be too simplistic. A decrease in the
stock’s market price tells us that investors lost confidence in
the corporation during the period. This could be explained
by new technology developed by other companies that put
Shiner at a disadvantage, the loss of market share, or any
number of other factors. The decrease in stock price also
indicates that the investment community believes the
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-31
company will not perform better in the future.
3-31.
a. The 90,000 shares of common stock and 10,000 shares of
preferred stock issued in 1992 and the 50,000 shares of
common and 5,000 shares of preferred issued in 1993
indicate primary stock market transactions. The item #2
transactions describe results of secondary market activity.
Items #3 and #4 describe results of activity in the secondary
stock market, but are not actual transactions.
b. The company received:
1992 (90,000 x $25 per share)
$2,250,000
1992 (10,000 x $100 per share)
1,000,000
1993 (50,000 x $35 per share)
1,750,000
1993 (5,000 x $150 per share)
750,000
Secondary stock transactions
-0Total
$5,750,000
c. Common stock will show a total of $4,000,000 ($2,250,000 +
$1,750,000) as determined in requirement b above.
Preferred stock will show a total of $1,500,000 ($1,000,000 +
$500,000) from the par value of $100 for 15,000 shares
issued. Additional Paid-in Capital – Preferred Stock will
reflect $250,000 ($50 x 5,000) for the shares sold above par
in 1993. Balance sheet figures for common stock and
preferred stock reflect what the corporation received for it
when it was issued, not its current market value.
d. Common Stock (90,000 + 50,000) = 140,000 shares
Market Value:
December 31, 2006 (140,000 shares x $55) = $7,700,000
December 31, 2007 (140,000 shares x $65) = $9,100,000
F3-32
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
Preferred Stock (10,000 + 5,000) = 15,000 shares
Market Value:
December 31, 2006 (15,000 shares x $135) = $2,025,000
December 31, 2007 (15,000 shares x $150) = $2,250,000
e. It is impossible to determine from the information given.
f.
It is impossible to determine from the information given.
3-32.
a. The 40,000 shares of stock issued in 1979 and the 70,000
shares issued in 1992 indicate primary stock market
transactions. The item #2 transactions describe results of
activity in the secondary market. Item #3 is a transaction
that involves the repurchase by the company of its stock in
the secondary market. Items #4 and #5 describe results of
activity in the secondary stock market, but are not actual
transactions.
b. The company received:
1979 (40,000 x $10 per share)
$ 400,000
1992 (70,000 x $15 per share)
1,050,000
Secondary stock transactions
-0Total
$1,450,000
The company paid out $200,000 for treasury stock in 1995.
c. Common stock will show a total of $1,450,000 as determined
in requirement b above. Balance sheet figures for common
stock reflect what the corporation received for it when it was
issued, not its current market value. The cost of the
Treasury Stock will be shown as a reduction from the total
stockholders’ equity.
d. The obvious answer is the company must have performed
poorly in 2007 because the stock price decreased
substantially. But, this response may be too simplistic. A
decrease in the market price tells us that investors have lost
confidence in the corporation during the period. This could
be explained by new technology developed by other
companies that puts Bennett at a disadvantage, the loss of
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-33
market share, or any number of other factors. In addition,
the decrease in the stock’s price during the year indicates
that the investment community believes the company will not
perform better in the future.
3-33.
Gaylord Corporation
Balance Sheet
July 10, 2007
Liabilities and Stockholders’ Equity
Cash
$360,000 Liabilities
$ -0Stockholders’ Equity:
Preferred Stock $200,000
Common Stock
50,000
Additional Paid-in
Capital
110,000
Total Stockholders’ Equity
360,000
Total Liabilities and
Total Assets $360,000
Stockholders’ Equity
$360,000
Assets
3-34.
Sheets Corporation
Balance Sheet
May 5, 2007
Assets
Cash
$5,250,000
F3-34
Liabilities and Stockholders’ Equity
Liabilities
$ -0Stockholders’ Equity:
Preferred Stock $2,500,000
Common Stock
300,000
Additional Paid-in
Capital
2,450,000
Total Stockholders’ Equity
5,250,000
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
Total
Assets $5,250,000
Total Liabilities and
Stockholders’ Equity
$5,250,000
3-35.
Mayes Corporation
Balance Sheet
April 15, 2007
Liabilities and Stockholders’ Equity
$7,500,000 Liabilities
$ -0Stockholders’ Equity:
Preferred Stock $1,000,000
Common Stock
5,000,000
Additional Paid-in
Capital
1,500,000
Total Stockholders’ Equity
7,500,000
Total
Total Liabilities and
Assets $7,500,000
Stockholders’ Equity
$7,500,000
Assets
Cash
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-35
3-36.
a. As of December 31, 2006, the company had issued
669,847,961 shares of stock. The total amount received for
these shares was $4,744,000,000. (Total of Common Stock
and Additional Paid-in Capital.)
The average amount
received for each share was $7.08.
$4,744,000,000 / 669,847,961 = $7.08
b. The number of common stock shares outstanding as of
December 31, 2007 was 671,242,137. Each share has a
par value of $.60. Therefore, the precise amount in the
Common Stock account is $402,745,282.20.
671,242,137 x $.60 = $402,745,282.20
c. The number of shares of common stock issued rose from
669,847,961 at the end of 1998 to 671,242,137 at the end of
2007.
The difference between these two amounts
represents the number of shares issued during 2007 of
1,394,176 shares.
d. The company has been authorized to issue up to
900,000,000 shares. With 671,242,137 shares already
issued as of the end of 2007, the company could issue the
remaining authorized shares.
900,000,000 – 671,242,137 = 228,757,863
F3-36
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners
3-37.
August 27, 2005
a.
b.
Type of stock
outstanding
Shares authorized
Shares issued
Shares outstanding
Common
600,000,000
188,871,875
165,262,513
August 28, 2004
Common
600,000,000
187,671,318
167,396,998
Family Dollar does have 500,000 Shares of preferred stock
authorized but no shares are issued or outstanding.
c. Family Dollar might wish to issue preferred stock to raise
additional capital without obligating itself for interest and debt
principal payments or to avoid diluting its earnings per share with
additional common stock issues. A corporation only has to pay
preferred dividends if it declares them.
d.
Year Ended August 27, 2005:
Assets
=
Liabilities + Stockholders’ Equity
$2,409,501
= $981,435
+ $1,428,066
Year Ended August 28, 2004:
Assets
=
Liabilities + Stockholders’ Equity
$2,229,361
= $887,279 + $1,337,082
Note to Instructor: Depending upon timing, students may find
different years listed than are presented here for problems. The
answers below are based upon the years available at our
publishing date.
Chapter 3 – Tools of the Trade, Part I:
The Balance Sheet: Initial Financing – Investment by Owners
F3-37
3-38.
January 28, 2006
a.
b.
c.
d.
January 29, 2005
Type of stock
outstanding
Common
Common
Shares authorized
500,000,000
500,000,000
Shares issued
68,557,041
68,325,046
Shares outstanding
68,316,590
68,325,046
Treasury shares
$240,451
$231,995
Assets = Liabilities + Stockholders’ Equity
1-28-06 $1,821,753,000 = $1,227,188,000 + $594,565,000
1-29-05 $1,867,023,000 = $1,213,567,000 + $653,456,000
3-39.
January 28, 2006
a.
b.
c.
d.
e.
F3-38
January 29, 2005
Type of stock
outstanding
Common
Common
Shares authorized
100,000,000
100,000,000
Shares issued
19,339,153
21,685,008
Shares outstanding
19,339,153
21,685,008
Long-term Liabilities`
$ 29,342,000
$ 26,879,000
Assets = Liabilities + Stockholders’ Equity
1-28-06 $374,266,000 = $74,473,000 + $299,793.000
1-29-05 $405,543,000 = $72,615,000 + $332,938,000
Each student may select a different article. It is important for
the student to develop their opinion and reaction to the
information.
Chapter 3 – Tools of the Trade, Part I
The Balance Sheet: Initial Financing – Investment by Owners