Chapter 9
Special Acquisitions: Financing
A Business with Equity
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The Business Cycle: Basic
Business Processes
The Cycle Starts Here:
But We Started Here:
Chapters 8 & 9: Obtain
Financing: Debt and Equity
Chapter 5:
Acquisition/Payment: PPE
Return to
Owners
Chapters 7:
Sales/Collection: Cash,
Accounts Receivable
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Chapters 6:
Acquisition/Payment:
Inventory and Human
Resources
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Equity in Corporations
The equity section for a corporation is
divided into two parts:
 Contributed Capital (a.k.a. paid-in-
capital)--this is the amount that owners
have contributed
 Capital Stock
 Additional paid-in-capital
 Retained Earnings--this is what the
company has earned over its whole life,
less any dividends paid out
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Authorized, Issued, and
Outstanding Capital Stock
Authorized
Shares
Owned by
stockholders
Outstanding
Shares
Issued
Shares
Unissued
Shares
Treasury
Shares
Reacquired by
corporation
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Common Stock
Basic voting stock of the corporation
Ranks after preferred stock for dividend
and liquidation distribution.
Dividend rates are determined by the
board of directors based on the
corporation’s profitability.
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Preferred Stock
 Has dividend and liquidation preference
over common stock.
 Cumulative preferred stock has a
preference for all past dividends over any
paid to common shareholders.
 Generally does not have voting rights.
 Usually has a par or stated value.
 Usually has a fixed dividend rate that is
stated as a percentage of the par value.
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Special Features of
Preferred Stock
 Convertible
preferred stock may
be exchanged for
common stock.
 Callable preferred
stock may be
repurchased by the
corporation at a
predetermined price.
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Par Value and
No-par Value Stock
 Par value
 Is a nominal value per share of capital stock
specified in the charter.
 Has no relationship to market value.
 Serves as the basis for legal capital.
 Legal capital is the amount of capital,
required by the state, that must remain
invested in the business.
 It serves as a cushion for creditors.
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Par Value and No-par Value Stock
 No-par value is capital stock that does not
have an amount per share specified in the
charter.
 When no-par stock is issued by a corporation,
the amount of legal capital is defined by the
state.
 Stated value is an amount per share that is
specified by the corporation when it issues
no-par stock.
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Accounting for Capital
Stock Transactions
 Two primary sources of stockholders’ equity:
 Contributed capital
 Par or stated value of issued stock.
 Additional paid-in capital in excess of par or
stated value.
 Retained earnings
 The cumulative net income earned by the
corporation less the cumulative dividends
declared by the corporation.
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Accounting for the Issue of
Common Stock
 When stock is issued, the equity
account Common Stock is
credited for the par or stated value
of the stock.
 If the stock sold for more than par,
the additional amount is credited
to the equity account Paid in
Capital in Excess of Par,
Common Stock.
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Accounting for Cash Dividends
 Dividends must be declared by the board
of directors before they can be paid.
 The corporation is not legally required to
declare (and subsequently pay) dividends.
 Once a dividend is declared, a liability is
created.
 Cash dividends require sufficient cash and
retained earnings to cover the dividend.
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Dividends on Preferred Stock
 Current preferred dividends must be paid
before paying any dividends to common
stock.
 If a preferred dividend is not paid, the unpaid
amount is either cumulative (a dividend in
arrears) or noncumulative.
 Cumulative: Unpaid dividends must be paid
before common dividends.
 Noncumulative: Unpaid dividends are lost.
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Treasury Stock
 A corporation’s own stock that had been issued
but was subsequently reacquired and is still
being held by that corporation.
 Why would a corporation reacquire its own
stock?
 To reduce the shares outstanding.
 Because the market price is low.
 To increase earnings per share.
 To use in employee stock option programs.
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Treasury Stock
is considered issued stock but not
outstanding stock.
has no voting or dividend rights.
is a contra-equity account.
reduces total stockholders’ equity on
the Balance Sheet.
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Treasury Stock Transactions
 Treasury stock is recorded at cost.
 The account, Treasury Stock, is contra to all
of Equity and subtracted at the end of the
section on the Balance Sheet.
 If the treasury stock is subsequently resold for
more than the cost, another equity account,
PIC Treasury Stock, would be credited for
the excess over cost
 NO gains or losses are recorded on the
purchase or on the reissue of treasury stock.
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Accounting for
Stock Dividends
 Stock dividends are distributions to
stockholders of additional shares of stock.
 Why issue a stock dividend?

Low on cash.

To decrease market price of stock.

To increase number of stockholders
(assuming some of the newly issued stock
will be sold).
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Accounting for Stock
Dividends
 All stockholders receive the same percentage
increase in the number of shares they own
(pro rata basis).
 No change in total stockholders’ equity.
 No change in par values.
 Effect on financial statements?
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Accounting for Stock Splits
 Distributions of
100% or more of
stock to
stockholders.
 Decreases par value
of stock.
 Increases number of
outstanding shares.
 No change in total
stockholders’ equity.
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Retained Earnings
 What affects Retained Earnings?
 net income
 cash dividends
 stock dividends
 prior period adjustments
 Appropriating Retained Earnings
 Board of Directors can restrict portions of retained
earnings (a communication device)
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