McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 Reporting and Interpreting Stockholders’ Equity PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, Ph.D., CA Corporate Ownership The major advantage of the corporate form of business is the ease of raising capital as both large and small investors can participate in corporate ownership. 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. 11-3 Corporate Ownership Voting rights. Dividends. Stockholder Benefits Residual claims. Preemptive rights. 11-4 Common Stock Transactions Two primary sources of Stockholders’ Equity Contributed Capital Common Stock 11-5 Additional Paid-in Capital Retained Earnings Authorization, Issuance, and Repurchase of Stock Authorized Shares Issued Shares 11-6 Outstanding shares are issued shares that are owned by stockholders. Issued Unissued shares are shares of Outstanding The maximum number Unissued authorized stock are Shares of shares of capital Shares shares of shares that be never stockstock that that can have Treasury shares are haveissued been to the public. been Treasury issued shares distributed to distributed to that have Shares been reacquired by the stockholders. stockholders. corporation. Stock Issuance Initial public offering (IPO) Seasoned new issue The first time a corporation issues stock to the public. Subsequent issues of new stock to the public. National Beverage issues stock. 11-7 Repurchase of Stock A corporation repurchases its stock to: Send a signal that the company believes its stock is undervalued. Obtain shares to reissue for the purchase of other companies. Obtain shares to reissue to employees as part of stock purchase or stock option plans. Treasury Stock 11-8 Repurchase of Stock National Beverage repurchases its own stock (Treasury stock) Stockholders Employee compensation package includes salary plus stock options. Stock options allow employees to purchase stock from the corporation at a fraction of the stock’s market price. Employee 11-9 Dividends on Common Stock Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash. 11-10 Dividends Dates 11-11 Stock Dividends Distribution of additional shares of stock to stockholders. No change in total stockholders’ equity. No change in par values. All stockholders retain same percentage ownership. Corporations issue stock dividends to: Remind stockholders of the accumulating wealth in the company. Reduce the market price per share of stock. Signal that the company expects strong financial performance in the future. 11-12 Stock Dividends Small Large Stock dividend < 20 – 25% Stock dividend > 20 – 25% Record at current market value of stock. Record at par value of stock. The journal entry moves an amount from Retained Earnings to other equity accounts. 11-13 Preferred Stock Dividends • Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock. • 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. 11-14 Retained Earnings Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating. Baker Company Comparative Balance Sheets (Partial) For Year Ended December 31 2009 2008 Stockholders' Equity Common Stock Additional Paid-in Capital Retained Earnings (Deficit) Total Stockholders' Equity $ 100,000 750,000 50,000 900,000 $ 100,000 750,000 (70,000) 780,000 Baker Company incurred a loss of $120,000 in 2009 that resulted in an Accumulated Deficit in Retained Earnings. 11-15 Earnings Per Share (EPS) Earnings per share is probably the single most widely watched financial ratio. Net Income EPS = Average Number of Common Shares Outstanding National Beverage’s income for 2008 was $22,500,000 and the average number of shares outstanding during the year was 45,900,000. EPS = 11-16 $22,500,000 45,900,000 Shares = $0.49 per share Return on Equity (ROE) Return on equity is the amount earned for each dollar invested by stockholders. ROE = Net Income Average Stockholders’ Equity National Beverage’s income for 2008 was $22,500,000 and the average Stockholders’ Equity was $151,000,000. ROE 11-17 = $22,500,000 $151,000,000 = 14.9 percent Price/Earnings (P/E) Ratio The P/E ratio is a measure of the value that investors place on a company’s common stock. P/E = Current Stock Price (per share) Earnings Per Share (annual) National Beverage’s stock price was $7.74 when the company reported its 2008 EPS of $0.49. P/E 11-18 = $ 7.74 $ 0.49 = 15.8 End of Chapter 11