Module 9
Reporting and Analyzing
Owner Financing
Stockholders’ Equity
Total stockholders’ equity is divided into two
components:
1.
2.

Contributed capital - proceeds received by the
issuing company from original stock issuances, net
of the amounts paid to repurchase shares of the
issuer’s stock from its investors.
Earned capital - Retained earnings and
accumulated other comprehensive income (AOCI).
In addition, many companies report an equity account
called noncontrolling interest, which reflects the equity of
minority shareholders.
Common Shares





Authorized—Number of shares that can be issued
based on the corporate charter.
Issued—Number of shares that have been issued in
the past.
Outstanding—Number of shares currently owned by
stockholders.
Authorized >= Issued >= Outstanding
Example:

Common Stock, $1 par, 100,000 shares authorized, 80,000
shares issued, and 75,000 shares outstanding.
Equity Components
Average issue price: (CS+APIC)/Shares issued=($386+$4,000)/385.9 = $11.37
Average treasury stock purchase price = $2,079 / 53.6 = $38.79
Shares outstanding = Shares issued – Shares in treasury = 385.9 – 53.6 = 332.3
Book value per share = $8,251 / 332.3 = $24.83
Types of Stock

There are two classes of stock:
1.
2.

Preferred Stock
Common Stock
Preferred stock preferences:
1.
2.
Dividend preference – preferred shareholders
receive dividends on their shares before common
shareholders do.
Liquidation preference –preferred shareholders
receive payment in full before common
shareholders in liquidation.
Preferred Stock Privileges
1.
2.
3.
Conversion privileges – a conversion privilege
allows preferred stockholders to convert their
shares into common shares at a predetermined
conversion ratio.
Participation feature – allows preferred
shareholders to share ratably with common
stockholders in dividends.
Issuance—issued often in the acquisition of
another company, public utilities, and some
banks.
Preferred and Common Dividends



Assume that a company has 15,000 shares of $50 par
value, 8% preferred stock outstanding and 50,000
shares of $5 par value common stock outstanding.
During its first three years in business, the company
declares $20,000 dividends in the first year, $260,000 of
dividends in the second year, and $60,000 of dividends
in the third year.
If the preferred stock is cumulative (most are), the total
amount of dividends paid to each class of stock in each
of the three years follows:
Preferred and Common Dividends
(cont’d)
Accounting for Stock Dividends
and Splits
Stock Split:
• No accounting entry.
• Reduce the par $ and increase the shares
Example: A 2-for-1 split of 10,000, $10 par shares would result
in 20,000 shares of $5 par stock.
Employee Stock Options



Stock Option—right to purchase common stock at a specific
price for a number of years.
Fair value of the option—must be recorded as an expense and
additional capital.
Fair value is commonly estimated with Black & Scholes model
of option value: an increasing function of current price,
variation, drift upwards, time and decreasing function of
dividends.
 Example: Profitable Company offers you options for 10,000
shares for 10 years at today’s price of $5 per share, expected
to increase at a rate of 8% per year, but price varies by 30%
in a given year. The value of this option would be about
$21,500.
Restricted Stock




Restricted Stock—Employee awarded right to receive
shares, but shares not awarded until work is done.
First recorded as unearned compensation (a contraequity) and additional capital.
As shares awarded for work done, then compensation
expense and reduce the unearned compensation.
Less incentive than options to take on risky projects.

Safe Co. awards you the right to receive 10,000 shares at a
rate of 2,000 shares per year of work. Stock is currently
selling for $5 per share.
Noncontrolling Interest



Noncontrolling interest represents the equity of noncontrolling
(minority) shareholders who only have a claim on the net
assets of one or more of the subsidiaries in the consolidated
entity.
When a company acquires less than 100% of the subsidiary, it
must include 100% of the subsidiary’s assets, liabilities,
revenues and expenses in its consolidated balance sheet and
income statement.
There are two groups of shareholders that have a claim on the
net assets and earnings of the subsidiary company:
 The parent company shareholders, and
 The noncontrolling shareholders (those shareholders who
continue to own shares of the subsidiary company).
Equity Carve Outs




Corporate divestitures have become increasingly
common.
Sell-off: Sale of a business unit or subsidiary to
another company.
Spin-off: Distribute shares of subsidiary as a
dividend to owners.
Split-off: Trade shares of subsidiary for shares
of parent company.
Global Accounting

Under IFRS, accounting for equity is similar to
that under U.S. GAAP. Following are a few
terminology differences:
Global Accounting


U.S. GAAP has a more narrow definition of liabilities
than IFRS. Therefore, more items are classified as
liabilities under IFRS.
 For example, some redeemable preferred shares are
deemed liabilities under IFRS and equity under
GAAP.
Treasury stock transactions are sometimes difficult to
identify under IFRS because companies are not
required to report a separate line item for treasury
shares on the balance sheet. Instead treasury share
transactions reduce share capital and share premium.