13-1
Chapter
13
McGraw-Hill/Irwin
Accounting for
Corporations
© The McGraw-Hill Companies, Inc., 2005
13-2
Learning objectives
1. Corporate form of organization
2. Common Stock
3. Preferred Stock
4. Dividends
5. Treasury Stock
6. Reporting Income and Equity
7. Decision analysis:
•
•
•
•
BPS
Dividend yield
PE ratio
Case: Pfizer, Johnson & Johnson, Eli Lilly
McGraw-Hill/Irwin
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13-3
1. Corporate Form of Organization
An entity
created by law.
Existence is
separate from
owners.
Has rights and
privileges.
McGraw-Hill/Irwin
Privately Held
Ownership
can be
Publicly Held
© The McGraw-Hill Companies, Inc., 2005
13-4
1. Corporate Form of Organization
- Characteristics of Corporations
Advantages
 Separate Legal Entity
 Limited Liability of Stockholders
 Transferable Ownership Rights
 Continuous Life
 Stockholders Are Not Corporate Agents
 Ease of Capital Accumulation
Disadvantages
 Governmental Regulation
 Corporate Taxation
McGraw-Hill/Irwin
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13-5
1. Corporate Form of Organization
- Organizing and Managing a Corporation
Stockholders
Board of Directors
President, Vice-President,
and Other Officers
Employees of the Corporation
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13-6
Organizing and Managing a Corporation
Corporate Organization Chart
Ultimate
control.
Stockholders
Selected by a
vote of the
stockholders.
Board of Directors
Stockholders
usually meet
once a year.
Overall
responsibility
for managing
the company.
President
Secretary
McGraw-Hill/Irwin
Vice President
Finance
Vice President
Production
Vice President
Marketing
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13-7
Rights of Stockholders
Vote at stockholders’ meetings.
Sell stock.
Purchase additional shares of stock.
Receive dividends, if any.
Share equally in any assets remaining
after creditors are paid in a liquidation.
McGraw-Hill/Irwin
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13-8
1. Corporate Form of Organization
- Stock Certificates and Transfer
Each unit of
ownership
is
When
the stock
called
a share
is sold,
the of
stock.
stockholder
transfer
Asigns
stockacertificate
endorsement
on
serves as proof
theaback
of the
that
stockholder
stock
certificate.
has purchased
shares.
McGraw-Hill/Irwin
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13-9
1. Corporate Form of Organization
- Basics of Capital Stock
Total amount of stock that a
corporation’s charter authorizes it to sell.
Stockholders' Equity
Common Stock, par value $.01;
authorized 250,000,000 shares; issued
92,556,295 shares in 2005; 111,015,133
shares in 2004
McGraw-Hill/Irwin
2005
$925,563
2004
$1,110,151
© The McGraw-Hill Companies, Inc., 2005
13-10
Basics of Capital Stock
Total amount of stock that has been
issued to stockholders.
Stockholders' Equity
Common Stock, par value $.01;
authorized 250,000,000 shares; issued
92,556,295 shares in 2005; 111,015,133
shares in 2004
McGraw-Hill/Irwin
2005
$925,563
2004
$1,110,151
© The McGraw-Hill Companies, Inc., 2005
13-11
Selling (Issuing) Stock
Par value is an
arbitrary amount
assigned to each
share of stock when
it is authorized.
McGraw-Hill/Irwin

Market price is the
amount that each
share of stock will
sell for in the market.
© The McGraw-Hill Companies, Inc., 2005
13-12
Classes of Stock
• Par Value
• No-Par Value
• Stated Value
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13-13
2. Common Stock
- Issuing Par Value Stock
Par Value Stock
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value stock for $25 per share.
Let’s record this transaction.
Record:
1. The cash received.
2. The number of shares issued × the par
value per share in the Common Stock
account.
3. The remainder is assigned to Contributed
Capital in Excess of Par.
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13-14
Issuing Par Value Stock
Par Value Stock
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value stock for $25 per share.
Let’s record this transaction.
Sept. 1 Cash
2,500,000
Common stock, $2 par value
Contributed capital in
excess of par value
200,000
2,300,000
Sold and issued 100,000 shares of common stock
McGraw-Hill/Irwin
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13-15
Issuing Par Value Stock
Stockholders' Equity with Common Stock
Stockholders' Equity
Contributed capital:
Common Stock - $2 par value; 500,000 shares
authorized; 100,000 shares issued and
outstanding
$ 200,000
Contributed Capital in Excess of Par
2,300,000
Retained earnings
650,000
Total stockholders' equity
$ 3,150,000
McGraw-Hill/Irwin
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13-16
Issuing Stock for Noncash Assets
Par Value Stock
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value stock for land valued at
$2,500,000. Let’s record this transaction.
Record:
1. The asset received at its market value.
2. The number of shares issued × the par
value per share in the Common Stock
account.
3. The remainder is assigned to Contributed
Capital in Excess of Par.
© The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
13-17
Issuing Stock for Noncash Assets
Par Value Stock
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value stock for land valued at
$2,500,000. Let’s record this transaction.
Sept. 1 Land
2,500,000
Common stock, $2 par value
Contributed capital in
excess of par value
200,000
2,300,000
Exchanges 100,000 common shares for land
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13-18
3. Preferred Stock
A separate class of stock, typically having priority
over common shares in . . .
 Dividend distributions.
 Distribution of assets in case of liquidation.
Usually has a stated
dividend rate.
Normally has no
voting rights.
Corporations
with no
Preferred Stock
Corporations
with Preferred
Stock
73%
McGraw-Hill/Irwin
27%
© The McGraw-Hill Companies, Inc., 2005
13-19
3. Preferred Stock
- Cumulative or Noncumulative Dividend
Cumulative
Dividends in arrears
must be paid before
dividends may be
paid on common
stock.
Vs.
Noncumulative
Undeclared dividends
from current and
prior years do not have
to be paid in future
years.
Most preferred stock
is cumulative.
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Cumulative or Noncumulative Dividend
Example: Consider the following partial
Statement of Stockholders’ Equity
Common stock, $5 par value; 40,000 shares
authorized, issued and outstanding
Preferred stock, 9%, $100 par value; 1,000
shares authorized, issued and outstanding
Total contributed capital
$
200,000
$
100,000
300,000
The Board of Directors did not declare or pay
dividends in 2004. In 2005, the Board of Directors
declare and pay cash dividends of $42,000.
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13-21
Cumulative or Noncumulative Dividend
If Preferred Stock is Noncumulative:
Year 2004: No dividends paid.
Year 2005:
1. Pay 2005 preferred dividend.
2. Remainder goes to common.
Preferred Common
$
$
-
If Preferred Stock is Cumulative:
Year 2004: No dividends paid.
Year 2005:
1. Pay 2004 preferred dividend in arrears.
2. Pay 2005 preferred dividend.
3. Remainder goes to common.
Totals
Preferred Common
$
$
-
McGraw-Hill/Irwin
$
9,000
$
$
33,000
9,000
9,000
$
$ 18,000 $
24,000
24,000
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13-22
Participating or Nonparticipating
Dividend
Participating
Dividends may
exceed a stated
amount once
common
stockholders receive
a dividend equal to
the preferred stated
rate.
McGraw-Hill/Irwin
Vs. Nonparticipating
Dividends are limited
to a maximum amount
each year. The
maximum is usually
the stated dividend
rate.
Most preferred
stock is
nonparticipating.
© The McGraw-Hill Companies, Inc., 2005
13-23
Reasons for Issuing Preferred Stock
 To raise capital without sacrificing
control.
 To boost the return earned by common
stockholders through financial leverage.
 To appeal to investors who may believe
the common stock is too risky or that
the expected return on common stock is
too low.
McGraw-Hill/Irwin
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13-24
4. Dividends
- Cash Dividends
To pay a cash
dividend the
corporation must
have:
1. A sufficient
balance in retained
earnings and
2. The cash
necessary to pay
the dividend.
McGraw-Hill/Irwin
Cash Dividend Types and Frequency
100%
80%
73%
60%
40%
23%
20%
0%
Common
Preferred
© The McGraw-Hill Companies, Inc., 2005
13-25
Cash Dividends
Regular cash dividends provide a return to
investors and almost always affect the
stock’s market value.
June
30
Stockholders
Corporation
Dividends
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-26
Entries for Cash Dividends
Three important dates
Date of Declaration
Date of Record
Date of Payment
Record liability
for dividend.
No entry
required.
Record payment of
cash to stockholders.
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13-27
Entries for Cash Dividends
On January 19, a $1 per share cash
dividend is declared on Dana, Inc.’s
10,000 common shares outstanding.
The dividend will be paid on March 19 to
stockholders of record on February 19.
Jan. 19 Retained earnings
10,000
Common dividend payable
10,000
Declared $1 per share cash dividend
Date of Declaration
Record liability
for dividend.
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13-28
Entries for Cash Dividends
On January 19, a $1 per share cash
dividend is declared on Dana, Inc.’s
10,000 common shares outstanding.
The dividend will be paid on March 19 to
stockholders of record on February 19.
Date of Record
No entry required on
February 19.
No entry
required.
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13-29
Entries for Cash Dividends
On January 19, a $1 per share cash
dividend is declared on Dana, Inc.’s
10,000 common shares outstanding.
The dividend will be paid on March 19 to
stockholders of record on February 19.
Mar. 19
Common dividend payable
Cash
10,000
10,000
Paid $1 per share cash dividend
Date of Payment
Record payment of
cash to stockholders.
McGraw-Hill/Irwin
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13-30
Deficits and Cash Dividends
Created when a company incurs cumulative losses
or pays dividends greater than total profits earned
in other years.
Dana, Inc.
Stockholders' Equity
December 31, 2005
Stockholders' Equity
Common stock $10 par value,
10,000 shares authorized and outstanding
Retained earnings deficit
Total stockholders' equity
McGraw-Hill/Irwin
$ 100,000
(8,500)
$ 91,500
© The McGraw-Hill Companies, Inc., 2005
13-31
4. Dividends
- Stock Dividends
The corporation distributes additional shares of
its own stock to its stockholders without
receiving any payment in return.
Why a stock dividend?
100
Shares
100 shares
HotAir, Inc.
Common Stock
•Can be used to keep the market
price on the stock affordable.
$1 par
$1 par value
•Can provide evidence of
management’s confidence that
Stockholders
the company is doing well.
McGraw-Hill/Irwin
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13-32
Stock Dividends
Small Stock Dividend
Distribution is  25% of the previously
outstanding shares.
Capitalize retained earnings for the market
value of the shares to be distributed.
Large Stock Dividend
Distribution is > 25% of the previously
outstanding shares.
Capitalize retained earnings for the minimum
amount required by state law, usually par or
stated value of the shares.
© The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
13-33
Recording a Small Stock Dividend
Here is the stockholders’ equity section
of Quest’s balance sheet prior to the
declaration of a small stock dividend.
Quest, Inc.
Stockholders' Equity
December 31, 2005
Common stock - $1 par value,
250,000 shares authorized,
100,000 shares issued and outstanding
Contributed capital in excess of par value
Total contributed capital
Retained earnings
Total stockholders' equity
McGraw-Hill/Irwin
$
$
$
100,000
8,000
108,000
35,000
143,000
© The McGraw-Hill Companies, Inc., 2005
13-34
Recording a Small Stock Dividend
On December 31, 2005, Quest declared a 2%
stock dividend, when the stock was selling for
$10 per share. The stock will be distributed to
stockholders on January 20, 2006. Let’s make
the December 31 entry.
Dec. 31 Retained earnings
Common stock dividend
distributable
Contributed capital in
excess of par value
20,000
2,000
18,000
Declared a 2,000 shares (2%) stock dividend
100,000 × 2% = 2,000 × $10 = $20,000
2,000 × $1 par = $2,000
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-35
Quest, Inc.
Stockholders' Equity
December 31, 2005
Before the
stock
dividend.
Common stock - $1 par value,
250,000 shares authorized,
100,000 shares issued and outstanding
Contributed capital in excess of par value
Total contributed capital
Retained earnings
Total stockholders' equity
$
$
$
100,000
8,000
108,000
35,000
143,000
Quest, Inc.
Stockholders' Equity
December 31, 2005
Common stock - $1 par value,
250,000 shares authorized,
100,000 shares issued and outstanding
Common stock distributable, 2,000 shares
Total common stock issued and to be issued
Contributed capital in excess of par value
Total contributed capital
Retained earnings
Total stockholders' equity
McGraw-Hill/Irwin
$ 100,000
2,000
$ 102,000
26,000
$ 128,000
15,000
$ 143,000
After the
stock
dividend.
© The McGraw-Hill Companies, Inc., 2005
13-36
Recording a Large Stock Dividend
Router, Inc. shows the following
stockholders’ equity section just prior to
issuing a large stock dividend.
Router, Inc.
Stockholders' Equity
December 31, 2005
Common stock - $1 par value,
200,000 shares authorized,
50,000 shares issued and outstanding
Contributed capital in excess of par value
Total contributed capital
Retained earnings
Total stockholders' equity
McGraw-Hill/Irwin
$
$
50,000
75,000
125,000
100,000
225,000
© The McGraw-Hill Companies, Inc., 2005
13-37
Recording a Large Stock Dividend
On December 31, 2005, Router declared a 40%
stock dividend, when the stock was selling
for $8 per share. State law requires that
large stock dividends be capitalized at par
value per share.
Dec. 31 Retained earnings
Common stock dividend
distributable
20,000
20,000
Declared a 20,000 shares (40%) stock dividend
50,000 × 40% = 20,000 shares × $1 par value =
$20,000
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-38
Stock Splits
A distribution of additional shares of stock to
stockholders according to their percent
ownership.
$10 par value
Common Stock
Old
Shares
100 shares
$5 par value
New
Shares
Common Stock
200 shares
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-39
Stock Splits
Thomas, Inc. has the following stockholders’
equity section just prior to a 2-for-1 stock split.
Thomas, Inc.
Stockholders' Equity
June 30, 2005
Common stock - $10 par value,
100,000 shares authorized,
25,000 shares issued and outstanding
Contributed capital in excess of par value
Total contributed capital
Retained earnings
Total stockholders' equity
McGraw-Hill/Irwin
$
250,000
300,000
550,000
775,000
$ 1,325,000
© The McGraw-Hill Companies, Inc., 2005
13-40
Stock Splits
After the 2-for-1 split the stockholders’ equity section
of the balance sheet looks like this . . .
Thomas, Inc.
Stockholders' Equity
June 30, 2005
No accounting
entry is made.
Common stock - $5 par value,
100,000 shares authorized,
50,000 shares issued and outstanding
Contributed capital in excess of par value
Total contributed capital
Retained earnings
Total stockholders' equity
McGraw-Hill/Irwin
$
250,000
300,000
550,000
775,000
$ 1,325,000
© The McGraw-Hill Companies, Inc., 2005
13-41
5. Treasury Stock
Corporations acquire shares of their own stock.
Why would a
company do
that?
Use the shares to acquire
control of another corporation.
To avoid a hostile takeover.
Use the shares for
employee stock options.
To maintain a strong market for
its stock or show management
confidence in the current price.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-42
Treasury Stock
Corporations and Treasury Stock
No Treasury Stock
38%
With Treasury
Stock
62%
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-43
5. Treasury Stock
- Purchasing Treasury Stock
On May 8, Whitt, Inc. purchased 2,000 of its
own shares of stock in the open market for
$8,000.
May 8
Treasury stock, common
Cash
8,000
8,000
Purchase 2,000 treasury shares at $4 per share
Treasury stock is shown as a reduction in total
stockholders’ equity on the balance sheet.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-44
5. Treasury Stock
- Selling Treasury Stock at Cost
On June 30, Whitt sold 100 shares of its
treasury stock for $4 per share.
June 30
Cash
400
Treasury stock, common
400
Sold 100 shares of treasury for $4 per share
$8,000 ÷ 2,000 shares = $4 cost per treasury
share
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-45
Selling Treasury Stock Above Cost
On July 19, Whitt, Inc. sold an additional 500
shares of its treasury stock for $8 per
share.
July 19
Cash
4,000
Treasury stock,
Contributed capital,
treasury stock
2,000
2,000
Sold 500 treasury shares for $8 per share
Shares Per Share Total
Sale
500 $
8.00 $ 4,000
Cost
500
4.00
2,000
Contributed capital
$ 2,000
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-46
Selling Treasury Stock Below Cost
On August 27, Whitt sold an additional 400
shares of its treasury stock for $1.50 per
share.
Aug. 27
Cash
Contributed capital,
treasury stock
Treasury stock,
600
1,000
1,600
Sold 500 treasury shares for $1.50 per share
Shares Per Share Total
Cost
400 $
4.00 $ 1,600
Sale
400
1.50
600
Difference
$ 1,000
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-47
Selling Treasury Stock Below Cost
On October 21, Whitt sold an 1000 shares of its
treasury stock for $2 per share.
Oct. 21
Cash
Contributed capital, treasury stock
Retained Earning
Treasury stock, common
2,000
1,000
1,000
4,000
Sold 1000 treasury shares for $2 per share
Shares
Cost
1,000
Sale
1,000
Per Share
$
4.00
$ 4,000
2.00
2,000
Difference
$ 2,000
Reduce:Contributed Capital,treasury stock
Reduce:Retained Earning
McGraw-Hill/Irwin
Total
1,000
$ 1,000
© The McGraw-Hill Companies, Inc., 2005
13-48
6. Reporting Income and Equity
Extraordinary
Items
Discontinued
Segments
Continuing
Operations
McGraw-Hill/Irwin
Changes in
Accounting
Principle
Net Income
© The McGraw-Hill Companies, Inc., 2005
13-49
6. Reporting Income and Equity
- Continuing Operations
Revenues, expenses
and income generated
by the company’s
continuing operations.
Continuing
Operations
McGraw-Hill/Irwin
Net Income
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13-50
6. Reporting Income and Equity
- Discontinued Segments
Income from operating the discontinued segment prior
to its disposal and gain or loss on the sale of the net
assets of the segment.
Discontinued
Segments
Net Income
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-51
6. Reporting Income and Equity
- Extraordinary Items
Extraordinary
Items
A gain or loss that
is unusual in nature
and infrequent in
occurrence.
McGraw-Hill/Irwin
Net Income
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13-52
6. Reporting Income and Equity
- Changes in Accounting Principles
The increase or
decrease in income
when changing from
one generally accepted
accounting principle to
another.
Changes in
Accounting
Principle
Net Income
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-53
Income Statement
Campus, Inc.
Partial Income Statement
For Year Ended December 31, 2005
Income from continuing operations
Discontinued operations:
Income from operating Radio Division (net
of $105,000 income taxes)
$ 420,000
Loss on disposal of Radio Division (net of
$38,500 tax benefit)
(154,000)
Extraordinary Item:
Loss from earthquake damage (net of
$157,500 tax benefit)
Cumulative effect of a change in accounting principle:
Effect on prior years' income of changing
to a different depreciation method (net of
$12,000 income taxes)
Net income
McGraw-Hill/Irwin
$ 1,389,500
266,000
(630,000)
48,000
$ 1,073,500
© The McGraw-Hill Companies, Inc., 2005
13-54
Changes in Accounting Principles
Campus, Inc. prepared the following schedule in
connection with its change from doubledeclining balance to straight-line depreciation
for an asset purchased in 2003.
Prior to
Change:
2003
2004
Year of
Change:
2005
After
Change:
McGraw-Hill/Irwin
DoubleDeclining
Depreciation
$
90,000
70,000
$
160,000
Straight-Line
Depreciation
$
50,000
50,000
$
100,000
Pre-Tax
Difference
$
$
50,000
$
50,000 per year
60,000
After-Tax
Cumulative
Effect
$
48,000
Campus is subject to
a 20% income tax rate.
© The McGraw-Hill Companies, Inc., 2005
13-55
Changes in Accounting Principles
Campus, Inc. prepared the following schedule in
connection with its change from doubledeclining balance to straight-line depreciation
for an asset purchased in 2003.
Prior to
Change:
2003
2004
Year of
Change:
2005
After
Change:
McGraw-Hill/Irwin
DoubleDeclining
Depreciation
$
90,000
70,000
$
160,000
Straight-Line
Depreciation
$
50,000
50,000
$
100,000
Pre-Tax
Difference
$
$
50,000
$
50,000 per year
60,000
After-Tax
Cumulative
Effect
$
48,000
The change from DDB
to SL would result in
an after-tax increase in
2005’s net income of
$48,000.
© The McGraw-Hill Companies, Inc., 2005
13-56
6. Reporting Income and Equity
- Earnings Per Share
Earnings per share is one of the most widely
cited items of accounting information.
Basic
Net income - Preferred dividends
earnings =
Weighted-average common shares outstanding
per share
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
13-57
Calculating Shares Outstanding
Derby, Inc. reports net income of $75,000 and
paid preferred dividends of $10,000 during
2005. The company started the year with
10,000 shares of common stock outstanding.
Derby sold an additional 4,000 share of stock
on March 31, and purchased 2,000 treasury
shares on September 30, 2005.
Date
Transaction
1/1/05
Balance
Sales of shares
3/31/05
Outstanding
Shares
Weighted
Average
10,000
3
2,500
14,000
6
7,000
3
3,000
12,500
Treasury shares
9/30/05
12,000
Weighted-average common shares outstanding
McGraw-Hill/Irwin
Fraction of
Year
/12
/12
/12
© The McGraw-Hill Companies, Inc., 2005
13-58
Earnings Per Share
Derby, Inc. reports net income of $75,000 and
paid preferred dividends of $10,000 during
2005. The company started the year with
10,000 shares of common stock outstanding.
Derby sold an additional 4,000 share of stock
on March 31, and purchased 2,000 treasury
shares on September 30, 2005.
EPS =
McGraw-Hill/Irwin
$75,000 - $10,000
12,500
= $5.20
© The McGraw-Hill Companies, Inc., 2005
13-59
6. Reporting Income and Equity
- Stock Options
The right to purchase common stock at a fixed
price over a specified period of time. As the
stock’s price rises above the fixed option
price, the value of the option increases.
Option
purchase
price $30
per share.
McGraw-Hill/Irwin
Market
price of
stock $75
per share.
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13-60
Stock Options
Options are given to key employees to
motivate them to:
 focus on company performance,
 take a long-run perspective, and
 remain with the company.
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6. Reporting Income and Equity
- Statement of Retained Earnings
Total cumulative amount of reported net income
less any net losses and dividends declared
since the company started operating.
Reed, Inc.
Statement of Retained Earnings
For Year Ended December 31, 2005
Retained earnings, 1/1/05
McGraw-Hill/Irwin
$
875,000
Plus: net income
155,600
Less: dividends declared
Retained earnings, 12/31/05
(80,000)
950,600
$
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Restricted Retained Earnings
Legal
Contractual
Most states restrict
the amount of
treasury stock
purchases to the
amount of retained
earnings.
Loan agreements
can include
restrictions on
paying
dividends below a
certain amount of
retained earnings.
McGraw-Hill/Irwin
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Appropriated Retained Earnings
A corporation’s directors can voluntarily limit
dividends because of a special need for cash
such as the purchase of new facilities.
Reed, Inc.
Statement of Retained Earnings
For Year Ended December 31, 2005
Retained earnings, 1/1/05
McGraw-Hill/Irwin
$
875,000
Plus: net income
155,600
Less: dividends declared
(80,000)
Retained earnings, 12/31/05
$
950,600
Appropriated retained earnings
Unappropriated retained earnings
(450,000)
$ 500,600
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13-64
Prior Period Adjustments
Correction of material errors in past years’
financial statements. If an amount is incorrectly
expensed, add amount to Retained Earnings.
Reed, Inc.
Statement of Retained Earnings
For Year Ended December 31, 2005
Retained earnings, 1/1/05, as previously reported
Prior period adjustment: Cost of equipment
incorrectly expensed (net of $28,000 income taxes)
$
875,000
72,000
Retained earnings, 1/1/05, as adjusted
947,000
Plus: net income
155,600
Less: dividends declared
Retained earnings, 12/31/05
McGraw-Hill/Irwin
(80,000)
$ 1,022,600
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6. Reporting Income and Equity
- Statement of Stockholders’ Equity
Matrix, Inc.
Statement of Stockholders' Equity
For the Year Ended December 31, 2005
Common stock and
(In millions)
capital in excess of par
Shares
Amount
Balance at January 1, 2005
821
$
2,500
Stock sales
17
500
Stock repurchases and retirement
(17)
(260)
Cash dividends declared
Other, net
Net income
Balance at December 31, 2005
821
$
2,740
Retained
Earnings
$ 9,500
(925)
(150)
70
5,100
$ 13,595
Total
$ 12,000
500
(1,185)
(150)
70
5,100
$ 16,335
This is a more inclusive statement than the statement of
retained earnings.
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7. Decision Analysis
- Book Value per Share—Common
Records amount of stockholders’ equity
applicable to common shares on a per
share basis.
Stockholders’ equity applicable
to common shares
Book value per
=
Number of common shares
common share
outstanding
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Book Value per Share—Preferred
Records amount of stockholders’ equity
applicable to preferred shares on a per
share basis.
Stockholders’ equity applicable
to preferred shares
Book value per
=
Number of preferred shares
preferred share
outstanding
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7. Decision Analysis
- Dividend Yield
Tells us the annual amount of cash dividends
distributed to common stockholders relative to
the stock’s market price.
Dividend
=
Yield
McGraw-Hill/Irwin
Annual cash dividends per share
Market value per share
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7. Decision Analysis
- Price Earnings
This ratio reveals information about the stock market’s
expectations for a company’s future growth in
earnings, dividends, and opportunities.
PriceMarket value per share
Earnings =
Earnings per share
If earnings go up,
will the market price
of my stock follow?
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Case
- Pharmaceutics Industry
1. Industry Background
• Technology intensive
• Strict Patent protection in US
• Highly profitable
• Non-cyclical at all
2. Key success factor
• R&D capability
• Marketing capability to Medical Doctors
• Blockbuster medicines are key
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Stock Price & Earnings
Price & EPS
What
drive the
stock
price?
3.50
70.00
3.00
60.00
2.50
50.00
2.00
40.00
EPS
Price
1.50
30.00
1.00
20.00
0.50
10.00
0.00
1940
1950
1960
1970
1980
1990
2000
0.00
2010
Year
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Volatility of Price Earnings Ratio
PE Ratio
70.00
70.00
60.00
60.00
50.00
50.00
PE Ratio
Price
40.00
40.00
30.00
30.00
20.00
20.00
10.00
10.00
0.00
1940
1950
1960
1970
1980
1990
2000
0.00
2010
Year
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End of Chapter 13
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005