Corporate Stock and
Earnings Issues
Chapter 24
Corporate Capital Structure
• Stockholders’ Equity
• Contributed Capital
• Retained Earnings
Capital Stock and
Legal Capital
• Capital stock - ownership unit
• Stockholders - owners of a corporation
• Stock certificate - legal document of
ownership of shares of stock
• Legal capital - total par value of the issued
capital stock
Stockholders’ Rights
•
•
•
•
Attend stockholders’ meetings
Vote in the election of the board of directors
Share in net income by receiving dividends
Purchase additional capital stock if it is
issued (preemptive right)
• Share in the distribution of the assets of the
corporation if it is liquidated
Stock Terminology
•
•
•
•
•
•
Par value
No-par capital stock
Stated value
Additional paid-in capital
Common stock
Preferred stock
Stockholders’ Equity
on the Balance Sheet
Stockholders’ Equity
Contributed capital
Preferred stock, $100 par, 2,000 shares authorized,
600 shares issued and outstanding
Additional paid-in capital on preferred stock
$ 60,000
72,000
Common stock, $10 par, 30,000 shares authorized,
9,000 shares issued and outstanding
Additional paid-in capital on common stock
Total contributed capital
Retained earnings
90,000
43,000
$265,000
173,000
Total Stockholders’ Equity
$438,000
Articles of Incorporation
The articles of incorporation lists the following:
• Classes of stock
• Par or stated value
• Number of authorized shares
• Preference provisions for
preferred stock
Issuing Stock for Cash
Cash
4,800
Common Stock
3,000
Additional Paid-in
Capital
1,800
Transfer of Stock
Between Stockholders
• Trading of stock among
stockholders does not affect the
corporation’s financial
statements
• The corporation must keep
records of the names and
addresses of the stockholders for
mailing reports and dividends
Preferred Stock Preferences
• Convertible
• Callable
• Redeemable
Treasury Stock
Treasury stock is a corporation’s own capital
stock that:
• stockholders fully paid for and the
corporation issued
• the corporation later reacquired, and
• the corporation currently holds
Reasons to Acquire
Treasury Stock
• To have shares available for employeepurchase plans
• To have shares available for conversion of
convertible stock
• To invest excess cash
• To have shares for the acquisition of other
companies
Reasons to Acquire
Treasury Stock
• To reduce the number of shares outstanding
and increase earnings per share
• To have shares for use in the issuance of a
stock dividend
• To concentrate ownership
of the shares as a defense
against hostile takeovers
Acquisition of
Treasury Stock
Cash
Treasury Stock
5,600
5,600
Issued capital stock - Treasury stock
= Outstanding capital stock
Reissuance of Treasury
Stock
Cash
4,500
Treasury Stock
Bal. 5,600
4,200
Bal. 1,400
Additional Paid-in
Capital
Bal. 10,000
300
Bal. 10,300
Stock Options
Compensatory stock options are intended to
provide additional compensation to the
corporation’s employees.
Corporate Income
Statement
Income from continuing operations
Operating income
Nonoperating income (other items)
Income tax expense related to continuing operations
Results of discontinued operations
Income (loss) from operations of a discontinued segment (net of
income taxes
Gain (loss) on disposal of discontinued segment (net of income
taxes)
Extraordinary gains or losses (net of income taxes)
Net income
Earnings per share
Basic Earnings Per Share
Net Income - Preferred Dividends
Weighted Average Number of Common Shares
Outstanding
Weighted Average
Common Shares
Number of Shares Outstanding
X Fraction of Year Outstanding
= Weighted Average Number of Shares
Reporting Earnings
Per Share
Earnings Per Share (EPS) are reported on the
income statement directly below the net
income.
EPS are computed for:
• Income from continuing operations
• Results of discontinued operations
• Extraordinary gain or loss
• Net income
Diluted Earnings Per
Share
• Complex capital structure - when stock
options and convertible securities have been
issued
• Potential common shares - securities that
can be converted into common stock
• Diluted EPS - shows the effects of all
potential common shares that would reduce
earnings per share
Price/Earnings Ratio
Market Price Per Share
Earnings Per Share
The price/earnings ratio indicates how
much investors are willing to pay per dollar
of current earnings.
Cash Dividends
• Date of Declaration
• Date of Record
• Date of Payment
Cash Dividends - Date
of Declaration
Dividends Payable
720,000
Retained Earnings
720,000
Cash Dividends - Date
of Payment
Cash
Dividends Payable
720,000
720,000
Cash Dividends on
Preferred Stock
• Preferred stockholders have a preference to:
– dividends
– accumulation of dividends
• One or both of the preferences may be
given to preferred stockholders
Stock Dividends
• Stock Dividend - a proportional distribution
of additional shares of stock
• Small Stock Dividend - 20% or less of the
previously outstanding common shares
• Large Stock Dividend - more than 20% of
the previously outstanding common shares
• Stock Split - decrease in the par value per
share and proportional increase in the
number of shares
Statement of Changes in
Stockholders’ Equity
• Changes in the different classes of capital
stock
• Changes in each additional paid-in capital
account
• Changes in treasury stock
• Changes in retained earnings
Conclusion
To evaluate a corporation, both external and
internal users must be familiar with how the
corporation issues and reports on its capital
stock.
A corporation may distribute either cash
dividends or stock dividends to the stockholders
of record.