Accounting & Financial Reporting
BUSG 503
Michael Dimond
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.
Michael Dimond
School of Business Administration
Components of Paid-in-Capital
Michael Dimond
School of Business Administration
P&G’s Stockholders’ Equity
Michael Dimond
School of Business Administration
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.
Michael Dimond
School of Business Administration
Preferred Stock Privileges
1. Conversion privileges – a conversion
privilege allows preferred stockholders to
convert their shares into common shares at a
predetermined conversion ratio.
2. Participation feature – allows preferred
shareholders to share ratably with common
stockholders in dividends.
Michael Dimond
School of Business Administration
Fortune Brands’ Convertible Preferred Stock
Michael Dimond
School of Business Administration
Fortune Brands’ Convertible Preferred Stock
• Holders of convertible preferred are entitled to $2.67
dividends per share.
• Each share of convertible preferred stock is entitled to 3/10 of
a vote per share.
• Holders of convertible preferred have a preference in
liquidation over common shareholders amounting to $30.50.
• Each share of convertible preferred is convertible into 6.601
shares of common stock.
• Fortune Brands has an option to redeem each share at a
price of $30.50; upon redemption, the preferred shareholder
will receive that cash amount and will surrender that share to
the company.
Michael Dimond
School of Business Administration
Aon’s Common Stock
• Par value of $1 per share.
• Aon has authorized the issuance of 750 million shares.
• To date, Aon’s management has issued (sold) 385.9 million shares
of stock.
• Aon has repurchased 53.6 million shares from its shareholders.
• The number of outstanding shares is equal to the issued shares
less treasury shares. There were 332.3 million (385.9 million – 53.6
million) shares outstanding at the end of 2010.
Michael Dimond
School of Business Administration
P&G’s Common Stock
Michael Dimond
School of Business Administration
Sale of Stock
• To illustrate, assume that AON issues 100,000 shares of
its $1 par value common stock at a market price of $43
cash per share:
1.
2.
3.
Cash increases by $4,300,000 (100,000 shares 3 $43 per share)
Common stock increases by the par value of shares sold (100,000
shares 3 $1 par value = $100,000)
Additional paid-in capital increases by the $4,200,000 difference
between the issue proceeds and par value ($4,300,000 2 $100,000)
Michael Dimond
School of Business Administration
Repurchase of Stock
• To illustrate, assume that 3,000 common shares of AON
previously issued for $43 are repurchased for $40:
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School of Business Administration
Repurchase of Stock cont’d
• Now assume that these 3,000 shares are subsequently
resold for $42 cash per share:
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School of Business Administration
Accounting for Stock Options
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School of Business Administration
Cisco’s Stock Option Expense
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School of Business Administration
Accounting for Restricted Stock
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School of Business Administration
Accounting for Dividends:
Cash Dividends
• Aon declares and pays a cash dividend of $10 million:
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School of Business Administration
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, the total amount of
dividends paid to each class of stock in each of the three
years follows:
Michael Dimond
School of Business Administration
Preferred and Common Dividends (cont’d)
Michael Dimond
School of Business Administration
Accounting for Dividends: Stock Dividends
Michael Dimond
School of Business Administration
Small Stock Dividends
• Assume that a company has 1 million shares of $5 par common
stock outstanding. It then declares a small stock dividend of 15% of
the outstanding shares when the market price of the stock is $30 per
share. This small stock dividend has the following financial
statement effects:
Michael Dimond
School of Business Administration
Large Stock Dividends
• To illustrate the effect of a large stock dividend, assume that the
company now declares a large stock dividend of 70% of the
outstanding shares when the market price of the stock is $30 per
share ($5 par value). The large stock dividend will have the following
effects on the balance sheet:
Michael Dimond
School of Business Administration
Accumulated Other Comprehensive Income
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School of Business Administration
Foreign Currency Translation on the Balance Sheet
Michael Dimond
School of Business Administration
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.
• If the 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, but
now there are two groups of shareholders that have a claim on the net
assets and earnings of the subsidiary company:
• The parent company, and
• The noncontrolling shareholders (those shareholders who continue
to own shares of the subsidiary company).
Michael Dimond
School of Business Administration
Noncontrolling Interest: Income Statement
Michael Dimond
School of Business Administration
Noncontrolling Interest: Balance Sheet
Michael Dimond
School of Business Administration
Michael Dimond
School of Business Administration