Corporate Reporting and

Analysis

Conceptual Learning Objectives

C1: Identify characteristics of
corporations and their organization.
C2: Explain characteristics of, and
distribute dividends between, common
and preferred stock.
C3: Explain the items reported in retained
earnings.
11-2

Analytical Learning Objectives

A1: Compute earnings per share and
describe its use.
A2: Compute price-earnings ratio and
describe its use in analysis.
A3: Compute dividend yield and explain
its use in analysis.
A4: Compute book value and explain its
use in analysis.
11-3

Procedural Learning Objectives

P1: Record the issuance of corporate
stock.
P2: Record transactions involving cash
dividends, stock dividends, and stock
splits.
P3: Record purchases and sales of
treasury stock and the retirement of
stock.
11-4

C1

Characteristics of Corporations

Advantages
Advantages
Separate
Separate legal
legal entity
entity
Limited
Limited liability
liability of
of stockholders
stockholders
Transferable
Transferable ownership
ownership rights
rights
Continuous
Continuous life
life
Lack
Lack of
of mutual
mutual agency
agency for
for stockholders
stockholders
Ease
Ease of
of capital
capital accumulation
accumulation
Disadvantages
Disadvantages
Governmental
Governmental regulation
regulation
Corporate
Corporate taxation
taxation

11-5

C1

Organizing and Managing

a Corporation

Corporate Organization Chart

Ultimate
Ultimate
control
control

Stockholders

Selected
Selected by
by aa
vote
vote of
of the
the
stockholders
stockholders

Board of Directors

President
Chief Fin.
Officer

Stockholders
Stockholders
usually
usually meet
meet
once
once aa year
year
Overall
Overall
responsibility
responsibility
for
for managing
managing
the
the company
company

Vice President Vice President Vice President

Finance
Production
Marketing
11-6

C1

Basics of Capital Stock

Total
Total amount
amount of
of stock
stock that
that aa
corporations
corporations charter
charter authorizes
authorizes itit to
to sell
sell

Total
Total amount
amount of
of stock
stock that
that has
has been
been issued
issued or
or
sold
sold to
to stockholders
stockholders

11-7

C1

Classes of Stock

Par value
No-par value

$1 par

Stated value
11-8

P1

Issuing Par Value Stock at a

Premium
Par
Par Value
Value Stock
Stock

On
On September
September 1,
1, Matrix,
Matrix, Inc.
Inc. issued
issued 100,000
100,000
shares
shares of
of $2
$2 par
par value
value stock
stock for
for $25
$25 per
per share.
share.
Lets
Lets record
record this
this transaction.
transaction.
Record:
Record:
1.
1. The
The cash
cash received.
received.
2.
2. The
The number
number of
of shares
shares issued
issued the
the par
par value
value
per
per share
share in
in the
the Common
Common Stock
Stock account.
account.
3.
3. The
The remainder
remainder is
is assigned
assigned to
to Paid-In
Paid-In Capital
Capital
in
in Excess
Excess of
of Par
Par Value,
Value, Common
Common Stock.
Stock.

11-9

P1

Issuing Par Value Stock at a

Premium
Par
Par Value
Value Stock
Stock

On
On September
September 1,
1, Matrix,
Matrix, Inc.
Inc. issued
issued 100,000
100,000
shares
shares of
of $2
$2 par
par value
value stock
stock for
for $25
$25 per
per share.
share.
Lets
Lets record
record this
this transaction.
transaction.

11-10

P1

Issuing Par Value Stock at a

Premium

11-11

P1

Issuing Stock for Noncash Assets

Par
Par Value
Value Stock
Stock

On
On September
September 1,
1, Matrix,
Matrix, Inc.
Inc. issued
issued 100,000
100,000
shares
shares of
of $2
$2 par
par value
value stock
stock for
for land
land valued
valued at
at
$2,500,000.
$2,500,000. Lets
Lets record
record this
this transaction.
transaction.
Record:
Record:
1.
1. The
The asset
asset received
received at
at its
its market
market value.
value.
2.
2. The
The number
number of
of shares
shares issued
issued the
the par
par value
value
per
per share
share in
in the
the Common
Common Stock
Stock account.
account.
3.
3. The
The remainder
remainder is
is assigned
assigned to
to Paid-In
Paid-In Capital
Capital
in
in Excess
Excess of
of Par,
Par, Common
Common Stock.
Stock.
11-12

P1

Issuing Stock for Noncash Assets

Par
Par Value
Value Stock
Stock

On
On September
September 1,
1, Matrix,
Matrix, Inc.
Inc. issued
issued 100,000
100,000
shares
shares of
of $2
$2 par
par value
value stock
stock for
for land
land valued
valued at
at
$2,500,000.
$2,500,000. Lets
Lets record
record this
this transaction.
transaction.

11-13

P2

Cash Dividends
To pay a cash
dividend, the
corporation
must have:

1.

2.

A sufficient
balance in
retained
earnings and
The cash
necessary to
pay the
dividend.
11-14

P2

Cash Dividends

Three important dates

ds
n
e
id
Div

Date of Declaration

Date of Record

Date of Payment

Record liability
for dividend.

No entry
required.

Record payment of
cash to stockholders.
11-15

P2

Entries for Cash Dividends

id
Di v

en d

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 Declaration

Record liability
for dividend.
11-16

P2

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.
11-17

P2

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 Payment

Record payment of
cash to stockholders.
11-18

P2

Stock Dividends
The
The corporation
corporation distributes
distributes additional
additional shares
shares
of
of its
its own
own stock
stock to
to its
its stockholders
stockholders without
without
receiving
receiving any
any payment
payment in
in return.
return.

Why
Why aa stock
stock dividend?
dividend?

100 shares

HotAir, Inc.
Common Stock

$1 par

Can
Can be
be used
used to
to keep
keep the
the market
market
price
price of
of the
the stock
stock affordable.
affordable.
Can
Can provide
provide evidence
evidence of
of
managements
managements confidence
confidence that
that
the
the company
company is
is doing
doing well.
well.
11-19

P2

Stock Dividends
Small
Small Stock
Stock Dividend
Dividend

Distribution
Distributionis
is 25%
25%of
of the
thepreviously
previously
outstanding
outstanding shares.
shares.
Capitalize
Capitalizeretained
retained earnings
earnings for
forthe
themarket
market value
value
of
of the
theshares
sharesto
tobe
bedistributed.
distributed.

Large
Large Stock
Stock Dividend
Dividend

Distribution
Distributionis
is>> 25%
25%of
of the
thepreviously
previously

outstanding
outstanding shares.
shares.

Capitalize
Capitalizeretained
retainedearnings
earningsfor
forthe
theminimum
minimum
amount
amountrequired
requiredby
bystate
statelaw,
law,usually
usuallypar
paror
or
stated
statedvalue
valueof
of the
theshares.
shares.
11-20

P2

Recording a Small Stock Dividend

Here
Here is
is the
the stockholders
stockholders equity
equity section
section of
of
Quests
Quests balance
balance sheet
sheet prior
prior to
to the
the declaration
declaration
of
of aa small
small stock
stock dividend.
dividend.

11-21

P2

Recording a Small Stock Dividend

On
On December
December 31,
31, 2013,
2013, Quest
Quest declared
declared aa 2%
2% stock
stock
dividend,
dividend, when
when the
the stock
stock was
was selling
selling for
for $10
$10 per
per
share.
share. The
The stock
stock will
will be
be distributed
distributed to
to stockholders
stockholders
on
on January
January 20,
20, 2014.
2014. Lets
Lets make
make the
the December
December 31
31
entry.
entry.

Temporary
equity
account

100,000
100,000 2%
2% == 2,000
2,000 $10
$10 == $20,000
$20,000
2,000
2,000 $1
$1 par
par == $2,000
$2,000
11-22

P2

Before the
stock
dividend.
Same amount

After the
stock
dividend.
11-23

P2

Recording a Large Stock Dividend

(greater than 25%)
Router,
Router, Inc.
Inc. shows
shows the
the following
following stockholders
stockholders
equity
equity section
section just
just prior
prior to
to issuing
issuing aa large
large
stock
stock dividend.
dividend.

11-24

P2

Recording a Large Stock Dividend

(greater than 25%)
On
On December
December 31,
31, 2013,
2013, Router
Router declared
declared aa
40%
40% stock
stock dividend,
dividend, when
when the
the stock
stock was
was
selling
selling for
for $8
$8 per
per share.
share. State
State law
law requires
requires
that
that large
large stock
stock dividends
dividends be
be capitalized
capitalized at
at
par
par value
value per
per share.
share.

50,000
50,000 40%
40% == 20,000
20,000 shares
shares $1
$1 par
par value
value == $20,000
$20,000
11-25

P2

Stock Splits
(Example of a 2 for 1 Stock Split)
A distribution of additional shares of stock to
stockholders according to their percent
ownership.
$10 par value

Common Stock
100 shares

Old
Shares

$5 par value

New
Shares

Common Stock
200 shares
11-26

P2

Stock Splits
Before the 2-for-1 split, the stockholders equity
section of the balance sheet looks like this:

11-27

P2

Stock Splits
After the 2-for-1 split, the stockholders equity
section of the balance sheet looks like this:
No accounting
entry is made.

11-28

C2

Preferred Stock
A
A separate
separate class
class of
of stock,
stock, typically
typically having
having
priority
priority over
over common
common shares
shares in
in .. .. ..

Dividend
Dividend distributions
distributions
Distribution
Distribution of
of assets
assets in
in case
case of
of liquidation
liquidation

Usually
Usually has
has aa stated
stated
dividend
dividend rate
rate

Normally
Normally has
has no
no
voting
voting rights
rights

11-29

C2

Cumulative or Noncumulative
Dividend
Cumulative

Dividends
Dividends in
in arrears
arrears
must
must be
be paid
paid before
before
dividends
dividends may
may be
be
paid
paid on
on common
common
stock.
stock.

Vs.

Noncumulative
Undeclared
Undeclared dividends
dividends
from
from current
current and
and
prior
prior years
years do
do not
not have
have
to
to be
be paid
paid in
in future
future
years.
years.

Most preferred stock

is cumulative.
11-30

C2

Cumulative or Noncumulative
Dividend

Example: Consider the following stockholders

equity section of the balance sheet

The board of directors did not declare or pay

dividends in 2013. In 2014, the board of directors
declare and pay cash dividends of $42,000.
11-31

C2

Cumulative or Noncumulative
Dividend

11-32

C2

Reasons for Issuing Preferred Stock

To
To raise
raise capital
capital without
without sacrificing
sacrificing control.
control.

To
To boost
boost the
the return
return earned
earned by
by common
common
stockholders
stockholders through
through financial
financial leverage.
leverage.

To
To appeal
appeal to
to investors
investors who
who may
may believe
believe

the
the common
common stock
stock is
is too
too risky
risky or
or that
that the
the
expected
expected return
return on
on common
common stock
stock is
is too
too
low.
low.

11-33

P3

Purchasing Treasury Stock

On
On May
May 8,
8, Whitt,
Whitt, Inc.
Inc. purchased
purchased 2,000
2,000 of
of its
its own
own
shares
shares of
of stock
stock in
in the
the open
open market
market for
for $8,000.
$8,000.

Treasury stock is shown as a reduction in total

stockholders equity on the balance sheet.
11-34

P3

Selling Treasury Stock at Cost

On
On June
June 30,
30, Whitt
Whitt sold
sold 100
100 shares
shares of
of its
its
treasury
treasury stock
stock for
for $4
$4 per
per share
share (the
(the
same
same price
price it
it paid
paid for
for it
it originally).
originally).

$8,000 2,000 shares = $4 cost per treasury share

11-35

P3

Selling Treasury Stock Above

Cost
On
On July
July 19,
19, Whitt,
Whitt, Inc.
Inc. sold
sold an
an additional
additional 500
500
shares
shares of
of its
its treasury
treasury stock
stock for
for $8
$8 per
per share.
share.
(they
(they originally
originally paid
paid $4
$4 per
per share).
share).

11-36

P3

Selling Treasury Stock

Below Cost
On
On August
August 27,
27, Whitt
Whitt sold
sold an
an additional
additional 400
400 shares
shares of
of
its
its treasury
treasury stock
stock for
for $1.50
$1.50 per
per share.
share.
(It
(It originally
originally paid
paid $4
$4 per
per share).
share).
Paid-in Capital, Treasury Stock
1,000
Treasury Stock, Common
Sold 500 treasury shares for $1.50 per share

1,600

11-37

C3

Statement of Retained Earnings

Retained
Retained earnings is
is the
the cumulative amount of reported
net
net income
income less
less any
any net
net losses
losses and
and dividends
dividends declared
declared
since
since the
the company
company started
started operating.
operating.

11-38

C3

Restricted Retained Earnings

Legal

Contractual

Most
Most states
states restrict
restrict
the
the amount
amount of
of
treasury
treasury stock
stock
purchases
purchases to
to the
the
amount
amount of
of retained
retained
earnings.
earnings.

Loan
Loan agreements
agreements
can
can include
include
restrictions
restrictions on
on
paying
paying
dividends
dividends beyond
beyond
aa certain
certain amount
amount of
of
retained
retained earnings.
earnings.
11-39

C3

Appropriated Retained Earnings

A corporations directors can voluntarily limit
dividends because of a special need for cash
such as the purchase of new facilities.

11-40

C3

Prior Period Adjustments

Correction of material errors in past years financial statements.
If an amount is incorrectly expensed, depending on the error, the
amount is either added to or subtracted from retained
earnings.

11-41

C3

Statement of Stockholders Equity

This is a more inclusive statement than the statement

of retained earnings.
11-42

C3

Stock Options
Options are given to key employees to motivate
them to:
Focus on company performance
Take a long-run perspective
Remain with the company.

11-43

A1

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

11-44

A2

Price-Earnings Ratio
This ratio reveals information about the stock
markets expectations for a companys future growth
in earnings, dividends, and opportunities.

Price- Market value (price) per share

earnings =
Earnings per share
ratio
If earnings go up,
will the market price
of my stock follow?

11-45

A3

Dividend Yield
Tells us the annual amount of cash
dividends distributed to common
stockholders relative to the stocks
market price.

Dividend
=
yield

Annual cash dividends per share

Market value per share

11-46

A4

Book Value per ShareCommon

Reflects amount of stockholders equity
applicable to common shares on a per
share basis.
Stockholders equity applicable
Book value per
to common shares
=
common share
Number of common shares
outstanding

11-47

A4

Book Value per SharePreferred

Reflects amount of stockholders equity
applicable to preferred shares on a per
share basis.

Stockholders equity applicable

Book value per
to preferred shares
=
preferred share
Number of preferred shares
outstanding

11-48

End of Chapter 11

11-49