Lecture financial and managerial accounting (4:e) chapter 11 wild, shaw, chiappetta

Financial and Managerial
Accounting

Wild, Shaw, and Chiappetta
Fourth Edition
McGraw-Hill/Irwin

Copyright © 2011 by The McGraw-Hill Companies, Inc. All


Chapter 11
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.
11-3


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.
11-4


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.

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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

11-6


C2

Basics of Capital Stock
Total
Total amount
amount of
of stock
stock that
that aa
corporation’s
corporation’s 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


P1

Issuing Par Value Stock
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.
Let’s
Let’s 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.

11-8


P2

Cash Dividends

Three important dates
n
ide
v
i
D

ds

Date of Declaration

Date of Record

Date of Payment

Record liability
for dividend.

No entry
required.

Record payment of
cash to stockholders.
11-9


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 on
on the
the stock
stock affordable.

affordable.
••Can
Can provide
provide evidence
evidence of
of
management’s
management’s confidence
confidence that
that
the
the company
company is
is doing
doing well.
well.
11-10


P2

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
11-11


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

11-12


P2

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.

11-13


C3

Statement of Retained Earnings
Total cumulative amount of reported net
income less any net losses and dividends
declared since the company started operating.

11-14


C3

Statement of Stockholders’ Equity

This is a more inclusive statement than the statement of
retained earnings.
11-15


End of Chapter 11

11-16