Chapter 11

11

REPORTING AND
ANALYZING
STOCKHOLDER’S EQUITY

11-1

Accounting, Fourth Edition


Study
Study Objectives
Objectives

11-2

1.

Identify and discuss the major characteristics of a corporation.

2.

Record the issuance of common stock.

3.

Explain the accounting for the purchase of treasury stock.

4.

Differentiate preferred stock from common stock.

5.

Prepare the entries for cash dividends and understand the
effect of stock dividends and stock splits.

6.

Identify the items that affect retained earnings.

7.

Prepare a comprehensive stockholders’ equity section.

8.

Evaluate a corporation’s dividend and earnings performance
from a stockholder’s perspective.


Reporting
Reporting and
andAnalyzing
Analyzing Stockholders’
Stockholders’Equity
Equity
The
Corporate
Form of

Organization
Characteristics
Formation
Stockholder
rights

Stock Issue
Considerations

Authorized
stock
Issuance
Par and no-par
value
Accounting for
common stock
issues

11-3

Accounting
for Treasury
Stock

Purchase of
treasury stock

Preferred
Stock

Dividends
and Retained
Earnings

Dividend
preferences

Cash
dividends

Liquidation
preference

Stock
dividends
Stock splits
Retained
earnings
restrictions

Financial
Statement
Presentation
and Corporate
Performance
Balance sheet
Statement of
cash flows
Dividend
record

Earnings
performance
Debt vs.
equity
decision


The
The Corporate
Corporate Form
Form of
of Organization
Organization
An entity separate and distinct from its owners.
Classified by Ownership

Classified by Purpose
Not-for-Profit

Publicly held

For Profit

Privately held

►

Salvation Army

►

Nike

►

American Cancer
Society

►

General Motors

►

IBM

Gates Foundation

►

General Electric

►
11-4

►

Cargill Inc.

The
The Corporate
Corporate Form
Form of
of Organization
Organization
Characteristics of a Corporation

11-5



Separate Legal Existence



Limited Liability of Stockholders



Transferable Ownership Rights



Ability to Acquire Capital



Continuous Life



Corporate Management



Government Regulations



Additional Taxes

Advantages

Disadvantages

SO 1 Identify and discuss the major characteristics of a corporation.


The
The Corporate
Corporate Form
Form of
of Organization
Organization
Characteristics of a Corporation

11-6



Separate Legal Existence



Limited Liability of Stockholders



Transferable Ownership Rights



Ability to Acquire Capital



Continuous Life



Corporate Management



Government Regulations



Additional Taxes

Corporation acts
under its own name
rather than in the
name of its
stockholders.

SO 1 Identify and discuss the major characteristics of a corporation.


The
The Corporate
Corporate Form
Form of
of Organization
Organization
Characteristics of a Corporation

11-7



Separate Legal Existence



Limited Liability of Stockholders



Transferable Ownership Rights



Ability to Acquire Capital



Continuous Life



Corporate Management



Government Regulations



Additional Taxes

Limited to their
investment.

SO 1 Identify and discuss the major characteristics of a corporation.


The
The Corporate

Corporate Form
Form of
of Organization
Organization
Characteristics of a Corporation

11-8



Separate Legal Existence



Limited Liability of Stockholders



Transferable Ownership Rights



Ability to Acquire Capital



Continuous Life



Corporate Management



Government Regulations



Additional Taxes

Shareholders may
sell their stock.

SO 1 Identify and discuss the major characteristics of a corporation.


The
The Corporate
Corporate Form
Form of
of Organization
Organization
Characteristics of a Corporation

11-9



Separate Legal Existence



Limited Liability of Stockholders



Transferable Ownership Rights



Ability to Acquire Capital



Continuous Life



Corporate Management



Government Regulations



Additional Taxes

Corporation can
obtain capital

through the issuance
of stock.

SO 1 Identify and discuss the major characteristics of a corporation.


The
The Corporate
Corporate Form
Form of
of Organization
Organization
Characteristics of a Corporation

11-10



Separate Legal Existence



Limited Liability of Stockholders



Transferable Ownership Rights



Ability to Acquire Capital



Continuous Life



Corporate Management



Government Regulations



Additional Taxes

Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
stockholder,
employee, or officer.

SO 1 Identify and discuss the major characteristics of a corporation.


The

The Corporate
Corporate Form
Form of
of Organization
Organization
Characteristics of a Corporation

11-11



Separate Legal Existence



Limited Liability of Stockholders



Transferable Ownership Rights



Ability to Acquire Capital



Continuous Life



Corporate Management



Government Regulations



Additional Taxes

Separation of
ownership and
management
prevents owners from
having an active role
in managing the
company.

SO 1 Identify and discuss the major characteristics of a corporation.


The
The Corporate
Corporate Form
Form of
of Organization
Organization
Characteristics of a Corporation

11-12



Separate Legal Existence



Limited Liability of Stockholders



Transferable Ownership Rights



Ability to Acquire Capital



Continuous Life



Corporate Management



Government Regulations



Additional Taxes
SO 1 Identify and discuss the major characteristics of a corporation.


The
The Corporate
Corporate Form
Form of
of Organization
Organization
Characteristics of a Corporation

11-13



Separate Legal Existence



Limited Liability of Stockholders



Transferable Ownership Rights



Ability to Acquire Capital



Continuous Life



Corporate Management



Government Regulations



Additional Taxes

Corporations pay
income taxes as
 a separate legal
entity and
 stockholders pay
taxes on cash
dividends.

SO 1 Identify and discuss the major characteristics of a corporation.


The

The Corporate
Corporate Form
Form of
of Organization
Organization
Stockholders

Illustration 11-1
Corporation
organization chart

Chairman and
Board of
Directors
President and
Chief Executive
Officer

General
Counsel and
Secretary

Vice President
Marketing

Treasurer
11-14

Vice President
Finance/Chief

Financial Officer

Vice President
Operations

Vice President
Human
Resources

Controller

SO 1 Identify and discuss the major characteristics of a corporation.


The
The Corporate
Corporate Form
Form of
of Organization
Organization
Stockholders Rights

Illustration 11-3

1. Vote in election of board of
directors and on actions that
require stockholder approval.

2. Share the corporate earnings
through receipt of dividends.

11-15

SO 1 Identify and discuss the major characteristics of a corporation.


The
The Corporate
Corporate Form
Form of
of Organization
Organization
Stockholders Rights

Illustration 11-3

3. Keep the same percentage ownership when new
shares of stock are issued (preemptive right).

11-16

SO 1 Identify and discuss the major characteristics of a corporation.


The
The Corporate
Corporate Form
Form of
of Organization
Organization

Stockholders Rights

Illustration 11-3

4. Share in assets upon liquidation in proportion to
their holdings. This is called a residual claim.

11-17

SO 1 Identify and discuss the major characteristics of a corporation.


Stock
Stock Issue
Issue Considerations
Considerations
Authorized Stock

11-18



Charter indicates the amount of stock that a
corporation is authorized to sell.



Number of authorized shares is often reported in the
stockholders’ equity section.

SO 1 Identify and discuss the major characteristics of a corporation.


Stock
Stock Issue
Issue Considerations
Considerations
Prenumbered

Shares

Illustration 11-4

Name of corporation
Stockholder’s
name

Signature of
corporate official
11-19

SO 1 Identify and discuss the major characteristics of a corporation.


Stock
Stock Issue
Issue Considerations
Considerations
Issuance of Stock




11-20

Corporation can issue common stock
►

directly to investors or

►

indirectly through an investment banking firm.

U.S. securities exchanges
►

New York Stock Exchange

►

American Stock Exchange

►

13 regional exchanges

►

NASDAQ national market

SO 1 Identify and discuss the major characteristics of a corporation.


Stock
Stock Issue
Issue Considerations
Considerations
Common
CommonStock
Stock
Paid-in
Paid-inCapital
Capital

Account
Account

Preferred
PreferredStock
Stock

Paid-in
Paid-inCapital
Capitalinin
Excess
Excessof
ofPar
Par
Account
Account

Account
Account

Two Primary
Sources of
Equity

Retained
RetainedEarnings
Earnings
Account
Account

Paid-in capital is the total amount of cash and other assets paid in
to the corporation by stockholders in exchange for capital stock.
11-21

SO 2 Record the issuance of common stock.


Stock
Stock Issue
Issue Considerations
Considerations
Common
CommonStock
Stock
Paid-in
Paid-inCapital

Capital

Account
Account

Preferred
PreferredStock
Stock

Paid-in
Paid-inCapital
Capitalinin
Excess
Excessof
ofPar
Par
Account
Account

Account
Account

Two Primary
Sources of
Equity

Retained
RetainedEarnings
Earnings
Account

Account

Retained earnings is net income that a corporation retains for
future use.
11-22

SO 2 Record the issuance of common stock.


Stock
Stock Issue
Issue Considerations
Considerations
Accounting for Common Stock Issues
Primary objectives:
1) Identify the specific sources of paid-in capital.
2) Maintain the distinction between paid-in capital and
retained earnings.
Other than consideration received, the issuance of common
stock affects only paid-in capital accounts.

11-23

SO 2 Record the issuance of common stock.


Stock
Stock Issue
Issue Considerations
Considerations

Accounting for Common Stock Issues
Illustration: Assume that Hydro-Slide, Inc. issues 1,000
shares of $1 par value common stock at par. Prepare the
journal entry.
Cash

1,000

Common stock (1,000 x $1)

11-24

1,000

SO 2 Record the issuance of common stock.


Stock
Stock Issue
Issue Considerations
Considerations
Accounting for Common Stock Issues
Illustration: Now assume Hydro-Slide, Inc. issues an
additional 1,000 shares of the $1 par value common stock for
cash at $5 per share. Prepare Hydro-Slide’s journal entry.
Cash

11-25

5,000

Common stock (1,000 x $1)

1,000

Paid-in capital in excess of par value

4,000

SO 2 Record the issuance of common stock.