11-1 CHAPTER 11 Reporting & Analyzing Stockholder’s Equity.

11-1

CHAPTER 11Reporting & Analyzing Stockholder’s Equity

11-2Ch. 11 Reporting & Analyzing Stockholders’ Equity

After studying Chapter 11, you should be able to: Identify and discuss the major characteristics of a

corporation. Record the issuance of common stock. Explain the accounting for purchase of treasury stock. Differentiate preferred stock from common stock. Prepare the entries for cash dividends and stock

dividends. Identify the items that affect retained earnings. Prepare a comprehensive stockholders' equity section. Evaluate a corporation's dividend and earnings

performance from a stockholder's perspective.

11-3

Corporation Possess legal entity Created by law Has most of the rights and privileges of a person Classified by purpose and ownership

Purpose - profit or nonprofitOwnership - publicly or privately heldPublicly Held -May have thousands of

stockholders and its stock is regularly traded on national securities markets.

Privately Held -May have few stockholders and does not offer its stock for sale to general public.

11-4

Separate legal existence Limited liability of stockholders Transferable ownership rights Ability to acquire capital Continuous life Formation of corporation Corporation management Government regulations Additional taxes Stockholder rights see illus. 11-1, 11-3, p. 513

Characteristics of a Corporation

11-5

Stock Certificate Shows...name of the corporationstockholder's nameclass and special features of the stockthe number of shares ownedthe signatures of duly authorized

corporate officials.

Illustration 11-4

11-6Questions in Issuing Stock... How many shares should be authorized for sale?

Authorized shares = Max. amount of stock a corporation is allowed to sell as authorized by corporate charter. Outstanding stock = # shares of issued stock held by stockholders.

How should the stock be issued? - Directly or through investment bankers.

At what price should the shares be issued? Company's anticipated future earnings Its expected dividend rate per shareIts current financial positionCurrent state of economy & securities market

What value should be assigned to the stock?

11-7

Par Value Stock… - illus. 11-5 Is capital stock that has been assigned an arbitrary

value per share in the corporate charter. Is usually low because some states levy a tax on the

corporation based on par value. The legal capital per share that must be retained in

the business.

No-Par Value Stock…Capital stock that has not been assigned a value per

share in the corporate charter. Stated value = Amount per share assigned by the board of directors to no-par stock.

Par & Stated Value have no relationship to Market Value

11-8

Stockholders’ Equity Section of a Corporation’s Balance Sheet...

Two Parts:Paid-in (contributed) capital (“PIC”)

• Amount paid to corporation by stockholders for shares of ownership.

Retained earnings (earned capital) (“RE”).• Earned capital held for future use in the business.

11-9Accounting for

Common Stock Issues The issue of common stock affects only paid-in

capital accounts. When the issuance of common stock for cash is

recorded, the par value of the shares is credited to Common Stock.

The portion of the proceeds above or below par value is recorded in a separate paid-in capital account.

11-10Issuing Stock at Par Assume Hydro-Slide, Inc., issues 1,000 shares of $1

par value of common stock at par for cash.

Cash 1,000 Common Stock 1,000

Issuing Stock above ParIf Hydro-Slide, Inc., issues an additional 1,000 shares of the $1

par value common stock for cash at $5 per share, the entry is:

Cash 5,000

Common Stock 1,000

Paid-in Capital in Excess of Par Val. 4,000

Stockholders' equity Paid-in capital Common stock $ 2,000 Paid-in capital in excess of par 4,000 Total paid-in capital $ 6,000 Retained earnings 27,000Total stockholders' equity $33,000

Mead, Inc. B/S (partial) Stockholders' equity Paid-in capital Common stock,$5par value, 100,000 shares issued & outstanding $ 500,000 Retained Earnings 200,000 Total stockholders’ equity $ 700,000

before treasury stock transaction

Hydro-Slide, Inc.Balance Sheet (partial)

Illustration 11-6 & 11-7

11-12Treasury Stock... Is a corporation's own stock

that has been issued fully paid forreacquired by the corporationheld in its treasury for future use.

Why Acquire Treasury Stock... Reissue shares to officers and employees under bonus and stock

compensation plans.Increase trading of company's stock in securities market in hopes

of enhancing market value.Have additional shares available for use in acquisition of other

companies.Reduce number of shares outstanding thereby increasing

earnings per share.Prevent a hostile takeover.

11-13Purchase of Treasury Stock On February 1, 2001, Mead acquires 4,000 shares of

its stock at $8 per share.

Treasury Stock 32,000

Cash 32,000

The Treasury Stock account would increase by the cost of the shares purchased - $32,000.

The original paid-in capital account, Common Stock, would not be affected because the number of issued shares does not change.

Treasury stock is deducted from total paid-in capital and retained earnings in the stockholders' equity section of the balance sheet.

Stockholders' equity Paid-in capital Common stock,$5par value, 100,000 shares issued and 96,000 outstanding $

500,000 Retained Earnings

200,000 Total stockholders’ equity 700,000 Less: Treasury Stock

32,000Total stockholders’ equity $

668,000

Mead, Inc.Balance Sheet (partial)

Illustration 11-8

AFTER TREASURY STOCK TRANSACTION

11-15Preferred Stock...

Capital stock that has contractual preferences over common stock in certain areas.DividendsAssets in the event of liquidationPreferred stockholders do not have voting rights.

Assume Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share.

Cash 120,000Preferred Stock 100,000Paid-in Capital in Excess 20,000

of Par Value--Preferred Stock (Preferred stock may have either a par value or no-

par value.)

11-16 Preferred Dividend...

Cumulative - Is a feature of preferred stock entitling the stockholder to receive current & unpaid prior-year dividends before common stockholders receive any dividends. No guarantee of dividend payment.

Liquidation Pref. - feature that gives preferred stockholders preference to corporate assets in the event of liquidation.

Arrears -Are preferred dividends that were scheduled to be declared but were not declared during a given period.Are not a liability. No liability exists until a dividends is

declared by board of directors.Must be disclosed in the notes to financial statements.

Dividends in arrears ($35,000 x 2 years) $ 70,000 Current-year dividends 35,000

Total preferred dividends $105,000

11-17Dividend... Is a distribution by a corporation to its stockholders on

a pro rata basis. Pro rata means that if you own 10% of the common

shares, you will receive 10% of the dividend. Dividend forms:

cash - need RE, cash, declared dividendpropertyscript (promissory note to pay cash) stock.

11-18

The Declaration Date...

Is the date the board of directors declares the cash dividend. Commits the corporation to a binding legal obligation that

cannot be rescinded.

On December 1, 2001 the directors of Media General declare a $.50 per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is $50,000 (100,000 x $.50). 12/1 Retained Earnings 50,000 Dividends Payable 50,000

11-19

The Record Date... The date ownership of the outstanding shares is determined for

dividend purposes. 12/10 No Entry Necessary.

The date dividend checks are mailed.January 20 is the payment date for Media General.

1/20 Dividends Payable 50,000Cash 50,000

The Payment Date...

11-20A Stock Dividend... Is a pro rata distribution of corporation's own stock to

stockholders. Is paid in stock. Results in a decrease in RE &increase in PIC. Does not decrease total stockholders' equity or total assets. Is often issued by companies that do not have adequate cash

to issue a cash dividend.You have a 2% ownership interest in Cetus Inc., owning 20 of

its 1,000 shares of common stock. In a 10% stock dividend, 100 shares (1,000 x 10%) of stock

would be issued. You would receive two shares (2% x 100), but your ownership interest would remain at 2% (22 /1,100).

You now own more shares of stock, but your ownership interest has not changed.

11-21

Stock Dividends

Medland Corporation has $300,000 in retained earnings and declares a 10% stock dividend on its 50,000 shares of $10 par value common stock.

The current fair market value of the stock is $15 per share.

Retained Earnings 75,000 Common Stock Dividends 50,000

Distributable Paid-in Capital in Excess 25,000 of Par Value

11-22

CINCINNATI FINANCIAL CORPORATION

P.O. BOX 145496 CINCINNATI, OHIO 45250-5496 (513) 870-2000

April 28, 1995

To Our Shareholders

Your Company is pleased to enclose your 5% Stock Dividend payable today to shareholders of record on March 17.

No fractional shares have been issued. Shareholders entitled to a fraction will find a check for the cash equivalent of suchfractional share based on the closing price on March 17, 1995 of $52.50.

If you are a member of our dividend reinvestment plan, the enclosed represents 5% of those shares registered in your name. The5% due you for shares held by and registered in the bank’s name was sent directly to the Fifth Third Bank. The next quarterlystatement you receive from the bank will show the 5% paid you on shares held for your account by the bank.

The Company is advised by counsel that, under existing Federal Income Tax law, the stock divided will not result in taxableincome or in gain or loss to the shareholders, except that the cash paid by the Company to the shareholder for a fractional sharemust be treated as ordinary income by the shareholder. For any additional information, it is suggested that you check with your taxadvisor.Your Company sells most types of Property, Casualty and Life insurance. You can contribute to the increased profitably of yourcompany by purchasing your insurance from one of our agents and by recommending the Company to friends, neighbors orrelatives.

CINCINNATI FINANCIAL CORPORATIONRobert J. Driehaus, Financial Vice President

11-23# 219085 THE CINCINNATI COMPANIES 5 SHARES

CINCINNATI FINANCIAL CORPORATION INCORPORATED UNDER THE LAWS OF OHIO CUSIP 172062 10 1

This Certifies that ELINDA FISHMAN KISS is the owner of ***5*** fully paid and non-assessable shares of common stock of the par value of $2.00 per share of Cincinnati Financial Corporation transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed.

In Witness Whereof, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its corporate seal to be hereunto affixed.

Dated April 28, 1995

Robert J. Driehaus SEAL Robert B. Morgan Treasurer President

11-24

(back of stock certificate)

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were writtenout in full according to applicable laws or regulations:TEN COM - as tenants in common UNIF GIFT MIN ACT -___________ Custodian __________TEN ENT - as tenants by the entireties (Cust) (Minor)JT TEN - as joint tenants with right of under Uniform Gifts to Minorssurvivorship and not as tenants Act _____________in common (State)

Additional abbreviations may also be used though not in the above list

For Value received, ________________hereby sell, assign and transfer nowPLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)

____________________________________________________________________________________ shares

of the capital stock represented by the within Certificate, and do herebyirrevocably constitute and appoint___________________________________________________________ Attorneyto transfer the said stock on the books of the within named Corporationwith full power of substitution in the premises.

Dated __________________________________________________________________________________________

NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE

CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

11-25

Stock Split... Is the issuance of additional shares of stock to stockholders

accompanied by:

A reduction in the par or stated value.

An increase in number of shares. A stock split does not have any effect on total paid-in capital,

retained earnings, and total stockholders' equity

Because stock split not affect balances in stockholders' equity accounts, it is not necessary to journalize a stock split.

11-26

THE

CINCINNATI INSURANCE COMPANIES

CINCINNATI FINANCIAL CORPORATION Mailing Address: P.O. BOX 145496 CINCINNATI, OHIO 45250-5496 (513) 870-2000 May 15, 1998 TO OUR SHAREHOLDERS: We are pleased to enclose your stock certificate issued as a result of the 3-for-1 stock split declared by your Board of Directors on April 4, 1998. The enclosed represents the additional shares due you for those shares registered in your name. If you participate in our dividend reinvestment plan, the additional shares due you for shares held by and registered in the bank's name were sent directly to the Fifth Third Bank. The next quarterly statement you receive form the bank will show the additional shares issued to you on shares held by the bank for your account . The Company is advised by counsel that, under exiting Federal Income Tax law, the stock split will not result in taxable income or in gain or loss to the shareholders. For any additional information, it is suggested that you check with your tax advisor .

Cordially,

T. F. Elchynski Theodore F. Elchynski Chief Financial Officer Secretary and Treasurer

6200 S. Gilmore Road, Fairfield, Ohio 45014-5141

11-27

Retained Earnings (RE)... Is net income that is retained in the business. The balance in retained earnings is part of the

stockholders' claim on the total assets of the corporation.

Retained earnings does not represent a claim on any specific asset.

Deficit = a debit balance in RE & is reported as a deduction in the stockholders' equity section of the balance sheet.

RE restrictions = legal, contractual or voluntary circumstances that make a portion of RE currently unavailable for dividends.

11-28

Stockholders' equity Common stock, $.01 par value;

1,500,000,000 shares authorized; 493,358,504 shares issued $ 493

Capital in excess of par value 1,667

Retained earnings 3,819Total stockholders' equity $ 5,979

Kmart, Inc. Balance Sheet (Partial)

(in millions)

Illustration 11-18

11-29Ratios Payout = TOT. CASH DIV. DECLARED ON COMMON STOCK

NET INCOME … measures the percentage of earnings distributed in

form of cash dividends to common stockholders. Dividend Yield = DIV. DECLARED per SHARE of COMMON STOCK

STOCK PRICE AT END OF YEAR…reports rate of return an investor earned from dividends. EPS = NET INCOME - PREFERRED STOCK DIVIDENDS

AVERAGE COMMON SHARES OUTSTANDING ...measures NI earned on each share of common stock. P-E = MARKET PRICE PER SHARE OF STOCK

EARNINGS PER SHARE

ROE = NET INCOME -PREFERRED STOCK DIVIDENDSAVERAGE COMMON STOCKHOLDERS’ EQUITY

11-30Ratios P-E = MARKET PRICE PER SHARE OF STOCK

EARNINGS PER SHARE To make a meaningful comparison of earnings across

firms, use the P-E ratio.P-E ratio reflects investors' assessment of a company's

future earnings.

Return on Common Equity Ratio (ROCE) or (ROE) =

NET INCOME -PREFERRED STOCK DIVIDENDS

AVERAGE COMMON STOCKHOLDERS’ EQUITY

...measures the profitability from the stockholders’ point of view.

Illustration 11-21 & 11-23