11-1 11 Reporting and Analyzing Stockholders’ Equity Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition 11-2 CHAPTER OUTLINE LEARNING OBJECTIVES 11-3 Discuss the major characteristics of a corporation Explain how to account for the issuance of common and preferred stock, and the purchase of treasury stock Explain how to account for cash dividends and describe the effect of stock dividends and stock splits Discuss how stockholders’ equity is reported and analyzed LEARNING OBJECTIVE Discuss the major characteristics of a corporation An entity separate and distinct from its owners Classified by Purpose Classified by Ownership Not-for-Profit Publicly For Privately Profit ►Salvation Army ►Facebook ►American ►IBM Cancer Society held ►Cargill Inc ►Caterpillar ►General 11-4 held Electric LO CHARACTERISTICS OF A CORPORATION Characteristics that distinguish corporations from proprietorships and partnerships Separate Limited Legal Existence Liability of Stockholders Transferable Ability to Acquire Capital Continuous Life Corporation Management Government Additional 11-5 Ownership Rights Regulations Advantages Disadvantages Taxes LO CHARACTERISTICS OF A CORPORATION Characteristics that distinguish corporations from proprietorships and partnerships Corporation acts Separate Legal Existence under its own name rather than in the Limited Liability of Stockholders name of its Transferable Ownership Rights stockholders Ability to Acquire Capital 11-6 Continuous Life Corporation Management Government Regulations Additional Taxes LO CHARACTERISTICS OF A CORPORATION Characteristics that distinguish corporations from proprietorships and partnerships 11-7 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporation Management Government Regulations Additional Taxes Limited to their investment LO CHARACTERISTICS OF A CORPORATION Characteristics that distinguish corporations from proprietorships and partnerships Separate Limited Legal Existence Liability of Stockholders Transferable Ability Shareholders may sell their stock to Acquire Capital Continuous Life Corporation Management Government Additional 11-8 Ownership Rights Regulations Taxes LO CHARACTERISTICS OF A CORPORATION Characteristics that distinguish corporations from proprietorships and partnerships Separate Limited Legal Existence Liability of Stockholders Transferable Ability to Acquire Capital Continuous Life Corporation Management Government Additional 11-9 Ownership Rights Corporation can obtain capital through the issuance of stock Regulations Taxes LO CHARACTERISTICS OF A CORPORATION Characteristics that distinguish corporations from proprietorships and partnerships Separate Limited Legal Existence Liability of Stockholders Transferable Ability to Acquire Capital Continuous Corporation Additional Life Management Government 11-10 Ownership Rights Regulations Taxes Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer LO DEBT VERSUS EQUITY DECISION Illustration: Microsystems Inc currently has 100,000 shares of common stock outstanding issued at $25 per share and no debt It is considering two alternatives for raising an additional $5 million: Plan A involves issuing 200,000 shares of common stock at the current market price of $25 per share Plan B involves issuing $5 million of 12% bonds at face value Income before interest and taxes will be $1.5 million; income taxes are expected to be 30% ILLUSTRATION 11-22 Effects on return on common stockholders’ equity 11-78 DO IT! 4b Analyzing Stockholders’ Equity On January 1, 2017, Siena Corporation purchased 2,000 shares of treasury stock Other information regarding Siena Corporation is provided below 2017 2016 Net income $110,000 $110,000 Dividends on preferred stock $10,000 $10,000 Dividends on common stock $1,600 $2,000 Common stockholders’ equity, beg of year $400,000* $500,000 Common stockholders’ equity, end of year $400,000 $500,000 LO 11-79 DO IT! 4b Analyzing Stockholders’ Equity 2017 Net income $110,000 Dividends on preferred stock $10,000 Dividends on common stock $2,000 Common stockholders’ equity, beg of year $400,000* $500,000 Common stockholders’ equity, end of year $500,000 2016 $110,000 $10,000 $1,600 $400,000 *Adjusted for purchase of treasury stock 11-80 Compute the return on common stockholders’ equity for each year LO LEARNING OBJECTIVE APPENDIX 11A: Prepare entries for stock dividends Illustration: Medland Corporation declares a 10% stock dividend on its 50,000 shares of $10 par value common stock The current fair market value of its stock is $15 per share Record the entry on the declaration date: Stock Dividends 75,000 Common Stock Dividends Distributable 50,000 Paid-in Capital in Excess of Par Value 25,000 11-81 LO STOCK DIVIDENDS ILLUSTRATION 11A-1 Statement presentation of common stock dividends distributable Illustration: Record the journal entry when Medland issues the dividend shares Common Stock Dividends Distributable 50,000 Common Stock 50,000 11-82 LO A Look at IFRS LEARNING OBJECTIVE Compare the accounting for stockholders’ equity under GAAP and IFRS KEY POINTS Similarities Aside from the terminology used, the accounting transactions for the issuance of shares and the purchase of treasury stock are similar 11-83 Like GAAP, IFRS does not allow a company to record gains or losses on purchases of its own shares The accounting related to prior period adjustment is essentially the same under IFRS and GAAP LO A Look at IFRS Similarities A statement of comprehensive income is presented in a one- or two-statement format The single-statement approach includes all items of income and expense, as well as each component of other comprehensive income or loss by its individual characteristic In the two-statement approach, a traditional income statement is prepared It is then followed by a statement of comprehensive income, which starts with net income or loss and then adds other comprehensive income or loss items Regardless of which approach is reported, income tax expense is required to be reported The 11-84 computations related to earnings per share are essentially the same under IFRS and GAAP LO A Look at IFRS Differences Under IFRS, the term reserves is used to describe all equity accounts other than those arising from contributed (paid-in) capital This would include, for example, reserves related to retained earnings, asset revaluations, and fair value differences Many 11-85 countries have a different mix of investor groups than in the United States For example, in Germany, financial institutions like banks are not only major creditors of corporations but often are the largest corporate stockholders as well In the United States, Asia, and the United Kingdom, many companies rely on substantial investment from private investors LO A Look at IFRS Differences There 11-86 are often terminology differences for equity accounts LO A Look at IFRS Differences A major difference between IFRS and GAAP relates to the account Revaluation Surplus Revaluation Surplus arises under IFRS because companies are permitted to revalue their property, plant, and equipment to fair value under certain circumstances This account is part of general reserves under IFRS and is not considered contributed capital IFRS often uses terms such as retained profits or accumulated profit or loss to describe retained earnings The term retained earnings is also often used Equity 11-87 is given various descriptions under IFRS, such as shareholders’ equity, owners’ equity, capital and reserves, LO A Look at IFRS LOOKING TO THE FUTURE The IASB and the FASB are currently working on a project related to financial statement presentation An important part of this study is to determine whether certain line items, subtotals, and totals should be clearly defined and required to be displayed in the financial statements For example, it is likely that the statement of stockholders’ equity and its presentation will be examined closely Both the IASB and FASB are working toward convergence of any remaining differences related to earnings per share computations 11-88 LO A Look at IFRS IFRS Practice Which of the following is true? a) In the United States, the primary corporate stockholders are financial institutions b) Share capital means total assets under IFRS c) The IASB and FASB are presently studying how financial statement information should be presented d) The accounting for treasury stock differs extensively between GAAP and IFRS 11-89 LO A Look at IFRS IFRS Practice Under IFRS, the amount of capital received in excess of par value would be credited to: a) Retained Earnings b) Contributed Capital c) Share Premium d) Par value is not used under IFRS 11-90 LO A Look at IFRS IFRS Practice Earnings per share computations related to IFRS and GAAP: a) are essentially similar b) result in an amount referred to as earnings per share c) must deduct preferred (preference) dividends when computing earnings per share d) All of the answer choices are correct 11-91 LO COPYRIGHT “Copyright © 2016 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” 11-92 .. .11 Reporting and Analyzing Stockholders’ Equity Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition 11- 2 CHAPTER OUTLINE LEARNING OBJECTIVES 11- 3 Discuss the major... value per share for capital stock False 11- 29 LO LEARNING OBJECTIVE Explain how to account for the issuance of common and preferred stock, and the purchase of treasury stock ACCOUNTING FOR COMMON... ILLUSTRATION 11- 3 Ownership rights of stockholders 11- 18 LO STOCKHOLDER RIGHTS Keep the same percentage ownership when new shares of stock are issued (preemptive right) ILLUSTRATION 11- 3 Ownership