Financial accounting 9th kieso kimmel chapter 11

Preview of Chapter Financial Accounting Ninth Edition Weygandt Kimmel Kieso 11-1 Preview of Chapter 11 Financial Accounting Ninth Edition Weygandt Kimmel Kieso 11-2 11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings Learning Objectives After studying this chapter, you should be able to: [1] Identify the major characteristics of a corporation [2] Record the issuance of common stock [3] Explain the accounting for treasury stock [4] Differentiate preferred stock from common stock [5] Prepare the entries for cash dividends and stock dividends [6] Identify the items reported in a retained earnings statement [7] Prepare and analyze a comprehensive stockholders’ equity section 11-3 The Corporate Form of Organization An entity separate and distinct from its owners Classified by Purpose Classified by Ownership  Not-for-Profit  Publicly held  For Profit  Privately held ► Salvation Army ► McDonald’s ► American Cancer Society ► Nike ► PepsiCo ► Google 11-4 ► Cargill Inc Alternative Alternative Terminology Terminology Privately Privately held held corporations corporations are are also also referred referred to to as as closely closely held held corporations corporations LO Characteristics of an Organization Characteristics that distinguish corporations from proprietorships and partnerships 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 LO Characteristics of an Organization 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  Corporate Management  Government Regulations  Additional Taxes LO Characteristics of an Organization 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  Corporate Management  Government Regulations  Additional Taxes Limited to their investment LO Characteristics of an Organization Characteristics that distinguish corporations from proprietorships and partnerships 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 LO Characteristics of an Organization Characteristics that distinguish corporations from proprietorships and partnerships 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 LO Characteristics of an Organization Characteristics that distinguish corporations from proprietorships and partnerships 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 LO APPENDIX 11B Book Value—Another per Share Amount Book Value per Share The computation of book value per share involves the following steps Compute the preferred stock equity This equity is equal to the sum of the call price of preferred stock plus any cumulative dividends in arrears If the preferred stock does not have a call price, the par value of the stock is used Determine the common stock equity Subtract the preferred stock equity from total stockholders’ equity Determine book value per share Divide common stock equity by shares of common stock outstanding 11-95 LO APPENDIX 11B Book Value—Another per Share Amount Illustration: Using the stockholders’ equity section of Graber Inc shown in Illustration 11-26 Graber’s preferred stock is callable at $120 per share and is cumulative Assume that dividends on Graber’s preferred stock were in arrears for one year, $54,000 (6,000 x $9) The computation of preferred stock equity (Step in the preceding list) is: Illustration 11B-2 11-96 LO APPENDIX 11B Book Value—Another per Share Amount Illustration 11B-2 Computation of book value: 11-97 Illustration 11B-3 LO APPENDIX 11B Book Value—Another per Share Amount Book Value versus Market Value The correlation between book value and the annual range of a company’s market value per share is often remote Illustration 11B-4 11-98 LO Key Points 11-99  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 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 10 Compare the accounting procedures for stockholders’ equity under GAAP and IFRS Key Points  11-100 There are often terminology differences for equity accounts The following summarizes some of the common differences in terminology LO 10 Key Points  11-101 The accounting for treasury stock differs somewhat between IFRS and GAAP (However, many of the differences are beyond the scope of this course.) Like GAAP, IFRS does not allow a company to record gains or losses on purchases of its own shares One difference worth noting is that, when a company purchases its own shares, IFRS treats it as a reduction of stockholders’ equity, but it does not specify which particular stockholders’ equity accounts are to be affected Therefore, it could be shown as an increase to a contra equity account (Treasury Stock) or a decrease to retained earnings or share capital LO 10 Key Points 11-102  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 LO 10 Key Points 11-103  The accounting related to prior period adjustment is essentially the same under IFRS and GAAP IFRS addresses the accounting for errors in IAS (“Accounting Policies, Changes in Accounting Estimates, and Errors”) One area where IFRS and GAAP differ in reporting relates to error corrections in previously issued financial statements While IFRS requires restatement with some exceptions, GAAP does not permit any exceptions  Equity is given various descriptions under IFRS, such as shareholders’ equity, owners’ equity, capital and reserves, and shareholders’ funds LO 10 Key Points 11-104  The income statement using IFRS is called the statement of comprehensive income 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 computations related to earnings per share are essentially the same under IFRS and GAAP LO 10 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 11-105 LO 10 IFRS Self-Test Questions Under IFRS, a purchase by a company of its own shares is recorded by: a) an increase in Treasury Stock b) a decrease in contributed capital c) a decrease in share capital d) All of these are acceptable treatments 11-106 LO 10 IFRS Self-Test Questions 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 amount to treasury stock is very different between U.S GAAP and IFRS 11-107 LO 10 A Look at IFRS IFRS Self-Test Questions 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 11-108 LO 10 Copyright “Copyright © 2014 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.” 11-109 ...Preview of Chapter 11 Financial Accounting Ninth Edition Weygandt Kimmel Kieso 11- 2 11 Corporations: Organization, Stock Transactions, Dividends,... obtain a license from each state in which they business 11- 15 LO 11- 16 LO The Corporate Form of Organization Stockholders Rights Illustration 11- 3 Ownership rights of stockholders Vote in election... section  No formal accounting entry LO Stock Issue Considerations Prenumbered Shares Illustration 11- 4 Name of corporation Stockholder’s name Signature of corporate official 11- 22 LO Stock Issue