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Prepared by Coby Harmon University of California, Santa Barbara Westmont College 11-1 11 Corporations: Organization, Stock Transactions, and Stockholders’ Equity Learning Objectives 11-2 Discuss the major characteristics of a corporation Explain how to account for the issuance of common, preferred, and treasury stock Explain how to account for cash dividends, 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 11-3 Classified by Ownership Not-for-Profit Publicly held For Profit Privately held ► Salvation Army ► McDonald’s ► American Cancer Society ► Nike ► Cargill Inc Alternative Alternative Terminology Terminology ► PepsiCo ► Google Privately Privately held held corporations corporations are are also alsoreferred referred to to as as closely closely held held corporations corporations LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships 11-4 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Advantages Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes Disadvantages LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships Corporation acts under its own name 11-5 Separate Legal Existence rather than in the name of its Limited Liability of Stockholders stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships 11-6 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 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 Corporate Management Government Regulations Additional Taxes Shareholders may sell their stock LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships 11-8 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Corporation can obtain capital Ability to Acquire Capital through the issuance of stock Continuous Life Corporate Management Government Regulations Additional Taxes LO Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships 11-9 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Continuance as a going concern is Ability to Acquire Capital not affected by the withdrawal, death, or incapacity of a stockholder, Continuous Life Corporate Management Government Regulations Additional Taxes employee, or officer LO Characteristics of a Corporation 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 Separation of ownership and management often reduces an owner’s ability to actively manage the company LO LEARNING OBJECTIVE APPENDIXBook 11B:Value—Another Compute book share pervalue Shareper Amount Book Value per Share The equity a common stockholder has in the net assets of the corporation Illustration 11B-1 Book value per share formula 11-93 LO Book Value per Share Book Value—Another per Share Amount 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 11-94 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 LO Book Value per Share Book Value—Another per Share Amount Illustration: Using the stockholders’ equity section of Graber Inc shown in Illustration 11-22 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 is: Illustration 11B-2 Computation of preferred stock equity—Step 11-95 LO Book Value per Share Book Value—Another per Share Amount Illustration 11B-2 Computation of book value: 11-96 Illustration 11B-3 LO Book Value versus MarketBook Value Value—Another per Share Amount The correlation between book value and the annual range of a company’s market value per share is often remote Illustration 11B-4 Book value and market prices compared 11-97 LO 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 11-98 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 Key Points 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 11-99 The computations related to earnings per share are essentially the same under IFRS and GAAP LO Key Points Differences Under IFRS, the term reserves is used to describe all equity accounts other than those arising from contributed (paidin) 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 11-100 LO Key Points There are often terminology differences for equity accounts The following summarizes some of the common differences in terminology 11-101 LO Key Points 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 is given various descriptions under IFRS, such as shareholders’ equity, owners’ equity, capital and reserves, and share holders’ funds 11-102 LO 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 11-103 LO IFRS Self-Test Questions Under IFRS, a statement of comprehensive income must include: 11-104 a) accounts payable b) income tax expense c) retained earnings d) preference stock LO IFRS Self-Test Questions Which of the following is true? 11-105 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 LO A Look at IFRS IFRS Self-Test Questions Under IFRS, the amount of capital received in excess of par value would be credited to: 11-106 a) Retained Earnings b) Contributed Capital c) Share Premium d) Par value is not used under IFRS LO Copyright “Copyright © 2017 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.” 11-107 ... characteristics of a corporation An entity separate and distinct from its owners Classified by Purpose 11-3 Classified by Ownership Not-for-Profit Publicly held For Profit Privately held ► Salvation... president, chief operating officer, and chief financial officer of SafeNet, a software encryption company, were each awarded employee stock options by the company’s board of directors as part of... General Counsel/ Secretary Vice President Marketing Treasurer 11-13 Vice President Finance/Chief Financial Officer Vice President Operations Vice President Human Resources Controller LO Forming
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