Lecture Accounting: What the numbers mean (5/e) - Chapter 8: Accounting for and presentation of owner’ equity

After studying this chapter, you should understand: The characteristics of common stock, and how common stock is presented in the balance sheet; what preferred stock is, what its advantages and disadvantages to the corporation are, and how it is presented in the balance sheet; the accounting for a cash dividend, and the dates involved in dividend transactions;...

CHAPTER ACCOUNTING FOR AND PRESENTATION OF OWNER’ EQUITY McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objectives • What are the characteristics of common stock, and how is common stock presented in the balance sheet? • What is preferred stock, what are its advantages and disadvantages to the corporation, and how is it presented on the balance sheet? • How are cash dividends accounted for, and what are the dates involved in dividend transactions? McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Learning Objectives ã What are stock dividends and stock splits, and why are they used? • What are the components of “other comprehensive income,” and why these items appear in owners’ equity? • What is treasury stock, why is it acquired, and how treasury stock transactions affect owners’ equity? • How are owners’ equity transactions for the year reported in the financial statements? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objective • What are the characteristics of common stock, and how is common stock presented in the balance sheet? McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Owners Equity ã The claim of the entitys owners to the assets shown in the balance sheet • Also called net assets • Owner’s equity for a individual proprietorship is called proprietor’s capital • Owners’ equity of a partnerships is called partners’ capital • Owners’ equity for a corporation consists of paid-in capital and retained earnings McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Paid-In Capital • Referred to as contributed capital • Consists of: – Common stock – Preferred stock – Additional paid-in capital McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Common Stock ã Also called capital stock • The ultimate owners of the corporation • Have claim to all assets after all liabilities and preferred stock claims have been satisfied • Have the right and obligation to elect members of the corporation’s board of directors McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Value of Common Stock • Common stock can have par or no-par • Par value is the nominal value assigned to the stock when the corporation is formed • Usually a stock cannot be issued for a value less than par • Stated value stock is essentially the same as par value McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Recording Common Stock ã Par-value common stock sold above par is recorded as follows: Cash Common stock Additional paid-in capital XX XX XX • No-par common stock is recorded as follows: Cash Common stock McGraw­Hill/Irwin XX XX âTheMcGrawưHillCompanies,Inc.,2002 Common Stock Disclosures ã Authorized shares of stock represents the maximum number of shares of stock the corporation is legally approved to issue • Issued shares represents the number of shares of stock that have been transferred from the corporation to shareholders • Outstanding shares of stock represents the shares of stock still in the hands of shareholders • Treasury stock represents the difference between issued and outstanding shares McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Dividend Dates ã Date of declaration is the date the board of directors declares the dividend • Date of record is the date used to determine who receives the dividend – the stockholders of record as of that date • Date of payment is the date the dividend checks are mailed to the shareholders • Ex-dividend date is three business days before the date of record – the stock trades without the dividend McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objective • What are stock dividends and stock splits, and why are they used? McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Stock Dividends ã The issuance of additional stock to existing shareholders in proportion to the number of shares currently owned • Used to maintain loyalty of stockholders when the firm does not have enough cash for a cash dividend • Affects only owners’ equity of the firm: Retained earnings XX Common stock XX Additional paid-in capital XX McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Stock Split ã Will lower the market price of a firm’s stock • Involves issuing additional share of stock to existing shareholders • No accounting entry is required • The par value and the number of shares issued changes McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Learning Objective ã What is treasury stock, why is it acquired, and how treasury stock transactions affect owners’ equity? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Treasury Stock • Shares of a corporation’s own stock that have been purchased from shareholders • Is reflected on the balance sheet as a contra owners’ equity account • Treasure stock is not an asset • Recorded as follows: Treasury stock Cash McGrawưHill/Irwin XX XX âTheMcGrawưHillCompanies,Inc.,2002 Sales of Treasury Stock ã When sold above purchase price, treasury stock transactions are recorded as follows: Cash XX Treasury stock Additional paid-in capital XX XX • Cash dividends are not paid on treasury stock since the firm would be paying itself a dividend • Stock dividends and stock splits affect treasury stock McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objective • What are the components of “other comprehensive income,” and why these items appear in owners equity? McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Other Comprehensive Income ã All items of income (or loss) ultimately affect owners’ equity • Comprehensive income consists of: – Net income (from income statement) – Cumulative foreign currency translation adjustment – Unrealized gains and losses on available-forsale securities (after taxes) – Additional minimum pension liability adjustments (after taxes) McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Cumulative Foreign Currency Translation Adjustment • Financial statements of a foreign subsidiary are expressed in the currency of the country in which it operates • The financial statements must be converted into U.S dollars • Because of fluctuations in exchange rates, a difference occurs between the translated assets and liabilities and the translated owners’ equity McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Cumulative Foreign Currency Translation Adjustment ã The difference may result in a gain or loss • The adjustment will fluctuate over time and will not be realized until the subsidiary is sold McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Learning Objective ã How are owners’ equity transactions for the year reported in the financial statements? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Reporting Changes in Owners’ Equity Accounts • May be reported in the balance sheet, a separate statement of changes in owners’ equity, or in the footnotes or financial review accompanying the financial statements • Reports all changes in owners’ equity for the year McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Owners’ Equity for Other Types of Entities • Proprietorships and partnership not issue stock • No distinction is made between paid-in capital and retained earnings • Distributions made to owners are usually recorded in a drawing account – similar to a dividend account McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Owners’ Equity for Other Types of Entities • Not-for-profit and governmental entities not have owners who have a direct financial interest in the entity • Owners’ equity is referred to as fund balance • A statement of changes in fund balances takes the place of a statement of owners’ equity McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 ... Objectives • What are stock dividends and stock splits, and why are they used? • What are the components of “other comprehensive income,” and why these items appear in owners’ equity? • What is treasury... • Date of declaration is the date the board of directors declares the dividend • Date of record is the date used to determine who receives the dividend – the stockholders of record as of that... McGraw­Hill/Irwin ? ?The? ?McGraw­Hill Companies, Inc., 2002 Owners’ Equity for Other Types of Entities • Not -for- profit and governmental entities not have owners who have a direct financial interest in the entity