Kế toán, kiểm toán - Reporting and analyzing stockholders’ equity

Reporting and Analyzing Stockholders’ EquityKimmel ● Weygandt ● KiesoFinancial Accounting, Eighth Edition11Explain how to account for the issuance of common and preferred stock, and the purchase of treasury stock.CHAPTER OUTLINEDiscuss the major characteristics of a corporation.12LEARNING OBJECTIVESExplain how to account for cash dividends and describe the effect of stock dividends and stock splits.3Discuss how stockholders’ equity is reported and analyzed.4An entity separate and distinct from its owners.Classified by PurposeNot-for-ProfitFor ProfitClassified by OwnershipPublicly heldPrivately heldFacebookIBMCaterpillarGeneral ElectricSalvation ArmyAmerican Cancer SocietyCargill Inc.LEARNING OBJECTIVEDiscuss the major characteristics of a corporation.1LO 1 Separate Legal ExistenceLimited Liability of StockholdersTransferable Ownership RightsAbility to Acquire CapitalContinuous LifeCorporation ManagementGovernment RegulationsAdditional TaxesCharacteristics that distinguish corporations from proprietorships and partnerships.AdvantagesDisadvantagesCHARACTERISTICS OF A CORPORATIONLO 1 Separate Legal ExistenceLimited Liability of StockholdersTransferable Ownership RightsAbility to Acquire CapitalContinuous LifeCorporation ManagementGovernment RegulationsAdditional TaxesCorporation acts under its own name rather than in the name of its stockholders.Characteristics that distinguish corporations from proprietorships and partnerships.CHARACTERISTICS OF A CORPORATIONLO 1 Separate Legal ExistenceLimited Liability of StockholdersTransferable Ownership RightsAbility to Acquire CapitalContinuous LifeCorporation ManagementGovernment RegulationsAdditional TaxesLimited to their investment.Characteristics that distinguish corporations from proprietorships and partnerships.CHARACTERISTICS OF A CORPORATIONLO 1 Shareholders may sell their stock.Separate Legal ExistenceLimited Liability of StockholdersTransferable Ownership RightsAbility to Acquire CapitalContinuous LifeCorporation ManagementGovernment RegulationsAdditional TaxesCharacteristics that distinguish corporations from proprietorships and partnerships.CHARACTERISTICS OF A CORPORATIONLO 1 Separate Legal ExistenceLimited Liability of StockholdersTransferable Ownership RightsAbility to Acquire CapitalContinuous LifeCorporation ManagementGovernment RegulationsAdditional TaxesCorporation can obtain capital through the issuance of stock.Characteristics that distinguish corporations from proprietorships and partnerships.CHARACTERISTICS OF A CORPORATIONLO 1 Separate Legal ExistenceLimited Liability of StockholdersTransferable Ownership RightsAbility to Acquire CapitalContinuous LifeCorporation ManagementGovernment RegulationsAdditional TaxesContinuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer.Characteristics that distinguish corporations from proprietorships and partnerships.CHARACTERISTICS OF A CORPORATIONLO 1 Separate Legal ExistenceLimited Liability of StockholdersTransferable Ownership RightsAbility to Acquire CapitalContinuous LifeCorporation ManagementGovernment RegulationsAdditional TaxesSeparation of ownership and management prevents owners from having an active role in managing the company.Characteristics that distinguish corporations from proprietorships and partnerships.CHARACTERISTICS OF A CORPORATIONLO 1 Separate Legal ExistenceLimited Liability of StockholdersTransferable Ownership RightsAbility to Acquire CapitalContinuous LifeCorporation ManagementGovernment RegulationsAdditional TaxesCharacteristics that distinguish corporations from proprietorships and partnerships.CHARACTERISTICS OF A CORPORATIONLO 1 Separate Legal ExistenceLimited Liability of StockholdersTransferable Ownership RightsAbility to Acquire CapitalContinuous LifeCorporation ManagementGovernment RegulationsAdditional TaxesCorporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends.Characteristics that distinguish corporations from proprietorships and partnerships.CHARACTERISTICS OF A CORPORATIONLO 1 StockholdersChairman and Board of DirectorsPresident andChief ExecutiveOfficerGeneral Counsel/SecretaryVice PresidentMarketingVice PresidentFinance/ChiefFinancial OfficerVice PresidentOperationsVice PresidentHumanResourcesTreasurerControllerILLUSTRATION 11-1 Corporation organization chartCHARACTERISTICS OF A CORPORATIONLO 1 The Impact of Corporate Social ResponsibilityA survey conducted by Institutional Shareholder Services, a proxy advisory firm, shows that 83% of investors now believe environmental and social factors can significantly impact shareholder value over the long term. This belief is clearly visible in the rising level of support for shareholder proposals requesting action related to social and environmental issues. The following table shows that the number of corporate social responsibility (CSR) related shareholder proposals rose from 150 in 2000 to 191 in 2010. Moreover, those proposals received average voting support of 18.4% of votes cast versus just 7.5% a decade earlier. Trends in Shareholder Proposals on Corporate Responsibility 2000 2005 2010Number of proposals voted 150 155 191Average voting support 7.5% 9.9% 18.4%Percent proposals receiving >10% support 16.7% 31.2% 52.1%Source: Investor Responsibility Research Center, Ernst & Young, Seven Questions CEOs and Boards Should Ask About: “Triple Bottom Line” Reporting.PEOPLE, PLANET, AND PROFIT INSIGHTLO 1 Other Forms of Business OrganizationLimited partnershipsLimited liability partnerships (LLPs) Limited liability companies (LLCs)S CorporationNo double taxation.Cannot have more than 100 shareholders.LO 1 File application with the Secretary of State.State grants charter.Corporation develops by-laws.Initial Steps:Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey).Corporations engaged in interstate commerce must obtain a license from each state in which they do business.FORMING A CORPORATIONLO 1 1. Vote in election of board of directors and on actions that require stockholder approval.2. Share the corporate earnings through receipt of dividends.STOCKHOLDER RIGHTSILLUSTRATION 11-3Ownership rights of stockholdersLO 1 3. Keep the same percentage ownership when new shares of stock are issued (preemptive right).STOCKHOLDER RIGHTSILLUSTRATION 11-3Ownership rights of stockholdersLO 1 4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.ILLUSTRATION 11-3Ownership rights of stockholdersSTOCKHOLDER RIGHTSLO 1 Name of corporationStockholder’s nameSTOCKHOLDER RIGHTSSharesPrenumberedSignatures of corporate officialsILLUSTRATION 11-4A stock certificateCharter indicates the amount of stock that a corporation is authorized to sell.Number of authorized shares is often reported in the stockholders’ equity section.Authorized StockSTOCK ISSUE CONSIDERATIONSLO 1 Corporation can issue common stock directly to investors or indirectly through an investment banking firm.Top five exchanges by value of shares traded:New York Stock ExchangeNasdaq stock marketLondon Stock ExchangeTokyo Stock ExchangeEuronextIssuance of StockSTOCK ISSUE CONSIDERATIONSLO 1 Total take: $1.7 millionANATOMY OF A FRAUDThe 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 their compensation package. Stock options enable an employee to buy a company’s stock sometime in the future at the price that existed when the stock option was awarded. For example, suppose that you received stock options today, when the stock price of your company was $30. Three years later, if the stock price rose to $100, you could “exercise” your options and buy the stock for $30 per share, thereby making $70 per share. After being awarded their stock options, the three employees changed the award dates in the company’s records to dates in the past, when the company’s stock was trading at historical lows. For example, using the previous example, they would choose a past date when the stock was selling for $10 per share, rather than the $30 price on the actual award date. In our example, this would increase the profit from exercising the options to $90 per share.THE MISSING CONTROL Independent internal verification. The company’s board of directors should have ensured that the awards were properly administered. For example, the date on the minutes from the board meeting should be compared to the dates that were recorded for the awards. The dates should again be confirmed upon exercise.LO 1 Par value stock is capital stock that has been assigned a value per share.Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors.Many states do not require a par value.No-par value stock is fairly common.In many states the board of directors assigns a stated value to no-par shares.Par and No-Par Value StocksSTOCK ISSUE CONSIDERATIONSLO 1 Review QuestionWhich of these statements is false?Ownership of common stock gives the owner a voting right.The stockholders’ equity section begins with paid-in capital.The authorization of capital stock does not result in a formal accounting entry.Legal capital is intended to protect stockholders.LO 1STOCK ISSUE CONSIDERATIONSPaid-in CapitalRetained EarningsAccountPaid-in Capital in Excess of ParAccountTwo Primary Sources of EquityCommon StockAccountPreferred StockAccountPaid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for shares of ownership.CORPORATE CAPITALLO 1 Paid-in CapitalRetained EarningsAccountPaid-in Capital in Excess of ParAccountTwo Primary Sources of EquityCommon StockAccountPreferred StockAccountRetained earnings is net income that a corporation retains for future use in the business.CORPORATE CAPITALLO 1 Indicate whether each of the following statements is true or false. Corporate OrganizationDO IT!1Similar to partners in a partnership, stockholders of a corporation have unlimited liability.It is relatively easy for a corporation to obtain capital through the issuance of stock.The separation of ownership and management is an advantage of the corporate form of business.The journal entry to record the authorization of capital stock includes a credit to the appropriate capital stock account.All states require a par value per share for capital stock.FalseTrueFalseFalseLO 1FalsePrimary objectives: Identify the specific sources of paid-in capital. Maintain the distinction between paid-in capital and retained earnings. Other than consideration received, the issuance of common stock affects only paid-in capital accounts.ACCOUNTING FOR COMMON STOCKLEARNING OBJECTIVEExplain how to account for the issuance of common and preferred stock, and the purchase of treasury stock.2LO 2Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share.Cash 1,000 Common Stock (1,000 x $1) 1,000Cash 5,000 Common Stock (1,000 x $1) 1,000 Paid-in Capital in Excess of Par Value 4,000(a)(b)Issuing Par Value Common Stock for CashLO 2Stockholders’ equity section assuming Hydro-Slide, Inc. has retained earnings of $27,000.Issuing Par Value Common Stock for CashILLUSTRATION 11-5Stockholders’ equity—paid-in capital in excess of par valueLO 2Review QuestionABC Corp. issues 1,000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, credits are made to:Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $2,000.Common Stock $12,000.Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000.Common Stock $10,000 and Retained Earnings $2,000.STOCK ISSUE CONSIDERATIONSLO 2Typically, preferred stockholders have a priority in relation todividends andassets in the event of liquidation. However, they sometimes do not have voting rights.Each paid-in capital account title should identify the stock to which it relates: Paid-in Capital in Excess of Par Value—Preferred StockPaid-in Capital in Excess of Par Value—Common StockACCOUNTING FOR PREFERRED STOCKLO 2Illustration: Stine Corporation issues 10,000 shares of$10 par value preferred stock for $12 cash per share. Journalize the issuance of the preferred stock.Cash 120,000 Preferred Stock (10,000 x $10) 100,000 Paid-in Capital in Excess of Par – Preferred Stock 20,000Preferred stock may have a par value or no-par value.ACCOUNTING FOR PREFERRED STOCKLO 2INVESTOR INSIGHTOrganized exchanges trade the stock of publicly held companies at dollar prices per share established by the interaction between buyers and sellers. For each listed security, the financial press reports the high and low prices of the stock during the year, the total volume of stock traded on a given day, the high and low prices for the day, and the closing market price, with the net change for the day. Facebook is listed on the Nasdaq exchange. Here is a recent listing for Facebook:How to Read Stock QuotesThese numbers indicate the following. The high and low market prices for the last 52 weeks have been $86.07 and $54.66. The trading volume for the day was 54,156,600 shares. The high, low, and closing prices for that date were $85.59, $83.11, and $84.63, respectively. The net change for the day was a decrease of $0.629 per share.LO 2LO 2Cayman Corporation begins operations on March 1 by issuing 100,000 shares of $1 par value common stock for cash at $12 per share. On March 28, Cayman issues 1,500 shares of $10 par value preferred stock for cash at $30 per share. Journalize the issuance of the common and preferred shares.Issuance of StockDO IT!2Cash 1,200,000 Common Stock (100,000 × $1) 100,000 Paid-in Capital in Excess of Par Value— Common Stock 1,100,000Mar. 1Cash 45,000 Preferred Stock (1,500 × $10) 15,000 Paid-in Capital in Excess of Par Value— Preferred Stock 30,000Mar. 28Paid-in CapitalRetained EarningsAccountPaid-in Capital in Excess of ParAccountLess:Treasury StockAccountTwo Primary Sources of EquityCommon StockAccountPreferred StockAccountTREASURY STOCKLO 2Treasury stock is a corporation’s own stock that has been reacquired by the corporation and is being held for future use.Corporations purchase their outstanding stock:To reissue shares to officers and employees under bonus and stock compensation plans.To increase trading of the company’s stock in the securities market. To have additional shares available for use in acquiring other companies.To increase earnings per share. Another infrequent reason is to eliminate hostile shareholders.TREASURY STOCKLO 2Generally accounted for by the cost method.Debit Treasury Stock for the price paid.Treasury stock is a contra stockholders’ equity account, not an asset.Treasury Stock decreases by the same amount when the company later sells the shares.TREASURY STOCKPurchase of Treasury StockLO 2Treasury Stock (4,000 x $8) 32,000 Cash 32,000Illustration: On February 1, 2017, Mead acquires 4,000 shares of its stock at $8 per share. Prepare the entry.Purchase of Treasury StockILLUSTRATION 11-6Stockholders’ equity withno treasury stockLO 2Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed.Purchase of Treasury StockILLUSTRATION 11-7Stockholders’ equity withtreasury stockLO 2Review QuestionTreasury stock may be repurchased:to reissue the shares to officers and employees under bonus and stock compensation plans.to signal to the stock market that management believes the stock is underpriced.to have additional shares available for use in the acquisition of other companies.More than one of the above.Purchase of Treasury StockLO 2Santa Anita Inc. purchases 3,000 shares of its $50 par value common stock for $180,000 cash on July 1. It expects to hold the shares in the treasury until resold. Journalize the treasury stock transaction.Treasury StockDO IT!2bTreasury Stock 180,000 Cash 180,000July 1LO 2A dividend is a distribution to stockholders on a pro rata (proportional to ownership) basis. Types of Dividends:Cash dividends.Property dividends.Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share.Stock dividends.Scrip (promissory note)LEARNING OBJECTIVEExplain how to account for cash dividends and describe the effect of stock dividends and stock splits.3LO 3For a corporation to pay a cash dividend, it must have:Retained earnings - Payment of dividends from retained earnings is legal in all states.Adequate cash.Declaration by the Board of Directors.CASH DIVIDENDSLO 3Dividends require information concerning three dates:Entries for Cash DividendsLO 3Illustration: On December 1, the directors of Media General declare a $0.50 per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on January 20 to shareholders of record on December 22:December 1 (Declaration Date)Cash Dividends 50,000Dividends Payable 50,000December 22 (Record Date)January 20 (Payment Date)Dividends Payable 50,000Cash 50,000No entryEntries for Cash DividendsLO 3Review QuestionEntries for cash dividends are required on the:declaration date and the record date.record date and the payment date.declaration date, record date, and payment date.declaration date and the payment date.Entries for Cash DividendsLO 3ACCOUNTING ACROSS THE ORGANIZATIONUp, Down, and ??The decision whether to pay a dividend, and how much to pay, is a very important management decision. As the chart below shows, from 2002 to 2007, many companies substantially increased their dividends, and total dividends paid by U.S. companies hit record levels. One reason for the increase is that Congress lowered, from 39% to 15%, the tax rate paid by investors on dividends received, making dividends more attractive to investors. Then the financial crisis of 2008 occurred. As a result, in 2009, 804 companies cut their dividends (see chart), the highest level since Standard & poor’s started collecting data in 1995. In 2010, more companies started to increase their dividends. However, potential higher taxes on dividends coming in the future and the possibility of a low growth economy may stall any significant increase.LO 3Preferred stockholders have the right to receive dividends before common stockholders.Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a specified amount.Cumulative dividend – holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends.Preference on corporate assets if the corporation fails. Preference may be for the par value of the shares or for a specified liquidating value.DIVIDEND PREFERENCESLO 3Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par value, cumulative preferred stock outstanding. Each $100 share pays a $7 dividend (.07 x $100). The annual dividend is $35,000 (5,000 x $7 per share). If dividends are two years in arrears, preferred stockholders are entitled to receive the following dividends in the current year.Cumulative PreferencesDividends in arrears ($35,000 × 2) $ 70,000Current-year dividends 35,000Total preferred dividends $105,000ILLUSTRATION 11-8Computation of total dividendsto preferred stockLO 3Review QuestionU-Bet Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2017. No dividends were declared in 2015 or 2016. If U-Bet wants to pay $375,000 of dividends in 2017, common stockholders will receive:$0. $295,000. $215,000.$135,000.Cumulative PreferencesLO 3MasterMind Corporation has 2,000 shares of 6%, $100 par value preferred stock outstanding at December 31, 2017. At December 31, 2017, the company declared a $60,000 cash dividend. Determine the dividend paid to preferred stockholders and common stockholders under each of the following scenarios. The preferred stock is noncumulative, and the company has not missed any dividends in previous years.SOLUTIONPreferred Stock DividendsDO IT!3aPreferred stockholders (2,000 x .06 x $100) $ 12,000Common stockholders ($60,000 - $12,000) 48,000Total dividends $60,000LO 3MasterMind Corporation has 2,000 shares of 6%, $100 par value preferred stock outstanding at December 31, 2017. At December 31, 2017, the company declared a $60,000 cash dividend. Determine the dividend paid to preferred stockholders and common stockholders under each of the following scenarios. The preferred stock is noncumulative, and the company did not pay a dividend in each of the two previous years.SOLUTIONPreferred Stock DividendsDO IT!3aPreferred stockholders (2,000 x .06 x $100) $ 12,000Common stockholders ($60,000 - $12,000) 48,000Total dividends $60,000LO 3MasterMind Corporation has 2,000 shares of 6%, $100 par value preferred stock outstanding at December 31, 2017. At December 31, 2017, the company declared a $60,000 cash dividend. Determine the dividend paid to preferred stockholders and common stockholders under each of the following scenarios. The preferred stock is cumulative, and the company did not pay a dividend in each of the two previous years.SOLUTIONPreferred Stock DividendsDO IT!3aPreferred stockholders (3 x 2,000 x .06 x $100) $ 36,000Common stockholders ($60,000 - $36,000) 24,000Total dividends $60,000LO 3Pro rata distribution of the corporation’s own stock.STOCK DIVIDENDSLO 3ILLUSTRATION 11-10Effect of stock split for stockholdersPro rata distribution of the corporation’s own stock.Results in decrease in retained earnings and increase in paid-in capital.Reasons why corporations issue stock dividends:Satisfy stockholders’ dividend expectations without spending cash.Increase the marketability of the corporation’s stock. Emphasize that a portion of stockholders’ equity has been permanently reinvested in the business.STOCK DIVIDENDSLO 3Changes the composition of stockholders’ equity. Total stockholders’ equity remains the same. No effect on the par or stated value per share.Increases the number of shares outstanding.Effects of Stock DividendsLO 3Illustration: Medland Corp. declares a 10% stock dividend on its $10 par common stock when 50,000 shares were outstanding. The market price was $15 per share.Effects of Stock DividendsLO 3ILLUSTRATION 11-9Stock dividend effectsReduces the market value of shares.No entry recorded for a stock split.Decrease par value and increase number of shares.STOCK SPLITS▼ HELPFUL HINTA stock split changes thepar value per share but does not affect any balances in stockholders’ equity.ILLUSTRATION 11-10Effect of stock split forstockholdersLO 3Illustration: Assuming that instead of issuing a 10% stock dividend, Medland splits its 50,000 shares of common stock on a 2-for-1 basis.STOCK SPLITSILLUSTRATION 11-11Stock split effectsLO 3Differences between the effects of stock dividends and stock splits.STOCK DIVIDENDS vs STOCK SPLITSILLUSTRATION 11-12Effects of stock splits and stock dividends differentiatedLO 3Review QuestionWhich of these statements about stock dividends is true?Stock dividends reduce a company’s cash balance.A stock dividend has no effect on total stockholders’ equity.A stock dividend decreases total stockholders’ equity.A stock dividend ordinarily will increase total stockholders’ equity.STOCK DIVIDENDSLO 3INVESTOR INSIGHTA No-Split PhilosophyWarren Buffett’s company, Berkshire Hathaway, has two classes of shares. Until recently, the company had never split either class of stock. As a result, the class A stock had a market price of $97,000 and the class B sold for about $3,200 per share. Because the price per share is so high, the stock does not trade as frequently as the stock of other companies. Buffett has always opposed stock splits because he feels that a lower stock price attracts short-term investors. He appears to be correct. For example, while more than 6 million shares of IBM are exchanged on the average day, only about 1,000 class A shares of Berkshire are traded. Despite Buffett’s aversion to splits, in order to accomplish a recent acquisition, Berkshire decided to split its class B shares 50 to 1. Source: Scott Patterson, “Berkshire Nears Smaller Baby B’s,” Wall Street Journal Online (January 19, 2010).Berkshire HathawayLO 3The market price of Sing CD Corporation’s 500,000 shares of $2 par value common stock is $45. President Joan Elbert is considering either a 10% stock dividend or a 2-for-1 stock split. She asks you to show the before-and-after effects of each option on (a) retained earnings, (b) total stockholders’ equity, and (c) par value per share.Stock Dividends; Stock SplitsDO IT!3bStock dividend amount is $2,250,000 [(500,000 × 10%) × $45].LO 3Retained earnings is net income that a company retains for use in the business.Net income increases Retained Earnings and a net loss decreases Retained Earnings.Retained earnings is part of the stockholders’ claim on the total assets of the corporation.A debit balance in Retained Earnings is identified as a deficit.LEARNING OBJECTIVEDiscuss how stockholders’ equity is reported and analyzed.4RETAINED EARNINGSLO 4RETAINED EARNINGSILLUSTRATION 11-14Stockholders’ equity with deficitLO 4Restrictions can result from:Legal restrictions.Contractual restrictions.Voluntary restrictions.ILLUSTRATION 11-15Disclosure of unrestricted retained earningsRETAINED EARNINGS RESTRICTIONSLO 4Two classifications of paid-in capital:Capital stockAdditional paid-in capitalOther comprehensive income items include certain adjustments to pension plan assets, types of foreign currency gains and losses, and some gains and losses on investments.BALANCE SHEET PRESENTATIONLO 4ILLUSTRATION 11-16Stockholders’ equity section of balance sheetLO 4Jennifer Corporation has issued 300,000 shares of $3 par value common stock. It is authorized to issue 600,000 shares. The paid-in capital in excess of par value on the common stock is $380,000. The corporation has reacquired 15,000 shares at a cost of $50,000 and is currently holding those shares. It also had a cumulative other comprehensive loss of $82,000. The corporation also has 4,000 shares issued and outstanding of 8%, $100 par value preferred stock. It is authorized to issue 10,000 shares. The paid-in capital in excess of par value on the preferred stock is $97,000. Retained earnings is $610,000. Prepare the stockholders’ equity section of the balance sheet.Stockholders’ Equity SectionDO IT!4aLO 4LO 4Dividend RecordIllustration: The following is the calculation of the payout ratio for Nike in 2014 and 2013.The payout ratio measures the percentage of earnings a company distributes in the form of cash dividends.ANALYSIS OF STOCKHOLDERS’ EQUITYILLUSTRATION 11-17Nike’s payout ratioLO 4This ratio shows how many dollars of net income a company earned for each dollar of common stockholders’ equity. Earnings PerformanceIllustration: The following is the calculation of Nike’s return on common stockholders’ equity ratios for 2014 and 2013.ANALYSIS OF STOCKHOLDERS’ EQUITYLO 4DEBT VERSUS EQUITY DECISIONILLUSTRATION 11-20Advantages of bond financing over common stockLO 4DEBT VERSUS EQUITY DECISIONILLUSTRATION 11-21Components of the return oncommon stockholders’ equityLO 4Illustration: Microsystems Inc. currently has 100,000 shares ofcommon 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%.DEBT VERSUS EQUITY DECISIONILLUSTRATION 11-22Effects on return on common stockholders’ equityOn January 1, 2017, Siena Corporation purchased 2,000 shares of treasury stock. Other information regarding Siena Corporation is provided below. 2017 2016Net income $110,000 $110,000Dividends on preferred stock $10,000 $10,000Dividends on common stock $1,600 $2,000Common stockholders’ equity, beg. of year $400,000* $500,000Common stockholders’ equity, end of year $400,000 $500,000*Adjusted for purchase of treasury stock.Compute the return on common stockholders’ equity for each year.Analyzing Stockholders’ EquityDO IT!4bLO 4 2017 2016Net income $110,000 $110,000Dividends on preferred stock $10,000 $10,000Dividends on common stock $1,600 $2,000Common stockholders’ equity, beg. of year $400,000* $500,000Common stockholders’ equity, end of year $400,000 $500,000*Adjusted for purchase of treasury stock.Compute the return on common stockholders’ equity for each year.Analyzing Stockholders’ EquityDO IT!4bLO 4Illustration: 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:LEARNING OBJECTIVEAPPENDIX 11A: Prepare entries for stock dividends.5Stock Dividends 75,000 Common Stock Dividends Distributable 50,000 Paid-in Capital in Excess of Par Value 25,000LO 5Illustration: Record the journal entry when Medland issues the dividend shares.STOCK DIVIDENDSCommon Stock Dividends Distributable 50,000 Common Stock 50,000ILLUSTRATION 11A-1Statement presentation ofcommon stock dividends distributableLO 5KEY POINTSA Look at IFRSLEARNING OBJECTIVECompare the accounting for stockholders’ equity under GAAP and IFRS.6SimilaritiesAside from the terminology used, the accounting transactions for the issuance of shares and the purchase of treasury stock are similar.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 6SimilaritiesA 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.A Look at IFRSLO 6 DifferencesUnder 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.A Look at IFRSLO 6 DifferencesThere are often terminology differences for equity accounts.A Look at IFRSLO 6 DifferencesA 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 shareholders’ funds.A Look at IFRSLO 6 A Look at IFRSLOOKING TO THE FUTUREThe 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. LO 6IFRS PracticeWhich of the following is true?In the United States, the primary corporate stockholders are financial institutions.Share capital means total assets under IFRS.The IASB and FASB are presently studying how financial statement information should be presented.The accounting for treasury stock differs extensively between GAAP and IFRS.A Look at IFRSLO 6IFRS PracticeUnder IFRS, the amount of capital received in excess of par value would be credited to:Retained Earnings. Contributed Capital. Share Premium.Par value is not used under IFRS.A Look at IFRSLO 6IFRS PracticeEarnings per share computations related to IFRS and GAAP:are essentially similar.result in an amount referred to as earnings per share.must deduct preferred (preference) dividends when computing earnings per share.All of the answer choices are correct.A Look at IFRSLO 6“Copyright © 2016 John Wiley & Sons, Inc. All rights reserved. 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