TOPIC 9
REPORTING AND INTERPRETING
OWNERS’ EQUITY
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
OWNERSHIP OF A CORPORATION
Voting rights
Distributions of
profits (dividends)
Stockholders’
Rights Distributions of
assets in a
liquidation.
OWNERSHIP OF A CORPORATION
Stockholders
(Owners of voting shares)
Board of Directors
Elected by
Internal (managers) and
External (non-managers)
shareholders
Appointed
by directors
President
Vice President Vice President Vice President Vice President
(Production) (Marketing) (Finance) (Controller)
AUTHORIZED, ISSUED, AND
OUTSTANDING SHARES
Authorized shares are the maximum
number of shares of capital stock that
can be sold to the public.
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
stock that stock that
have been never have
sold. been sold.
AUTHORIZED, ISSUED, AND
OUTSTANDING SHARES
Outstanding shares are
issued shares that are
owned by stockholders.
Outstanding Unissued
Issued Shares Shares
Shares
Treasury Treasury shares are
issued shares that have
Shares
been reacquired by the
corporation.
EARNINGS PER SHARE (EPS)
Net Income*
EPS =
Average Number of Shares
Outstanding for the Period
*If there are preferred dividends, the amount is subtracted from net income.
Earnings per share is probably the single
most widely watched financial ratio.
Kroger’s income for 2012 is $602,000,000 and the
average number of shares outstanding is 597,000,000.
$602,000,000
EPS = = $1.01 per share
597,000,000 Shares
COMMON STOCK TRANSACTIONS
Two primary sources of
stockholders’ equity
Contributed Retained
capital earnings
Common Capital in
stock, par excess of
value par value
COMMON STOCK TRANSACTIONS
Basic
voting
stock
Ranks after Dividend set
preferred by board
stock of directors
COMMON STOCK TRANSACTIONS
Par Value
Nominal Legal
value capital
Legal capital is the amount of capital, required by
the law, that must remain invested in the
business.
COMMON STOCK TRANSACTIONS
Par Some states do
not require that a
Value
≠
par value be
stated in the
charter.
Market
Value
INITIAL SALE OF STOCK
Initial public offering
(IPO)
The first time a
corporation sells
stock to the public.
INITIAL SALE OF STOCK
Kroger issued 100,000 shares of $1 par value
common stock for $20 per share.
The journal entry to record this
transaction is:
SALE OF STOCK IN SECONDARY
MARKETS
Transactions between two investors
that do not affect the corporation’s
accounting records.
I’d like to sell I’d like to buy
some of my some of your
Kroger stock. Kroger stock.
STOCK ISSUED FOR EMPLOYEE
COMPENSATION
Employee
compensation
package includes Stock options allow
salary and stock employees to purchase
options. stock from the corporation
at a fixed price.
Employee
REPURCHASE OF STOCK
Kroger buys
its own stock in
the secondary
market.
(Treasury Stock) Stockholders
Repurchased stock is called treasury stock. A corporation
records treasury stock at cost. Treasury stock has no voting or
dividend rights. Treasury stock is not an asset. It is a contra
equity account.
REPURCHASE OF STOCK
Kroger reacquired 100,000 shares of its
common stock at $20 per share.
The journal entry to record this
transaction is:
REISSUANCE OF TREASURY STOCK
Kroger reissued 10,000 shares
of the treasury stock at $30 per share.
The journal entry to record this
transaction is:
DIVIDENDS ON COMMON STOCK
Declared by board of Not legally
directors. required.
Requires sufficient
Creates liability at
Retained Earnings and
declaration.
Cash.
Declaration date
• Board of directors declares the dividend.
• Record a liability.
GENERAL JOURNAL
Date Description Debit Credit
Retained earnings (-SE) XXX
Dividends payable (+L) XXX
DIVIDEND DATES
Date of Payment
• Record the dividend payment to stockholders.
GENERAL JOURNAL
Date Description Debit Credit
Dividends payable (-L) XXX
Cash (-A) XXX
STOCK DIVIDENDS
Distribution of additional shares of stock to owners.
No change in total No change in par values.
stockholders’ equity.
All stockholders retain same
percentage ownership.
Small Large
Stock dividend < 20-25% Stock dividend > 20-25%
Record at current market Record at par value
value of stock. of stock.
STOCK DIVIDENDS
Assume The Kroger Co. issued a large stock dividend. The
company issued 400,000,000 shares of its $1 par value
stock. The journal entry to record the stock dividend is:
The stock dividend did not change total stockholders’ equity.
It changed only the balances of two accounts within
stockholders’ equity.
STOCK SPLITS
Stock splits change the par value per share,
but the total par value is unchanged.
Assume that a corporation had 3,000 shares of $2 par value
common stock outstanding before a 2–for–1 stock split.
Before After
Split Split
Increase
Common Stock Shares 3,000 6,000
Decrease
Par Value per Share $ 2.00 $ 1.00
No
Total Par Value $ 6,000 $ 6,000
Change
PREFERRED STOCK
Preference
over common
stock
Usually has Usually has a
no voting fixed dividend
rights rate
INTERNATIONAL PERSPECTIVE—
WHAT’S IN A NAME?
US GAAP and IFRS use different words to describe
the same corporate equity accounts.
EFFECT ON STATEMENT OF CASH FLOWS
