Sections of Stockholders' Equity
Paid-in capital, retained earnings, treasury stock
paid-in capital
amount stockholders have invested in the corporation
treasury stock
corporation's own stock that it has reacquired to...
boost under-priced stock
distribute surplus cash without paying dividends
boost earnings per share
offset issuance of shares under stock-based compensation plans
Stages of Equity Financing
investment by the founders of the business, investment by friends and family of the founders, outside investment by "angel" investors (wealthy individuals in the business community willing to provide investment funds) and venture capital firms (provide ad
Initial public offering (IPO)
the first time a corporation issues stock to the public
Public corporations
stocks trade on stock exchanges (i.e. NYSE, AMEX) or by over-the-counter trading; regulated by the SEC; i.e. Walmart, Microsoft, Intel
Private corporations
does not allow investment by the general public and has fewer stockholders; not regulated by the SEC and do not need to file financial statements with it; i.e. Chrysler
Stockholders Rights
right to vote, receive dividends, share in distribution of assets, preemptive right - allows a stockholder to maintain his or her % share of ownership
Advantages of Corporation
limited liability, ability to raise capital, lack of mutual agency
Disadvantages of Corporation
additional taxes, more paperwork
Authorized Stock (3 types)
shares available to sell (issued and unissued)
Issued Stock
shares actually sold (includes treasury stock)
Issued=Authorized-Unissued
Outstanding Stock
shares held by investors (excludes treasury stock)
Outstanding=Issued-Treasury Stock
Par Value
the legal capital per share of stock that's assigned when the corporation is first established
(No par value- common stock that has not been assigned a par value)
$1 par value common stock means two credits: common stock and additional paid-in capital
Stated Value
*treated in the same manner as par value shares
When a corporation receives cash from issuing common stock, it ____ cash
debits
If it issues no-par value stock, the corporation ____ the equity account entitled common stock
credits
If the corporation issues par value stock, we credit ________ and ___________
common stock; additional paid-in capital
preferred stockholders give up the right to vote in stockholders' meetings
common stockholders have voting rights; highest risk to the investor; lowest risk of contract violations; bonds have highest risk of contract violations and the lowest risk to the investor
Preferred Stock
flexibility allowed in its contractual provisions; convertible (shares can be exchanged for common stock), redeemable (shares can be returned to the corp at a fixed price), cumulative (shares receive priority for future dividends, if dividends are not pai
Treasury stock is a contra ______ account
equity
(When a corp repurchases its own stock, it increases, or debits treasury stock and vice versa when it sells. Must take out what we put in. Debit Treasury Stock, Credit Cash, then Debit Cash, Credit Treasury Stock and Additional Paid-in Capital
Retained Earnings
earnings not paid out as dividends to stockholders;
= all net income - all dividends;
normal credit balance (like all other SE accounts); if losses > income, retained earnings will have a debit balance called an accumulated deficit
Accumulated Deficit
A debit balance in retained earnings when losses exceed income since the corporation began
Dividends
Cash payments to stockholders by a corporation
*Not paid on treasury shares repurchased by corp
**Debit stock dividends (#shares x par value), credit common stock
Dividends on declaration date:
debit retained earnings, credit dividends payable
Dividends on payment date (*NO ENTRY FOR RECORD DATE)
debit dividends payable, credit cash
% stock dividend x # of shares you own =
# of additional shares you'll receive
Stock Dividends (increase in the par value of the common shares)
debit retained earnings, credit common stock
Stock Splits
a stock distribution of 25% or higher; make no journal entry to record a stock split; after a 2-for-1 stock split, the common stock account balance (total par) represents twice as many shares and the par value per share is reduced by one-half
Return on Equity
measures the ability of company management to generate earnings from the resources that owners provide; = net income/avg. SE
(net income from income statement and avg from beginning SE + ending SE/2)
Return on Market Value of Equity
to supplement the return on the equity ratio, analysts often relate earnings to the market value of equity calculated as the ending stock price x the # of shares outstanding;
= net income/market value of equity
Earnings per share
measures the net income earned per share of common stock; useful in evaluating the earnings performance of a company over time;
not
useful in comparing earnings performance across companies
=net income/avg shares outstanding during period
Price-Earnings Ratio
a high PE ratio indicates investors expect future earnings to be higher; a low PE ratio indicates investors lack of confidence in future earnings growth
=stock price/earnings per share
(Growth stocks- priced high in relation to current earnings; Value sto
2-for-1 stock split
multiply number of shares x2, divide par value per share by 2, divide market price per share by 2
A reason companies invest in other companies is to ______
build strategic alliances
All companies are not required to pay dividends to their investors
When market interest rates increase, the market value of a bond decreases
One way for a company to expand operations into a new industry is to acquire the majority of common stock in another company that already operates in that industry
this is why we hear about "buy-outs
Stocks typically have greater upside potential, providing a higher average return to their investors over the long run than do bonds
but the greater the return, the greater the risk
Reported in the stockholders' equity:
treasury stock, common stock, retained earnings
*NOT sales revenue
Smallest number of shares to the largest number of shares:
outstanding, issued, and authorized
The par value of shares issued is normally recorded in the
common stock account
Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to:
dividends and distribution of assets if the corp is dissolved
Journal entries to record cash dividends are made on the
declaration date and payment date (not the record date)
Stock splits are issued primarily to
lower the trading price of the stock per share
the issuer of a 100% common stock dividend (larger stock dividend) to common stockholders should debit stock dividends for an amount equal to the
par value of the shares issued
the issuer of a 5% common stock dividend (small stock dividend) to common stockholders should debit stock dividends for an amount equal to the
market value of the shares issued