Bài giảng Financial Accounting - Chapter 11: Corporations and Stockholders Equity

CORPORATION is:Separate Legal Entity created by law - Enter into contracts - Declare bankruptcy - Corporation pays tax on net income - Shareholders pay tax only if dividends are paid - Continuous life Not hard to form - File for state charter - Articles, By-laws, Initial stockholders - Authorization to issue stock1201Lec11.PPTXCorporations and Stockholders Equity11The Corporate Form of Organization2Stockholders-shareholders (publicly or privately-closely held) Shares owned / Total Shares = % owned by each stockholderElect Representatives.Board of Directors (BOD) Control & Guide BusinessAppoint Managers Officers CEO/ CFO / President / Vice President / EtcRun day to day operations of business and carry out BOD directions. Owned byCorporation - Legal EntityProtect shareholders personal assets - Only investment in stock is at risk - Enter risky businessesRaise money Tax planningEase of changing / transferring ownership 3Advantages of IncorporatingRegulations, paperworkTax traps (Double TAX) Corp earns $, pays tax. Pay out to shareholders, then they pay tax again. U Make It - We Take It IRS4Disadvantages of IncorporatingS corporation: - 100 shareholder maximum - Regular corporation first, then shareholders elect subchapter S status with the IRS. - Result: NO TAX paid by corporation on income. - The catch: Shareholders must each claim their share of corporate income on their tax returns even if not distributed via dividends to them. - Dividend distributions are not taxable - Called a “flow through” entity.5Alternatives to regular corporate form:Limited Liability Company or Partnership (LLC, LLP) - Relatively new type of entity. - Owner protection like corporations - Set up process is similar to corporations - Also flow through entities - No maximum number of “members”Also from chapter 1: Sole Proprietorship, General Partnership6Alternatives to regular corporate form:Stock must be authorized by state for sale.Issued stock was sold, given or traded to shareholders. Outstanding means someone owns it.Stock bought back from stockholders is treasury stock.7Stock of a corporation:Generally, all corporations have some common stock. Typically each share has 1 vote for BOD.Can have Par Value, Stated Value or No Par. - This “value” has little meaning for common stock. See preferred stock discussion though. - Has nothing to do with market value.8COMMON StockEXAMPLE: Issue 500,000 shares for $55/share.PAR VALUE (or stated value) is $1/share. Cash 27,500,000 Common Stock 500,000 Paid-In-Capital in Excess of Par (plug) 27,000,000 Note: If NO Par, NO Stated Value: No paid in capital in excess of par is used. Credit all to common stock.9BALANCE SHEETStockholder’s EquityPaid in capital: Common Stock $ 500,000 Paid-In-Capital in Excess of Par 27,000,000 Total paid in capital $27,500,00010Optional class of stock. Preferential treatment over common stock: ~ Receive Liquidation assets before common stock. ~ Dividends received before common stock Usually LARGE Par, FIXED dividend rate. For preferred, par does affect: - dividend amount - liquidation amount - market price If Cumulative feature, unpaid dividends accumulate and are paid in the future. (called “dividends in arrears”)11PREFERRED StockEXAMPLE: * 100,000 shares of $100 par 5% cumulative Preferred. * 500,000 shares of 10 cent par Common. Preferred dividends = ($500,000 for 2015) + ($500,000 in Arrears) = $1,000,000. Common dividends = Left overs = $1,200,000 - $1,000,000 = $200,000. Note dividends in arrears are not liabilities!12ASSUME $1,200,000 dividends in 2015, no payouts in 2014. How much paid to preferred? To Common?STOCK VALUES:Price per ShareTimeCommon price bounces around, no relation to par. Preferred price hovers around par. 13Stock issued, then reaquired by corp. - Buy out unhappy or retiring shareholders - Use excess cash to reduce equity owners. Fewer shareholders to deal with, maximize EPS. - Increase or decrease take-overs. Mergers, acquisitions, buy-outsNot an asset. Contra-Equity.14TREASURY StockEXAMPLE: Assume 1,000 shares in earlier example were reacquired several years later for $70 per share. Treasury Stock 70,000 Cash 70,000BALANCE SHEETStockholder’s EquityPaid in capital: Common Stock $ 500,000 Paid-In-Capital in Excess of Par 27,000,000 Total paid in capital $ 27,500,000Retained Earnings xxx,xxx,xxx Less: Treasury Stock ( 70,000) Total Stockholder’s Equity $xxx,xxx,xxx15Distributions to shareholders - Cash - Additional stock - Other assets (excess inventory, personal use of corporate assets, stock)Must be declared (announced) by BOD. - Becomes a liability on declarationTaxable income to shareholders, not deductible by corporations. - Exception: Stock dividends aren’t taxable16Dividends 17Dec 22: No entry. Stock price decreases. (trades “ex-dividend”)Dec 1: Retained earnings (or dividends) xxxx Dividends payable xxxxJan 20: Dividends payable xxxx Cash xxxx Dividend dates – Large corporations Say a company worth $1,200,000 has 100,000 shares of stock outstanding. Price per share = $1,200,000 / 100,000 = $12.00. Shareholders get more stock. - No assets are used Pay a 20% stock dividend. Total shares now = 100,000 + 20,000 = 120,000. Price per share will be $1,200,000 / 120,000 = $10.00 Same pie, more slices18STOCK Dividends ↓ Retained earnings reduced by value of stock distributed.↑ Common stock increased by number of shares distributed times par value per share.↑ Paid in capital in excess par increased. NOTE: Net equity effect = $0 Stock price will decrease 20% at date of record.19Effect of stock dividend on balance sheet Original: $10/shareNow:$10,000/share!!20 Answer: Lower stock price to increase marketability Think of supply, demand effect of price of a good. EXAMPLE: Say a company worth $1 million has 100,000 shares. After many successful years it is now worth $1 billion. Why bother with stock dividends?Total shareholder value = shares x share priceVery similar to stock dividendNo journal entries.New shares with different par value are traded for old shares. EXAMPLE: 100,000 shares of $1 par are split 2 for 1. After split 200,000 shares of $0.50 par. RESULTS: Balance sheet totals are all unchanged. Stock price cut in half though!21Stock SPLITS2250:1 split - Berkshire HathawayWith the split, trading volume will likely increase, and that could attract a new group of bigger and faster-trading investors. The B shares closed Friday at $3,247, a lofty price that limited the kind of investors who bought the stock to mostly those with a long-term performance view.The price of the stock will be about $65 after the split. There will be no change to the more exclusive Class A shares, which closed at $97,500 a piece Friday.From Wall Street Journal 1/19/10CASH DIVIDENDS DECLARED ON COMMON STOCKNET INCOME measures the percentage of earnings distributed in the form of cash dividends to common stockholders.Income stock: High payout %Growth stock: Low payout %23Ratios: The PAYOUT ratio...measures the profitability from the stockholders’ point of view.(Income per dollar invested)24Net Income – Preferred Stock Dividends Average Common Stockholders’ EquityRatios: Return on Common Stockholders’ Equity25Debt versus Equity Decision