Accounting and its Relationship to Shareholder Value and Business
PERTEMUAN III
KEMAMPUAN AKHIR YANG DIHARAPKAN
Mahasiswa mampu menguraikan hubungan antara akuntansi dengan nilai perusahaan melalui
pemahaman atas konsep value based
Privately Held Privately Held Publicly Held Publicly Held Ownership can be
Corporate Form of
Organization
Existence is separate from owners Existence is separate from owners An entity created by lawAn entity created by law
Has rights and privileges
Has rights and privileges
Characteristics of
Corporations
Advantages
Separate legal entity
Limited liability of stockholders
Transferable ownership rights
Continuous life
Lack of mutual agency for
stockholders
Ease of capital accumulation
Disadvantages
Governmental regulation Corporate taxation
Stockholders
Stockholders
Board of Directors
Board of Directors
President, Vice-President,
President, Vice-President,
and Other Officers
and Other Officers
Employees of the Corporation
Employees of the Corporation
Corporate Organization and
Management
C o r p o r a t e O r g a n iz a t io n C h a r t
S e c r e t a r y V i c e P r e s i d e n t F i n a n c e
V ic e P r e s id e n t P r o d u c t i o n
V i c e P r e s i d e n t M a r k e t i n g P r e s id e n t
B o a r d o f D i r e c t o r s S t o c k h o ld e r s
Ultimate control
Stockholders usually meet
once a year
Selected by a vote of the stockholders
Overall
responsibility for managing
the company
Corporate Organization and
Management
Rights of Stockholders
Vote at stockholders’ meetings
Sell stock
Purchase additional shares of
stock
Receive dividends, if any
Share equally in any assets
remaining after creditors are
paid in a liquidation
Each unit of ownership is called a share of
stock.
A stock certificate serves as proof that a stockholder
has purchased shares.
Stock Certifcates and
Transfer
When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.
Basics of Capital Stock
Total amount of stock that a
corporation’s charter authorizes it to sell.
Total amount of stock that has been issued or sold to stockholders.
Par value
is an
arbitrary amount
assigned to each
share of stock when
it is authorized.
Market price
is the
amount that each
share of stock will
sell for in the market.
Basics of Capital Stock
Classes of Stock
Par Value
No-Par Value
Stated Value
Par Value Stock
On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for $25 per share.
Let’s record this transaction.
Issuing Par Value Stock
Dr Cr
Sept. 1 Cash 2,500,000
Common Stock, $2 par value 200,000 Paid-in Capital in Excess
of Par Value, Common 2,300,000
Issued 100,000 shares of common stock.
Issuing Par Value Stock
Issuing Stock for Noncash
Assets
Par Value Stock
On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for land valued at
$2,500,000. Let’s record this transaction.
Dr Cr
Sept. 1 Land 2,500,000
Common Stock, $2 par value 200,000 Paid-in Capital in Excess 2,300,000 of Par Value, Common
Exchanged 100,000 common shares for land.
Dividends Stockholders
Cash Dividends
Corporation
To pay a cash dividend, the corporation must have:
1. A sufficient balance in retained earnings; and 2. The cash necessary to
pay the dividend.
75% 22% 0% 20% 40% 60% 80% 100% Common Preferred
%of Corporations Paying Divends
Regular cash dividends provide a return to investors
and almost always affect the stock’s market value.
Accounting for Cash
Dividends
Three important dates
Three important dates
Date of Declaration
Record liability for dividend. Divide
nds
Date of Record
No entry required.
Date of Payment
Date of Declaration
Record liability for dividend.
Divide nds
Dr Cr Jan. 19 Retained Earnings 10,000
Common Dividend Payable 10,000
Declared $1 per share cash dividend.
Accounting for Cash
Dividends
On January 19, a $1 per share cash dividend is declared
on Dana, Inc.’s 10,000 common shares outstanding. The
dividend will be paid on March 19 to stockholders of
record on February 19.
No entry required on February 19, the date of record.
Dr Cr
Mar. 19 Common Dividends Payable 10,000
Cash 10,000
Paid $1 per share cash dividend. Date of Payment
Record payment of cash to stockholders.
Accounting for Cash
Dividends
On January 19, a $1 per share cash dividend is declared
on Dana, Inc.’s 10,000 common shares outstanding. The
dividend will be paid on March 19 to stockholders of
record on February 19.
Defcits and Cash Dividends
A deficit is created when a company incurs
cumulative losses or pays dividends greater
than total profits earned in other years.
Stock Dividends
Why a stock dividend?
Can be used to keep the market price on the stock affordable.
Can provide evidence of management’s confidence that the company is doing well.
A distribution of a corporation’s own shares to its stockholders without receiving any payment in return.
Small Stock Dividend
Distribution is 25% of the previously outstanding shares.
Large Stock Dividend
Distribution is > 25% of the previously outstanding shares.
HotAir, Inc. Common Stock
100 shares
$1 par
Recording a Small Stock
Dividend
Simmons has 100,000 shares of $1 par value stock outstanding. On December 31, 2011, Simmons declared a 2% stock dividend, when the
stock was selling for $10 per share. The stock will be distributed to stockholders on January 20, 2012. Let’s prepare the December 31 entry.
Dr Cr
Dec. 31 Retained Earnings 20,000
Common Stock Dividend Distributable 2,000 Paid-In Capital in Excess
of Par Value 18,000 Declared a 2,000 share (2%) stock dividend.
2,000 × $1 par Capitalize retained earnings for the market
Before the
Before the
stock
stock
dividend.
dividend.
After the
After the
stock
stock
dividend.
dividend.
Recording a Large Stock
Dividend
Dr Cr
Dec. 31 Retained Earnings 20,000
Common Stock Dividend Distributable 20,000 Declared a 20,000 share (40%) stock dividend.
Capitalize retained earnings for the minimum amount required by state law, usually par or stated value of the shares.
(50,000 × 40% = 20,000 shares × $1 par value = $20,000)
Router, Inc. has 50,000 shares of $1 par value stock
outstanding. On December 31, 2009, Router declared a 40% stock dividend, when the stock was selling for $8 per share.
The stock will be distributed to stockholders on January 20, 2010. Let’s prepare the December 31 entry.
Common Stock
$10 par value
100 shares
Old Shares
New
Shares Common Stock $5 par value
200 shares
Stock Splits
A distribution of additional shares of stock to stockholders according to their percent ownership.
Preferred Stock
A separate class of stock, typically having priority over common shares in . . .
– Dividend distributions
– Distribution of assets in case of liquidation
Usually has a stated
dividend rate
vs.
Noncumulative
Cumulative
Dividends in arrears must be paid before dividends may be paid on common
stock. (Normal case)
Undeclared dividends from current and prior years do
not have to be paid in future years.
Preferred Stock
Consider the following Stockholders’ Equity section of the Balance Sheet. The Board of Directors did not declare or pay dividends in 2010. In 2011, the Board
declared and paid cash dividends of $42,000.
If Preferred Stock is Noncumulative: Preferred Common
Year 2010: No dividends paid. $ - $ -Year 2011:
1. Pay 2011 preferred dividend. $ 9,000
2. Remainder goes to common. $ 33,000
If Preferred Stock is Cumulative: Preferred Common
Year 2010: No dividends paid. $ - $ -Year 2011:
1. Pay 2010 preferred dividend in arrears. $ 9,000 2. Pay 2011 preferred dividend. 9,000
3. Remainder goes to common. $ 24,000
Totals $ 18,000 $ 24,000
vs. Nonparticipating Participating
Dividends may exceed a stated amount once common stockholders receive a dividend equal to
the preferred stated rate.
Dividends are limited to a maximum amount each year.
The maximum is usually the stated dividend rate.
(Normal case)
Preferred Stock
Reasons for Issuing Preferred Stock
To raise capital without sacrificing control
To boost the return earned by common stockholders through financial leverage
To appeal to investors who may believe the common stock is too risky or that the expected return on
common stock is too low
Treasury Stock
Treasury stock represents shares of a company’s own stock that has been acquired. Corporations might acquire its own stock to:
1. Use their shares to buy other companies. 2. Avoid a hostile takeover.
3. Reissue to employees as compensation. 4. Support the market price.
Purchasing Treasury Stock
Treasury stock is shown as a reduction in total
Treasury stock is shown as a reduction in total
stockholders’ equity on the balance sheet.
stockholders’ equity on the balance sheet.
Treasury stock is shown as a reduction in total
Treasury stock is shown as a reduction in total
stockholders’ equity on the balance sheet.
stockholders’ equity on the balance sheet.
Dr Cr
May 8 Treasury stock, common 8,000
Cash 8,000
Purchase 2,000 treasury shares at $4 per share.
On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $4 per share.
Selling Treasury Stock at
Cost
Dr Cr
June 30 Cash 400
Treasury stock, common 400 Sold 100 shares of treasury
for $4 per share.
On June 30, Whitt sold 100 shares of its treasury stock for $4 per share.
Selling Treasury Stock
Above Cost
Dr Cr July 19 Cash 4,000
Treasury Stock, common 2,000 Paid-In Capital, Treasury Stock 2,000
Sold 500 treasury shares for $8 per share.
On July 19, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per share.
Selling Treasury Stock
Below Cost
Dr Cr
Aug. 27 Cash 600
1,000
Treasury Stock, Common 1,600 Sold 500 treasury shares for $1.50 per share.
Paid-in Captial, Treasury Stock
On August 27, Whitt sold an additional 400
shares of its treasury stock for $1.50 per share.
Statement of Retained
Earnings
Retained earnings is the total cumulative amount of reported net income less any net losses and dividends
declared since the company started operating.
Legal Restriction Most states restrict
the amount of treasury stock purchases to the amount of retained
earnings.
Contractual Restriction Loan agreements
can include
restrictions on paying dividends below a
certain amount of retained earnings. Restricted Retained Earnings
Appropriated Retained
Earnings
A corporation’s directors can voluntarily limit dividends because of a special need for cash
such as the purchase of new facilities.
Prior Period Adjustments
Prior period adjustments are corrections of material errors in past years’ financial statements that result in a
change in the beginning balance of retained earnings.
(In millions) Retained
Shares Amount Earnings Total Balance at December 31, 2010 821 $ 2,500 $ 9,500 $ 12,000 Stock sales 17 500 500 Stock repurchases and retirement (17) (260) (925) (1,185) Cash dividends declared (150) (150)
Other, net 70 70
Net income 5,100 5,100
Balance at December 31, 2011 821 $ 2,740 $ 13,595 $ 16,335 Common stock and
capital in excess of par Matrix, Inc.
Statement of Stockholders' Equity For the Year Ended December 31, 2011
(In millions) Retained
Shares Amount Earnings Total Balance at December 31, 2010 821 $ 2,500 $ 9,500 $ 12,000 Stock sales 17 500 500 Stock repurchases and retirement (17) (260) (925) (1,185) Cash dividends declared (150) (150) Other, net 70 70 Net income 5,100 5,100 Balance at December 31, 2011 821 $ 2,740 $ 13,595 $ 16,335
Common stock and capital in excess of par
Matrix, Inc.
Statement of Stockholders' Equity For the Year Ended December 31, 2011
Statement of
Stockholders’ Equity
This is a more inclusive statement than the statement of retained earnings.
Option purchase price $30 per share.
Stock Options
Market price of stock $75 per share.
The right to purchase common stock at a fixed price over a specified period of time. As the stock’s price rises above
the fixed option price, the value of the option increases.
Options are given to key employees to motivate them to:
focus on company performance, take a long-run perspective, and remain with the company.
Earnings Per Share
Basic earnings
per share =
Net income - Preferred dividends
Weighted-average common shares outstanding Earnings per share is one of the most widely
If earnings go up, will the market price
of my stock follow?
Price
–
Earnings Ratio
Price–
Earnings
Ratio
=
Market value per share
Earnings per share
This ratio reveals information about the stock
market’s expectations for a company’s future growth in earnings, dividends, and opportunities.
Dividend Yield
Dividend
Yield
=
Annual cash dividends per share
Market value per share
Tells us the annual amount of cash dividends distributed to common stockholders relative to
Book Value per Share
–
Common
Book value per
Book value per
common share
common share =
Stockholders’ equity applicable
to common shares
Number of common
shares outstanding
Reflects the amount of stockholders’ equity
applicable to common shares on a per share basis.
Book Value per Share
–
Preferred
Book value per
preferred
share =
Stockholders’ equity applicable
to
preferred
shares
Number of
preferred
shares
outstanding
Reflects the amount of stockholders’ equity
applicable to preferred shares on a per share basis.
Global View
U.S. GAAP and IFRS have similar procedures for issuing common
U.S. GAAP and IFRS have similar procedures for issuing common
stock at par, at a premium, at a discount, and for noncash assets.
stock at par, at a premium, at a discount, and for noncash assets.
Accounting for and reporting cash dividends, stock dividends, and
Accounting for and reporting cash dividends, stock dividends, and
stock splits, are consistent under both U.S. GAAP and IFRS.
stock splits, are consistent under both U.S. GAAP and IFRS.
Accounting for treasury stock is consistent under both U.S. GAAP and
Accounting for treasury stock is consistent under both U.S. GAAP and
IFRS. Companies do not report gains or losses on transactions
IFRS. Companies do not report gains or losses on transactions
involving their own stock.
involving their own stock.
Preferred stock that is redeemable at the option of the preferred
Preferred stock that is redeemable at the option of the preferred
stockholder is reported between liabilities and equity under U.S. GAAP,
stockholder is reported between liabilities and equity under U.S. GAAP,
but it is reported as a liability under IFRS. Also, the issue price of
but it is reported as a liability under IFRS. Also, the issue price of
convertible preferred stock (and bonds) is recorded entirely under
convertible preferred stock (and bonds) is recorded entirely under
preferred stock (or bonds), and none to the conversion feature under
preferred stock (or bonds), and none to the conversion feature under
U.S. GAAP. However, IFRS requires that a portion of the issue price be
U.S. GAAP. However, IFRS requires that a portion of the issue price be
allocated to the conversion feature.
