COLGATE-PALMOLIVE COMPANY Consolidated Balance Sheets (in part)
December 31
(In millions) 2004 2003
Shareholders’ Equity
Preference stock $ 274.0 $ 292.9
Common stock, $1 par value (1,000,000,000 shares
authorized, 732,853,180 shares issued) 732.9 732.9
Additional paid-in capital 1,093.8 1,126.2
Retained earnings 8,223.9 7,433.0
Accumulated other comprehensive income (1,806.2) (1,866.8)
$ 8,518.4 $ 7,718.2
Unearned compensation (307.6) (331.2)
Treasury stock, at cost (6,965.4) (6,499.9)
Total shareholders’ equity $ 1,245.4 $ 887.1
Continued
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Statement of Changes in Stockholders’ Equity
L I N K T O I N T E R N A T I O N A L D I F F E R E N C E S
Under international accounting standards, a corporation’s shareholders’ interests (the term used for stockholders’ equity) consists of two sections: (a) share capital, and (b) other equity. Many of the dis- closures required under share capital are the same as those required under U.S. GAAP; for example, the number of shares authorized, issued, and outstanding, par value, reacquired shares, and rights, preferences, and restriction regarding dividends. The differences from those required by U.S. GAAP include disclosure of any capital not yet paid in, any restrictions on the repayment of capital, and the shares reserved for future issuance under sales contracts.
Share premium (additional paid-in capital) is disclosed in the other equity section, along with reval- uation surplus, reserves, and retained earnings. Revaluation surplus and reserves are equity items that are different from those allowed under U.S. GAAP. Although International Accounting Standards are based on historical cost, some countries allow companies to revalue (upward and downward) their property, plant, and equipment (and intangibles) based on professionally qualified appraisals. When a company increases its asset values because of a revaluation, it also credits a revaluation surplus account. (A decrease because of revaluation would reduce this revaluation account, or if no balance exists in revaluation surplus, would be recognized in income.) In some respects, reserves under interna- tional accounting standards are similar to restrictions (appropriations) of retained earnings under U.S.
GAAP.They may differ, however, in that reserves may be required by foreign statutes or tax laws, whereas there are no such requirements in the United States.
A company must disclose the “movement” in share capital accounts and in other equity for the period. In effect, these international disclosure requirements result in reporting the changes in share- holders’ interests and are similar to the requirements of U.S. GAAP regarding the statement of changes in stockholders’ equity, although the format of the disclosures may be different.
C
Reporting
A
COLGATE-PALMOLIVE COMPANY Consolidated Statements of Retained Earnings, Comprehensive Income and Changes in Capital Accounts (in part) AdditionalAccumulatedCompre- (Dollars in millionsCommon SharesPaid-in Treasury SharesRetainedOther Compre-hensive except per share amounts)SharesAmountCapitalSharesAmountEarningshensive IncomeIncome Balance, December 31, 2002536,001,784$732.9$1,133.9196,873,236$6,152.3$6,518.5$(1,865.6) Net income1,421.3$1,421.3 Other comprehensive income: Cumulative translation adjustment4.04.0 Other(5.2)(5.2) Total comprehensive income$1,420.1 Dividends declared: Series B Convertible Preference Stock, net of income taxes(25.5) Preferred stock(.2) Common stock(481.1) Shares issued for stock options4,928,861(20.9)(4,928,861)(96.9) Treasury stock acquired(10,146,986)10,250,146554.9 Other2,913,51813.2(3,038,518)(110.4) Balance, December 31, 2003533,697,177$732.9$1,126.2199,156,003$6,499.9$7,433.0$(1,866.8) Net income1,327.1$1,327.1 Other comprehensive income: Cumulative translation adjustment75.475.4 Other(14.8)(14.8) Total comprehensive income$1,387.7 Dividends declared: Series B Convertible Preference Stock, net of income taxes(25.9) Common stock(510.3) Shares issued for stock options2,142,8952.1(2,142,895)(60.5) Treasury stock acquired(12,383,273)12,383,273637.9 Other3,168,259(34.5)(3,168,259)(111.9) Balance, December 31, 2004526,625,058$732.9$1,093.8206,228,122$6,965.4$8,223.9$(1,806.2)
Questions:
1. How many shares of treasury stock were issued for stock options in 2004? At what average price were they issued?
2. How many shares of treasury stock were acquired in 2004? At what average price per share were they acquired?
3. What were the total dividends declared during 2004?
4. What was the average dividend per common share outstanding during 2004?
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Summary
S E C U R E Y O U R K N O W L E D G E 17-3
•
Prior period adjustments (restatements) are reported as adjustments of the beginning balance of retained earnings, net of taxes, on the statement of retained earnings.•
A restriction of retained earnings, to meet legal requirements or contractual restric- tions, indicates that a portion of retained earnings is unavailable for dividends.•
A statement of retained earnings is often used to disclose the items affecting retained earnings—net income (loss), dividends, prior period (and retrospective) adjustments, and other reductions.•
Accumulated other comprehensive income may be reported on the face of the income statement, in a separate statement of comprehensive income, or in the state- ment of changes in stockholders’ equity.•
A statement of changes in stockholders’ equity is used to disclose the changes in different classes of common stock, additional paid-in capital, retained earnings, accu- mulated other comprehensive income, and treasury stock.S U M M A R Y
At the beginning of the chapter, we identified several objectives you would accomplish after reading the chapter. The objec- tives are listed below, each followed by a brief summary of the key points in the chapter discussion.
1.Compute basic earnings per share. The numerator for computing basic earnings per share is net income minus preferred dividends. The denominator is the weighted average number of common shares outstanding.
2.Understand how to compute the weighted average common shares for EPS. The weighted average is computed by summing the “equivalent whole units” of shares for all the “layers” of stock. The equivalent whole units are computed by multiplying the number of shares for that layer times the fraction of the year the layer is outstanding.
3.Identify the potential common shares included in diluted EPS. The most common “potential common shares” that may be included in computing diluted EPS are share options and warrants, as well as convertible preferred stock and con- vertible bonds. These securities are included in diluted EPS only if they decrease EPS.
4.Apply the treasury stock method for including share options and warrants in diluted EPS. To apply the treasury stock method, compute the assumed shares issued and the proceeds received from the assumed exercise. Then compute the assumed shares reacquired by dividing the proceeds by the average market price. Finally, deduct the assumed shares reac- quired from the assumed shares issued to determine the incremental shares.
5.Calculate the impact of a convertible security on diluted EPS. The impact is computed by dividing the increase in the EPS numerator by the increase in the EPS denominator, assuming the convertible security is converted into common stock. For a convertible bond, the numerator increases by the savings in interest expense (net of taxes). For a convertible bond, the numerator increases by the savings in preferred dividends.
6.Compute diluted EPS. Begin with the calculation of basic EPS. Then, increase the denominator for the increased shares from the assumed exercise of share options and warrants. Then include the impact on the numerator and denominator of the assumed conversion of each dilutive convertible security in sequential order until the impact of the next security is antidilutive.
7.Record the declaration and payment of cash dividends. A corporation records the declaration by debiting retained earnings and crediting dividends payable. It records the payment by debiting dividends payable and crediting cash.
8.Account for a property dividend. A corporation accounts for a property dividend at the fair value of the asset transferred, and records a gain (or loss) on the date of declaration.
9.Explain the difference in accounting for small and large stock dividends. A corporation accounts for a small stock div- idend by transferring from retained earnings to contributed capital an amount equal to the fair value of the additional shares issued. It accounts for a large stock dividend by transferring an amount equal to the par value.
10. Understand how to report accumulated other comprehensive income.A corporation reports its accumulated other comprehensive income in the stockholders’ equity section of its balance sheet. It may report the amount of accumulated other comprehensive income for each item or it may report the total. If it reports the total, it must disclose the amounts for each of the items in the notes to its financial statements.
11. Prepare a statement of changes in stockholders’ equity. Start with the beginning balance of each stockholders’ equity account. Then add (or deduct) the change in each account resulting from the related transactions during the accounting period. Report the ending amounts on the stockholders’ equity section of the balance sheet.