Corporate Reporting and Analysis PDF

Review: Managerial vs Financial Accounting 4 Basic Financial Statements Assets, Liabilities, Equity, Revenue, Expense – What statement reflects these balances? – Debit or Credit to Increase? Accounting Equation 1  Chapter...

Review: Managerial vs Financial Accounting 4 Basic Financial Statements Assets, Liabilities, Equity, Revenue, Expense – What statement reflects these balances? – Debit or Credit to Increase? Accounting Equation 1  Chapter 11: Corporate Reporting and Analysis Part 1 Wild and Shaw Financial and Managerial Accounting 9th Edition  Corporate Form of Organization An An entity entity created created by by law law Privately Held Existence Existence is is Ownership separate separate from from can be owners owners Publicly Held Has Has rights rights and and privileges privileges  Characteristics of Corporations Advantages Disadvantages Separate legal entity Governmental regulation Limited liability Corporate taxation Transferable ownership rights Continuous life Stockholders limited in committing corp. to contracts Easier capital accumulation Corporate Organization and Management  Rights of Stockholders 1. Vote at stockholders’ meetings (or register proxy votes) 2. Sell or dispose stock 3. Purchase proportional additional shares of stock 4. Receive dividends, if any 5. Share in any assets remaining after creditors and preferred stockholders are paid in a liquidation  Stock Certificates and Transfer Each unit of ownership is called a share of stock. A stock certificate serves as proof that a stockholder has purchased shares.  Basics of Capital Stock Authorized stock: number of shares that a corporation’s charter allows it to sell. Par Value stock: amount assigned per share. No-Par Value stock: not assigned an amount per share. Stated Value stock: no-par stock that has an assigned “stated” value per share. Stockholders’ equity consists of: 1. Paid-in (contributed) capital: total amount of cash and other assets corporation receives from its stockholders in exchange for its stock. 2. Retained earnings: cumulative net income (and loss) not distributed as dividends to its stockholders.  Par Value vs. Market Price ≠ Par value is an Market price is the arbitrary amount amount that each assigned to each share of stock will share of stock when sell for in it is authorized. the market. Classes of Stock Par Value No-Par Value Stated Value Stockholders’ Equity Stockholders’ equity (or shareholders’ equity or corporate equity) consists of: Paid-in (contributed) capital – cash and other assets received in exchange for stock Retained earnings – cumulative net income (loss) not distributed as dividends.  Issuing Par Value Stock at Par Par Value Stock On June 5, Dillon Snowboards, Inc. issued 30,000 shares of $10 par value stock for $300,000. Let’s record this transaction.  Issuing Par Value Stock at a Premium Par Value Stock On June 5, Dillon, Inc. issued 30,000 shares of $10 par value stock for $12 per share. Let’s record this transaction. Issuing Par Value Stock  Issuing No-Par Value Stock No-Par Value Stock On October 20, Dillon issued 1,000 shares of no-par value stock for $40 per share. Let’s record this transaction.  Issuing Stated Value Stock Stated Value Stock On October 20, Dillon issued 1,000 shares of $40 stated value stock for $50 per share. Let’s record this transaction.  Issuing Stock for Noncash Assets Par Value Stock On June 10, 4,000 shares of $20 par value stock is given for land valued at $105,000. Let’s record this transaction. Land $105,000 Common Stock, $20 par $80,000 Landlll Additional Paid in Capital, CS $25,000 Issuing Stock for Noncash Assets (Cont’d) Par Value Stock On June 5, 600 shares of $15 par value stock is issued for $12,000 of organizing work.  Example Rodriguez Corporation issues 19,000 shares of its common stock for $152,000 cash on February 20. Prepare journal entries to record this event under each of the following separate situations. 1. The stock has a $2 par value. 2. The stock has neither par nor stated value. 3. The stock has a $5 stated value.  Example (Cont’d) 1. Feb 20 Cash $152,000 Common Stock, $2 Par Value $38,000 Paid-In Capital in Excess of Par, C/S $114,000 *19,000 shares x $2 per share = $38,000; $152,000 - $38,000 = $114,000 2. Feb 20 Cash $152,000 Common Stock, No-Par Value $152,000 3. Feb 20 Cash $152,000 Common Stock, $5 Stated Value $95,000 Paid-In Capital in Excess of Stated Value $57,000 *19,000 shares x $5 per share = $95,000; $152,000 - $95,000 = $57,000  Cash Dividends Cash dividends provide a return to investors and almost always affect the stock’s market value. 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.  Cash Dividend Dates Three Important Dates Date of Date of Record Date of Payment Declaration Record liability No entry Record payment of for dividend. required. cash to stockholders.  Accounting for Cash Dividends: Date of Declaration On January 9, a $1 per share cash dividend is declared on Z-Tech, Inc.’s 5,000 common shares outstanding. The dividend will be paid on February 1 to stockholders of record on January 22. Record liability for dividend.  Accounting for Cash Dividends: Date of Payment On January 9, a $1 per share cash dividend is declared on Z-Tech, Inc.’s 5,000 common shares outstanding. The dividend will be paid on February 1 to stockholders of record on January 22. No entry required on January 22, the date of record.  Stock Dividends A distribution of a corporation’s own shares to its stockholders without receiving any payment in return. Why a stock dividend? ▪ Used to keep the market price on the stock affordable. ▪ Show management’s confidence that company is doing well. Small Stock Dividend Distribution is ≤ 25% of the previously outstanding shares. Large Stock Dividend Distribution is > 25% of the previously outstanding shares.  Recording a Small Stock Dividend Quest has 10,000 shares of $10 par value stock outstanding. On December 31, Quest declared a 10% stock dividend, when the stock was selling for $15 per share. The stock will be distributed to stockholders on January 20. Let’s prepare the December 31 entry. Capitalize retained earnings for the market value of the shares to be distributed. (10,000 × 10% = 1,000 × $15 = $15,000) 1,000 × $10 par  Recording a Small Stock Dividend: Date of Payment Quest has 10,000 shares of $1 par value stock outstanding. On December 31, Quest declared a 10% stock dividend, when the stock was selling for $15 per share. The stock will be distributed to stockholders on January 20. Let’s prepare the January 20 entry.  Recording a Large Stock Dividend Quest, Inc. has 10,000 shares of $10 par value stock outstanding. On December 31, Quest declared a 30% stock dividend. The stock will be distributed to stockholders on January 20, 2021. Let’s prepare the December 31 entry. Capitalize retained earnings for the minimum amount required by state law, usually par or stated value of the shares. (10,000 × 30% = 3,000 shares × $10 par value = $30,000)  Large Stock Dividend – Payment date Quest, Inc. has 10,000 shares of $10 par value stock outstanding. On December 31, Quest declared a 30% stock dividend. The stock will be distributed to stockholders on January 20, 2021. Let’s prepare the January 20th entry. Common Stock Dividend Distributable $30,000 Common Stock, $10 par $30,000  Stock Splits A distribution of additional shares of stock to stockholders according to their percent ownership. $20 par value 100,000 shares Common Stock Old Shares $10 par value Market Value $88 200,000 shares New Common Stock Shares Est. Market Value $44 Financial Statement Effects of Dividends and Splits  Example The stockholders’ equity section of TVX Company on February 4 follows. On February 5, the directors declare a 20% stock dividend distributable on February 28 to the February 15 stockholders of record. The stock market value is $40 per share on February 5 before the stock dividend. 1. Prepare entries to record both the dividend declaration and its distribution. 2. Prepare the stockholders’ equity section after the stock dividend is distributed. (Assume no other changes to equity.)  Example (Cont’d) Feb 5 Retained Earnings $480,000 Common Stock Dividend Distributable $120,000 Paid-In Capital in Excess of Par, C/S $360,000 12,000 shares x $40 per share = $480,000 12,000 shares x $10 per share = $120,000 $480,000 - $120,000 = $360,000 Feb 28 Common Stock Dividend Distributable $120,000 Common Stock, $10 Par Value $120,000  Example (Cont’d) 2.  Chapter 11: Corporate Reporting and Analysis Part 2 Wild and Shaw Financial and Managerial Accounting 9th Edition Financial Statement Effects of Dividends and Splits  Example The stockholders’ equity section of TVX Company on February 4 follows. On February 5, the directors declare a 20% stock dividend distributable on February 28 to the February 15 stockholders of record. The stock market value is $40 per share on February 5 before the stock dividend. 1. Prepare entries to record both the dividend declaration and its distribution. 2. Prepare the stockholders’ equity section after the stock dividend is distributed. (Assume no other changes to equity.)  Example (Cont’d) Feb 5 Retained Earnings $480,000 Common Stock Dividend Distributable $120,000 Paid-In Capital in Excess of Par, C/S $360,000 12,000 shares x $40 per share = $480,000 12,000 shares x $10 per share = $120,000 $480,000 - $120,000 = $360,000 Feb 28 Common Stock Dividend Distributable $120,000 Common Stock, $10 Par Value $120,000  Example (Cont’d) 2.  Issuance of Preferred Stock If Dillon issues 50 shares of $100 par value preferred stock for $6,000 cash, the entry is: Equity section of year-end balance sheet for Dillon is:  Reasons for Issuing Preferred Stock Reasons for Issuing Preferred Stock To raise money without sacrificing control To appeal to investors who may believe the common stock is too risky or that the expected return on common stock is too low To boost the return earned by common stockholders through financial leverage  Increase % Return to Common Stock by issuing Preferred Stock Assume net after tax Assume net after tax income is $22,000 and income is $22,000 and company has $200,000 company has $150K of of common stock. 8% preferred stock and $50K of common stock. This produces a 11% return on common This produces a 20% shares. ($22K/$200K) return on common shares. ($22,000 – (150K x 8%) / 50,000)  Dividend Preference of Preferred Stock Cumulative vs. Noncumulative Dividends in arrears must Undeclared dividends from be paid before dividends current and prior years do may be paid on common not have to be paid in stock. (Normal case). future years.  Dividend Preference of Preferred Stock: Illustration Assume Corporation’s outstanding stock is as follows in year one of operations: 1,000 shrs $100 par 9% preferred stock 4,000 shrs of $50 par Common Stock. In Year 1, the Board declares/pays $5,000 of cash dividends and $42,000 in Year 2. How would the dividend be allocated between preferred & common shares? Year 2 Cumulative Preferred: $13,000; Common: $29,000; Total: $42,000 Year 2 Noncumulative Preferred: $9,000; Common: $33,000; Total: $42,000  Treasury Stock Treasury stock represents shares of a company’s own stock that has been reacquired. A corporation might acquire its own stock to: 1. Use its shares to buy other companies. 2. Avoid a takeover of the company. 3. Reissue to employees as compensation. 4. Maintain a strong market and/or show confidence in current price  Purchasing Treasury Stock On May 1, Cyber, Inc. purchased 1,000 of its own shares of stock in the open market for $11.50 per share. Treasury stock is shown as a reduction in total stockholders’ equity on the balance sheet.  Selling Treasury Stock at Cost On May 21, Cyber sold 100 shares of its treasury stock for $11.50 per share.  Selling Treasury Stock above Cost On June 3, Cyber, Inc. sold an additional 400 shares of its treasury stock for $12 per share.  Selling Treasury Stock below Cost On July 10, Cyber sold an additional 500 shares of its treasury stock for $11.20 per share.  Example On October 10, the stockholders’ equity section of Sherman Systems appears as follows. Prepare journal entries to record the following transactions for Sherman Systems. a. Purchased 5,000 shares of its own common stock at $25 per share on October 11. b. Sold 1,000 treasury shares on November 1 for $31 cash per share c. Sold all remaining treasury shares on November 25 for $24 cash per share  Example (Cont’d) (a) Oct 11 Treasury Stock (5,000 x $25) $125,000 Cash $125,000 (b) Nov 11 Cash (1,000 x $31) $31,000 Treasury Stock (1,000 x $25) $25,000 Paid-In Capital, Treasury Stock $6,000 (c) Nov 25 Cash (4,000 x $24) $96,000 Paid-In Capital, Treasury Stock $4,000 Treasury Stock (4,000 x $25) $100,000  Statement of Retained Earnings Retained earnings is the total cumulative amount of reported net income less any net losses and dividends declared. Restricted Retained Earnings Contractual Restriction Legal Restriction Loan agreements can Most states restrict the include restrictions on amount of treasury stock paying dividends below a purchases to the amount of certain amount of retained retained earnings. earnings.  Example On January 1, Payson Inc. had a retained earnings balance of $20,000. During the year, Payson reported net income of $30,000 and paid cash dividends of $17,000. Calculate the retained earnings balance at its December 31 year-end. Beginning retained earnings $ 20,000 Net income 30,000 Cash dividends (17,000) Ending retained earnings $ 33,000  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.  Statement of Stockholders’ Equity This is a more inclusive statement than the statement of retained earnings.  Earnings Per Share (EPS) Earnings per share is one of the most widely cited accounting statistics. Basic Earnings = Net income − Preferred dividends Per Share Weighted-average common shares outstanding  Example Kelley Company reports $960,000 of net income and declares $120,000 of cash dividends on its preferred stock for the year. At year- end, the company had 400,000 weighted-average shares of common stock. 1. What is the company’s basic EPS? Round your answer to the nearest whole cent. 2. In the prior year, Kelley had a basic EPS of $1.90. Did Kelley improve its EPS in the current year?  Example (Cont’d) Kelley Company reports $960,000 of net income and declares $120,000 of cash dividends on its preferred stock for the year. At year- end, the company had 400,000 weighted-average shares of common stock. 1. What is the company’s basic EPS? Round your answer to the nearest whole cent. Basic EPS = ($960,000 - $120,000) / 400,000 = $2.10 2. In the prior year, Kelley had a basic EPS of $1.90. Did Kelley improve its EPS in the current year? Improved. Increasing EPS from $1.90 to $2.10.  Price-Earnings Ratio This ratio reveals information about the stock market’s expectations for a company’s future growth in earnings, dividends, and opportunities. Price– earnings = Market value (price) per share Ratio Earnings per share  Example Compute the price-earnings ratio for each of these four separate companies. For which of these four companies does the market have the lowest expectation of future performance?  Example Compute the price-earnings ratio for each of these four separate companies. For which of these four companies does the market have the lowest expectation of future performance? Hilton $176.40 ÷ $12.00 = 14.7 SPG $96.00 ÷ $10.00 = 9.6 Hyatt $93.75 ÷ $7.50 = 12.5 Accor $250.00 ÷ $50.00 = 5.0 The market has the lowest expectation of future performance for Accor. This is because Accor has the lowest PE ratio of 5.0.  Return from Stock Income Stocks – Large, Regular Cash Dividends Growth Stocks - Little/No Dividends but expected Stock Price Increase High Dividend Yield indicated Income Stock Low Dividend Yield indicates Growth Stock  Dividend Yield Tells us the annual amount of cash dividends distributed to common stockholders relative to the stock’s market price. Dividend Annual cash dividends per share = Yield Market value per share  Example Foxburo Company expects to pay a $2.34 per share cash dividend this year on its common stock. The current market value of Foxburo stock is $32.50 per share. Compute the expected dividend yield. If a competitor with a dividend yield of 3% is considered an income stock, would we classify Foxburo as a growth or an income stock? Dividend yield = $2.34 / $32.50 = 7.2% Income stock. The company’s dividend yield of 7.2% indicates that it should be classified as an income stock. That is, the company annually pays out cash dividends to its shareholders in an amount that equals 7.2% of the company’s market value.