Kế toán, kiểm toán - Chapter 8: Accounting for and presentation of owner’ equity

CHAPTER 8ACCOUNTING FOR AND PRESENTATION OF OWNER’ EQUITYMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesWhat are the characteristics of common stock, and how is common stock presented in the balance sheet?What is preferred stock, what are its advantages and disadvantages to the corporation, and how is it presented on the balance sheet?How are cash dividends accounted for, and what are the dates involved in dividend transactions?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objectives What are stock dividends and stock splits, and why are they used?What are the components of “other comprehensive income,” and why do these items appear in owners’ equity?What is treasury stock, why is it acquired, and how do treasury stock transactions affect owners’ equity?How are owners’ equity transactions for the year reported in the financial statements?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 1What are the characteristics of common stock, and how is common stock presented in the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Owners’ EquityThe claim of the entity’s owners to the assets shown in the balance sheetAlso called net assetsOwner’s equity for a individual proprietorship is called proprietor’s capitalOwners’ equity of a partnerships is called partners’ capitalOwners’ equity for a corporation consists of paid-in capital and retained earningsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Paid-In CapitalReferred to as contributed capitalConsists of:Common stockPreferred stockAdditional paid-in capitalMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Common StockAlso called capital stockThe ultimate owners of the corporationHave claim to all assets after all liabilities and preferred stock claims have been satisfiedHave the right and obligation to elect members of the corporation’s board of directorsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Value of Common StockCommon stock can have par or no-parPar value is the nominal value assigned to the stock when the corporation is formedUsually a stock cannot be issued for a value less than parStated value stock is essentially the same as par valueMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Recording Common StockPar-value common stock sold above par is recorded as follows: Cash XX Common stock XX Additional paid-in capital XXNo-par common stock is recorded as follows: Cash XX Common stock XXMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Common Stock DisclosuresAuthorized shares of stock represents the maximum number of shares of stock the corporation is legally approved to issueIssued shares represents the number of shares of stock that have been transferred from the corporation to shareholdersOutstanding shares of stock represents the shares of stock still in the hands of shareholdersTreasury stock represents the difference between issued and outstanding sharesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 2What is preferred stock, what are its advantages and disadvantages to the corporation, and how is it presented on the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Preferred StockHas several debt-like features and a limited claim on the assets in the event of liquidationMost preferred stock receives a quarterly or semiannual dividendA dividend is a distribution of earnings of a corporation to its ownersThe amount of the dividend is usually stated as a dollar amount or as a percentage (of par value)McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Preferred Stock DividendsA cumulative dividend means that a missed dividend must be paid before dividends are paid to common shareholdersA participating dividend means that after common stockholders have received a specified dividend, further dividends are shared by common and preferred shareholdersA liquidating dividend is the preferred stock claim on assets in the event of liquidationMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Types of Preferred StockCallable preferred stock is redeemable at the option of the corporationConvertible preferred stock may be exchanged for common stock of the corporation at the option of the shareholder at a stated conversion rateMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Additional Paid-In CapitalThe owners’ equity category that reflects the excess of the amount received from the sale of preferred or common stock over par valueAlso referred to as capital in excess of par value or capital surplusMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Retained EarningsThe retained earnings account reflects the cumulative earnings of the corporation that have been retained for use in the business rather than paid out as dividendsRetained earnings are not cashThe main factors affecting retained earnings are net income (or loss) and dividendsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 3How are cash dividends accounted for, and what are the dates involved in dividend transactions?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Cash DividendsTo pay a dividend, a corporation must have:Sufficient retained earningsSufficient cash to pay the dividendA dividend declaration by the board of directorsThe key dates related to dividends are:Date of declarationDate of recordDate of paymentMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Dividend DatesDate of declaration is the date the board of directors declares the dividendDate of record is the date used to determine who receives the dividend – the stockholders of record as of that dateDate of payment is the date the dividend checks are mailed to the shareholdersEx-dividend date is three business days before the date of record – the stock trades without the dividendMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 4What are stock dividends and stock splits, and why are they used?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Stock DividendsThe issuance of additional stock to existing shareholders in proportion to the number of shares currently ownedUsed to maintain loyalty of stockholders when the firm does not have enough cash for a cash dividendAffects only owners’ equity of the firm: Retained earnings XX Common stock XX Additional paid-in capital XXMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Stock SplitWill lower the market price of a firm’s stockInvolves issuing additional share of stock to existing shareholdersNo accounting entry is requiredThe par value and the number of shares issued changesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 6What is treasury stock, why is it acquired, and how do treasury stock transactions affect owners’ equity?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Treasury StockShares of a corporation’s own stock that have been purchased from shareholdersIs reflected on the balance sheet as a contra owners’ equity accountTreasure stock is not an assetRecorded as follows: Treasury stock XX Cash XXMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Sales of Treasury StockWhen sold above purchase price, treasury stock transactions are recorded as follows: Cash XX Treasury stock XX Additional paid-in capital XXCash dividends are not paid on treasury stock since the firm would be paying itself a dividendStock dividends and stock splits do affect treasury stockMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 5What are the components of “other comprehensive income,” and why do these items appear in owners’ equity?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Other Comprehensive IncomeAll items of income (or loss) ultimately affect owners’ equityComprehensive income consists of:Net income (from income statement)Cumulative foreign currency translation adjustmentUnrealized gains and losses on available-for-sale securities (after taxes)Additional minimum pension liability adjustments (after taxes)McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Cumulative Foreign Currency Translation AdjustmentFinancial statements of a foreign subsidiary are expressed in the currency of the country in which it operatesThe financial statements must be converted into U.S. dollarsBecause of fluctuations in exchange rates, a difference occurs between the translated assets and liabilities and the translated owners’ equity McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Cumulative Foreign Currency Translation AdjustmentThe difference may result in a gain or lossThe adjustment will fluctuate over time and will not be realized until the subsidiary is soldMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 7How are owners’ equity transactions for the year reported in the financial statements?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Reporting Changes in Owners’ Equity AccountsMay be reported in the balance sheet, a separate statement of changes in owners’ equity, or in the footnotes or financial review accompanying the financial statementsReports all changes in owners’ equity for the yearMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Owners’ Equity for Other Types of EntitiesProprietorships and partnership do not issue stockNo distinction is made between paid-in capital and retained earningsDistributions made to owners are usually recorded in a drawing account – similar to a dividend accountMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Owners’ Equity for Other Types of EntitiesNot-for-profit and governmental entities do not have owners who have a direct financial interest in the entityOwners’ equity is referred to as fund balanceA statement of changes in fund balances takes the place of a statement of owners’ equityMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002