Slides09-01
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Transcript of Slides09-01
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KNOWLEDGE FOR ACTION
Shareholders Equity
Shareholders equity is the residual claim on assets after settling claims of creditors (i.e. assets liabilities)
Shareholders equity due to share issuance: Contributed capital
Common stock Preferred stock
Treasury Stock Repurchased shares that may be reissued
Shareholders equity due to operations: Retained earnings
End Retained Earnings = Beg Retained Earnings + Net Income Dividends Accumulated Other Comprehensive Income
Items that bypass the Income Statement
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KNOWLEDGE FOR ACTION
Types of Stock
Preferred stock Between debt holders and common stock holders in claim on assets No voting rights, but pay a fixed dividend that must be paid before common
dividends May be callable, convertible, or redeemable
Common Stock Voting rights, but residual claimant to assets
Par Value Stated value on shares used to compute balance in Common Stock or Preferred
Stock Additional Paid In Capital (APIC) Amount received in excess of par value
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KNOWLEDGE FOR ACTION
Contributed Capital Terminology
Shares Authorized Total number of shares the firm could issue
Shares Issued Number of shares that have been sold to the public Balance in Common Stock at Par based on this amount
Shares Outstanding Number of shares currently held by the public Shares issued minus treasury shares Dividends and Earnings Per Share based on this amount
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KNOWLEDGE FOR ACTION
Example: Issuing Stock - Preferred
On 1/14/2012, Stack Inc. issued 10,000 shares of no-par preferred stock for proceeds of $7 per share. The preferred stock specifies cumulative $1 annual dividends per share.
Journal entry1/14/12 Dr. Cash (+A) 70,000 (10,000 x 7)
Cr. Preferred Stock (+SE) 70,000
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KNOWLEDGE FOR ACTION
Example: Issuing Stock - Common
On 1/14/2012, Stack Inc. issued 12,000 shares of $1 par value stock for proceeds of $10 per share
Journal entry1/14/12 Dr. Cash (+A) 120,000 (12,000 x 10)
Cr. Common Stock (+SE) 12,000 (12,000 x 1)Cr. Addl Paid in Capital (+SE) 108,000 (Plug)
Shares issued: 12,000 Shares outstanding: 12,000
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KNOWLEDGE FOR ACTION
Share Repurchases and Treasury Stock
Companies sometimes repurchase their own shares Repurchased shares are carried in the Treasury Stock (XSE) account Treasury stock does not have voting rights or dividend rights Treasury stock can be reissued by the firm Reissued treasury stock is removed from the Treasury Stock account at the
original price paid to repurchase APIC or Retained Earnings are used to balance the journal entry if reissue price
differs from repurchase price Companies cannot book gains or losses in trading in their own stock!
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KNOWLEDGE FOR ACTION
Example: Treasury Stock Purchase
On 3/3/2012, Stack Inc. repurchased 4,000 shares of its common stock at a price of $11 per share
Journal entry3/3/12 Dr. Treasury Stock (+XSE) 44,000 (4,000 x 11)
Cr. Cash (-A) 44,000
Shares issued: 12,000 Shares outstanding: 8,000
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KNOWLEDGE FOR ACTION
Example: Treasury Stock Sale Price Increase
On 4/4/2012, Stack Inc. sold 1,000 shares of its treasury stock at a price of $14 per share
Journal entry4/4/12 Dr. Cash (+A) 14,000 (1,000 x 14)
Cr. Addl Paid in Capital (+SE) 3,000 (Plug)Cr. Treasury Stock (-XSE) 11,000 (Original cost)
Shares issued: 12,000 Shares outstanding: 9,000
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KNOWLEDGE FOR ACTION
Example: Treasury Stock Sale Price Decrease
On 5/5/2012, Stack Inc. sold 1,000 shares of its treasury stock at a price of $9 per share
Journal entry5/5/12 Dr. Cash (+A) 9,000 (1,000 x 9)
Dr. Addl Paid in Capital (-SE) 2,000 (Plug)Cr. Treasury Stock (-XSE) 11,000 (Original cost)
Shares issued: 12,000 Shares outstanding: 10,000
Note: if APIC has a zero balance, debit Retained Earnings
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KNOWLEDGE FOR ACTION
Example: Treasury Stock Retirement
On 5/15/2012, Stack Inc. decided to retire 1,000 shares of its treasury stock
Journal entry5/15/12 Dr. Common Stock (-SE) 1,000 (1,000 x 1)
Dr. Addl Paid in Capital (-SE) 10,000 (Plug)Cr. Treasury Stock (-XSE) 11,000 (Original cost)
Shares issued: 11,000 Shares outstanding: 10,000