BSAD 221Introductory Financial

Accounting

Donna Gunn, CA

Shareholders(Owners of voting shares)

Board of DirectorsInternal (managers) andExternal (non-managers)

President

Vice President(Production)

Vice President(Marketing)

Vice President(Finance)

Vice President(Controller)

Appointedby directors

Elected byshareholders

Ownership of a Corporation

AuthorizedShares

UnissuedShares

TreasuryShares

OutstandingSharesIssued

SharesTreasury shares are

issued shares that have been reacquired by the corporation. In Canada, reacquired shares are

usually cancelled.

Outstanding shares are issued shares that are

owned by shareholders.

Authorized, Issued, and Outstanding Shares

Common Shares

Preferred Shares

Types of Share Capital

Common Shares

Basic Voting Shares

Dividend set by Board of Directors

Dividends paid AFTER preferred share dividends

Two primary sources of shareholders’ equity

Retained earnings

Share capital

Accounting for Share Capital

Initial public offering (IPO)

The first time a corporation sells

shares to the public

Sale and Issuance of Capital Shares

Seasoned new issue

Subsequent sales of new shares to the

public.

Secondary Markets

Transactions between two investors that do not affect the corporation’s accounting records.

I’d like to sell some of my

Sun Life shares.

I’d like to buy some of your

Sun Life shares.

GENERAL JOURNAL Page 34Date Description Debit Credit

July 6 Cash (A) 2,200,000Common shares (SE) 2,200,000

Sale and Issuance of Shares

On July 6, Sun Life issued 100,000 common shares for $22 per share.

100,000 shares × $22 per share = $2,200,000

1.) Record assets or services received at the market value of the shares given up at the date of

the transaction.

Shares Issued for Non-cash Assets and/or Services

2.) If the market value of the shares cannot be determined, then the market value of the assets or

services received should be used.

GENERAL JOURNAL Page 12Date Description Debit Credit

Mar. 14 Legal fees expense (E) 150,000Common shares (SE) 150,000

10,000 shares × $15 = $150,000

Shares Issued for Non-cash Assets and/or ServicesOn March 14, Sun Life issued 10,000 common

shares to the Rose Law firm. The share was selling for $15.

Accounting for Cash Dividends

Declared by board of directors

Not legally required

Creates liability at declaration

Requires sufficient Retained Earnings

and Cash

$

Dividend DatesDeclaration date

Board of directors declares the dividend. Record a liability.

Date Description Debit CreditRetained Earnings (SE) XXX

Dividends Payable (L) XXX

GENERAL JOURNAL

X

Date of RecordShareholders holding shares on this date will receive the dividend. (No entry)

Dividend Dates

Date of PaymentRecord the dividend payment to shareholders.

Date Description Debit CreditDividends Payable (L) XXX

Cash (A) XXX

GENERAL JOURNAL

Dividend Dates

Accounting for Stock Dividends

Distribution of additional sharesto shareholders.

No change in total shareholders’ equity

All shareholders retain the same

percentage ownership

Retained earnings decrease

Stock Splits

Distributions of equal to 100% or more of outstanding shares to

shareholders

Assume that a corporation had 5,000 shares outstanding with a book value of $5,000 before a 2–

for–1 stock split.

Increase

Decrease

No Change

Before Split

After Split

Number of common shares 5,000 10,000

Total book value 5,000$ 5,000$

Average issue price per share 1.00$ 0.50$

Stock Splits

Preference over common shares

Usually has no voting rights

Usually has a fixed dividend rate

Preferred Shares

Convertible preferred shares may be exchanged for common shares.

Callable (redeemable) preferred shares may be repurchased by the corporation at a

predetermined price.

Retractable preferred shares may be redeemed at the option of the shareholder for the redemption

price.

Special Features of Preferred Shares

Dividends on Preferred Shares

1. Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common shares.

2. Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

If the preferred shares are noncumulative, any dividends not declared in previous years are lost

permanently.

Dividends on Preferred Shares

Dividends on Preferred Shares

Kites, Inc. has the following shares outstanding:

Common shares: 100,000 sharesPreferred shares: $3.00, cumulative, 5,000 shares

Preferred shares: $4.00, noncumulative, 3,000 shares

Dividends were not paid last year. In the current year, the board of directors declared dividends of $50,000.

How much will each class of shares receive?

Total dividend declared 50,000$ Preferred shares (cumulative)Arrearage ($3 per share × 5,000 shares) 15,000$ Current Yr. ($3 per share × 5,000 shares) 15,000 30,000 Remainder 20,000$ Preferred shares (noncumulative)Current Yr. ($4 per share × 3,000 shares) 12,000 Remainder 8,000$ Common sharesCurrent Yr. ($8,000 Remainder) 8,000 Remainder 0$

Dividends on Preferred Shares

Focus on Cash Flows

Financing Activity Effect on Cash Flows

Issuance of shares +Repurchase of shares -Payment of cash dividends -