PRINCIPLES OF FIANNCIAL ACCOUNTING

CHAPTER 11

Characteristics of a Corporation Separate Legal Existence Limited liability Ease of transfer of ownership Ability to acquire capital Continuous life Broader management skills More government regulations Double taxation

Stock Authorized, issued, outstanding

Treasury stock Par, no par, stated value stock

Legal Capital Contributed capital

Par value + Paid in capital in excess of par Earned capital

Retained Earnings

Preferred Stock

Preference to dividends Cumulative stock

Liquidation preference

Cash dividends Date of declaration

Entry required (DR) + Dividends or - RE; (CR) + Dividends

Payable

Date of Record Date of Payment

Entry required (DR)- Dividends Payable, (CR) - Cash

Stock Dividends vs stock split

Stock Dividends - An increase in paid-in capital and a decrease in retained earnings (use market value at the date of declaration)

Stock split – Par value is reduced. It has no effect on paid-in capital or retained earnings.

Retained Earnings

A debit balance (negative balance) is called a deficit.

Restrictions on RE are called appropriations. The restrictions reduce the amount that is available for dividends.

Ratio analysis

Cash Dividends declared on common stock / net income = Payout ratio

Cash dividends declared per share/Stock Price at year-end = Dividend Yield

More ratios:

Net income – Preferred stock dividends / average common shares outstanding = Earnings per share

Stock Price per share / Earnings per share = Price-earnings ratio

Assignment

E11-2 E11-4 E11-6 E11-8 BYP11-1 BYP11-11