PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA

Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA
McGraw-Hill/I rwin Copyright 2011 by The McGraw-Hill Companies, I nc. All rights reserved.
Chapter 13
ACCOUNTING FOR CORPORATIONS
13 - 2
Privately Held
Publicly Held
Ownership
can be
CORPORATE FORM OF ORGANIZATION
Existence is
separate from
owners
An entity
created by law
Has rights and
privileges
C 1
13 - 3
CHARACTERISTICS OF CORPORATIONS
Advantages
Separate legal entity
Limited liability of shareholders
Transferable ownership rights
Continuous life
Lack of mutual agency for shareholders
Ease of capital accumulation
Disadvantages
Governmental regulation
Corporate taxation
C 1
13 - 4
Shareholders
Board of Directors
President, Vice-President,
and Other Officers
Employees of the Corporation
CORPORATE ORGANIZATION AND
MANAGEMENT
C 1
13 - 5
RIGHTS OF SHAREHOLDERS
Vote at shareholders meetings
Sell shares
Purchase additional shares
Receive dividends, if any
Share equally in any assets remaining after
creditors are paid in a liquidation
C 1
13 - 6
Shareholders' Equity
Share capital-Ordinary, par value $.01;
authorized 250,000,000 shares; issued and
outstanding 92,556,295 shares $925,563

BASICS OF SHARE CAPITAL
Total number of shares that a corporation
is authorized to sell or issue.
Total number of shares that has been
sold or issued to shareholders.
C 1
13 - 7
Par value is an
arbitrary amount
assigned to each
share when it is
authorized.
Market price is the
amount that each
share will sell for in
the market.

BASICS OF SHARE CAPITAL
Classes of Shares
Par Value
No-Par Value
Stated Value
C 1
13 - 8
Par Value Share
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value for $25 per share. Lets
record this transaction.
ISSUING PAR VALUE SHARE
Dr Cr
Sept. 1 Cash 2,500,000
Share Capital-Ordinary, $2 par value 200,000
Share Premium-Ordinary 2,300,000
Issued 100,000 ordinary shares.
P 1
13 - 9
Shareholders' Equity with Ordinary Shares
Shareholders' Equity
Share Capital-Ordinary, $2 par value; 500,000 shares
authorized; 100,000 shares issued and
outstanding 200,000 $
Share Premium-Ordinary 2,300,000
Retained earnings 650,000
Total shareholders' equity
3,150,000 $
ISSUING PAR VALUE SHARES
P 1
13 - 10
ISSUING SHARES FOR NONCASH ASSETS
Par Value Shares
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value for land valued at
$2,500,000. Lets record this transaction.
Dr Cr
Sept. 1 Land 2,500,000
Share Capital-Ordinary, $2 par value 200,000
Share Premium-Ordinary 2,300,000
Exchanged 100,000 ordinary shares for land.
P 1
13 - 11
Dividends Shareholders
CASH DIVIDENDS
Corporation
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.
75%
22%
0%
20%
40%
60%
80%
100%
Common Preferred
% of Corporations Paying Divends
Regular cash dividends provide a return to investors
and almost always affect the shares market value.
P 2
13 - 12
ACCOUNTING FOR CASH DIVIDENDS
Three important dates
Date of Declaration
Record liability
for dividend.
Date of Record
No entry
required.
Date of Payment
Record payment of
cash to shareholders.
P 2
13 - 13
Date of Declaration
Record liability
for dividend.
Dr Cr
Jan. 19 Retained Earnings 10,000
Ordinary Dividend Payable 10,000
Declared $1 per share cash dividend.
ACCOUNTING FOR CASH DIVIDENDS
On January 19, a $1 per share cash dividend is declared
on Dana, Inc.s 10,000 ordinary shares outstanding. The
dividend will be paid on March 19 to shareholders of
record on February 19.
P 2
13 - 14
No entry required on February 19, the date of record.
Dr Cr
Mar. 19 Ordinary Dividend Payable 10,000
Cash 10,000
Paid $1 per share cash dividend.
Date of Payment
Record payment of
cash to shareholders.
ACCOUNTING FOR CASH DIVIDENDS
On January 19, a $1 per share cash dividend is declared
on Dana, Inc.s 10,000 ordinary shares outstanding. The
dividend will be paid on March 19 to shareholders of
record on February 19.
P 2
13 - 15
SHARE DIVIDENDS OR BONUS ISSUE
Why a share dividend?
Can be used to keep the market price on the shares affordable.
Can provide evidence of managements confidence that
the company is doing well.
A distribution of a corporations own shares to its
shareholders without receiving any cash payment in return.
Capitalization: Transferring a portion of equity from retained
earnings to contributed capital.
P 2
13 - 16
Ordinary Shares
$10 par value
100 shares
Old
Shares
New
Shares
Ordinary Shares
$5 par value
200 shares
SHARE SPLITS
A distribution of additional shares to shareholders
according to their percent ownership.
P 2
13 - 17
PREFERENCE SHARES
A separate class of shares, typically having
priority over ordinary shares in . . .
Dividend distributions
Distribution of assets in case of liquidation
Usually has a stated
dividend rate
Normally has no
voting rights
C 2
13 - 18
vs. Noncumulative Cumulative
Dividends in arrears must
be paid before dividends
may be paid on ordinary
shares. (Normal case)
Undeclared dividends from
current and prior years do
not have to be paid in
future years.
PREFERENCE SHARES
Share Capital-Ordinary, $5 par value; 40,000 shares
authorized, issued and outstanding 200,000 $
Share Capital-Preference, 9%, $100 par value; 1,000
shares authorized, issued and outstanding 100,000
Total Share Capital
300,000 $
Consider the following Shareholders Equity section of
the Balance Sheet. The Board of Directors did not
declare or pay dividends in 2010. In 2011, the Board
declared and paid cash dividends of $42,000.
C2
13 - 19
If Preference Shares Are Noncumulative: Preference Ordinary
Year 2010: No dividends paid. - $ - $
Year 2011:
1. Pay 2011 preference dividend. 9,000 $
2. Remainder goes to ordinary. 33,000 $
If Preference Share Are Cumulative: Preference Ordinary
Year 2010: No dividends paid. - $ - $
Year 2011:
1. Pay 2010 preference dividend in arrears. 9,000 $
2. Pay 2011 preference dividend. 9,000
3. Remainder goes to ordinary. 24,000 $
Totals 18,000 $ 24,000 $
PREFERENCE SHARES
C2
13 - 20
vs. Nonparticipating Participating
Dividends may exceed a
stated amount once
common shareholders
receive a dividend equal to
the preferred stated rate.
Dividends are limited to a
maximum amount each year.
The maximum is usually the
stated dividend rate.
(Normal case)
PREFERENCE SHARES
Reasons for Issuing Preference Shares
To raise capital without sacrificing control
To boost the return earned by ordinary shareholders
through financial leverage
To appeal to investors who may believe the ordinary
shares are too risky or that the expected return on
common stock is too low
C2
13 - 21
TREASURY SHARES
Treasury shares are a companys own shares
that have been acquired. Corporations might
acquire its own shares to:
1. Use their shares to buy other companies.
2. Avoid a hostile takeover.
3. Reissue to employees as compensation.
4. Support the market price.
P 3
13 - 22
PURCHASING TREASURY SHARES
Treasury shares are shown as a reduction in total
shareholders equity on the balance sheet.
Dr Cr
May 8 Treasury Shares-Ordinary 8,000
Cash 8,000
Purchase 2,000 treasury shares
at $4 per share.
On May 8, Whitt, Inc. purchased 2,000 of its own
shares in the open market for $4 per share.
P 3
13 - 23
SELLING TREASURY SHARES AT COST
Dr Cr
June 30 Cash 400
Treasury Shares-Ordinary 400
Sold 100 treasury shares
for $4 per share.
On June 30, Whitt sold 100 shares of
its treasury shares for $4 per share.
P 3
13 - 24
SELLING TREASURY SHARES
ABOVE COST
Dr Cr
July 19 Cash 4,000
Treasury Shares-Ordinary 2,000
Share Premium-Treasury Shares 2,000
Sold 500 treasury shares for $8 per share.
On July 19, Whitt, Inc. sold an additional 500
treasury shares for $8 per share.
P 3
13 - 25
SELLING TREASURY SHARES
BELOW COST
Dr Cr
Aug. 27 Cash 600
1,000
Treasury Shares-Ordinary 1,600
Sold 500 treasury shares for $1.50 per share.
Share Premium-Treasury Shares
On August 27, Whitt sold an additional 400
treasury shares for $1.50 per share.
P 3
13 - 26
STATEMENT OF COMPREHENSIVE INCOME
Statement of
Comprehensive
Income (SCI)
All non-owner
changes in equity +
other comprehensive
income
Can be 2 statements:
Income statement +
SCI
C3
13 - 27
STATEMENT OF CHANGES IN EQUITY
Statement of
Changes in
Equity (SCE)
All owner changes
in equity, including
changes in
accounting policies
Dividends
C3
13 - 28
RESERVES
Most reserves result from accounting standards
to reflect certain measurement changes in equity
rather than the income statement, e.g. asset
revaluation reserve, foreign currency translation
reserve and other statutory reserves.
Retained earnings also called revenue reserves.
Ending Retained Earnings =
Beginning Retained Earnings + Net Income Dividends

A companys cumulative net income less any net losses and
dividends declared since its inception.
C3
13 - 29
EARNINGS PER SHARE
Basic
earnings
per share
=
Net income - Preference dividends
Weighted-average ordinary shares outstanding
Earnings per share is one of the most widely
cited accounting statistics.
A 1
13 - 30
PRICEEARNINGS RATIO
Price
Earnings
Ratio
=
Market value per share
Earnings per share
This ratio reveals information about the stock
markets expectations for a companys future growth
in earnings, dividends, and opportunities.
A 2
13 - 31
DIVIDEND YIELD
Dividend
Yield
=
Annual cash dividends per share
Market value per share
Tells us the annual amount of cash dividends
distributed to ordinary shareholders relative to
the shares market price.
A 3
13 - 32
BOOK VALUE PER
ORDINARY SHARE
Book value per
ordinary share
=
Shareholders equity applicable
to ordinary shares
Number of ordinary
shares outstanding
Reflects the amount of shareholders equity
applicable to ordinary shares on a per share basis.
A 4
13 - 33
END OF CHAPTER 13