Welcome to Week 14!

Financial Accounting: Chapter 9 - 10 Ashton Converse

Owners’/Stockholders’ Equity

Let It SNOW!!! *******

Objectives/Schedule• Welcome• Review TIME!• Quiz Next Week• Advantages and Disadvantages of a corporation• Effect of Issuing Stock• Stock and Dividends• Decision Making with Stock• Application Article of a Companies Stock Report– You will be able to work in groups of no more than 4

Review• What is a pension?• Give an example of a lease.• What is the equation for Time Interest Earned

Ratio?• What are bonds?• What a is a warranty?• What are the two main types of payrolls?• Define a current installment of long-term debt?• Why are these important to discuss?

Quiz Next Week

What to Review• Power Points• Chapters after the Exam (6-9)• Homework• Website• Notes• Chapter Reviews– There is no study guide…

Opening Question/Thought

• What is Owners’ or Stockholders Equity?– Stockholders’ ownership interest in the assets of a

corporation• Now discuss with several other people the

following:– How can stock impact a company? What is the

influence of stock on a company?– What are current disadvantages we know about

stock? (come up with 3)– What are the current advantages we know about

stock?

Defining Owners’ Equity• What is a stockholder?– A person who owns stock in a corporation– Also called a shareholder

• Corporation– Reminder it is a separate legal entity– Meaning: it is like an artificial person

• Limited Liability– Stockholders have this for the corporation’s debts.– The most they can lose is their investment in the stock– One of the most attractive parts about corporations

Organizing a Corporation• Every Corporation should have “bylaws”– Constitution for governing a corporation– Laws, rules, policies that should be used for any

organization• What is the “board of directors”?– Group elected by the stockholders to set policy or a

corporation and to appoint its officers• The Two Head Positions on a Board– Chairperson: most powerful, elected by board– President: manages day-to-day activities, cheif

Defining Stockholders’ Equity

Stockholders’ Equity is divided into two main parts:• Paid-in Capital– The amount of stockholders’ equity that

stockholders have contributed to the corporation• Retained Earnings– The amount of stockholders’ equity that the

corporation has earned through profitable operation of the business and has not given back to stockholders

Discuss Exhibits and Graphs• Exhibit 9-2 (edition 6, page 420)

– This is the authority structure in a corporation– Notice that Stockholders are the top of the chain…

they are the most important as they vote for the board of directors

• Exhibit 9-3 (edition 6, page 421)

– This is a stock certificate– Notice several of the main parts:• Company Name, Stockholder Name• Number of shares, Par Value of each share

Classes of Stock

Corporations issue different types of stock to appeal to a variety of investors:• Common Stock– The most basic form of capital stock– Owners of a corporation/business…and given

different rights• Some companies issue different classes– Class A = right to vote– Class B = may be nonvoting

Classes of Stock

Preferred Stock• Stock that gives its owners certain advantages– Priority to receive dividends before the common

stockholders– Priority to receive assets before the common

stockholders if the corporation liquidates• Read through Exhibit 9-5 to understand more

about Common Stock vs. Preferred Stock vs. Long-Term Debt

Deeper Understanding of SE

• Par Value– Amount assigned by a company to share or stock

• Legal capital– Minimum amount of stockholders’ equity that

corporation must maintain for the protection of creditors

• Stated Value– Amount assigned to the no-par stock– No-par stock is not common…only 9% of

companies use.

Practice and APPLY In groups of 2-4 people, talk about and WRITE what the journals and ledgers would look like with the following information:• On January 1st, Arby’s will issue 8,700,000 shares

of stock• Class of Stock is Common Stock• Par value is $.01• Price per Share is $10• 6,700,000 shares sold in the U.S.A.• 2,000,000 shares sold Internationally

Converse about Concepts

Treasury Stock• A corporation’s own stock that is has issued and later

reacquiredReasons for Purchasing Your Own Stock1. Issued all of its authorized stock and needs the stock for

giving to employees under stock purchase plans.2. The business is trying to increase net assets by buying

its shares low and hoping to resell them for a higher price

3. Management wants to avoid a takeover by an outside party

Retirement of Stock• Some companies retire their stock to avoid

paying dividends• Usually occurs more with preferred stock• Retired stock cannot be reissued

Influence on Statements:• The journal entry debits the stock account and

any paid-in capital on the stock• Credits cash

WELCOME TO DAY 2 of Week 14!

• Welcome: ARE YOU READY FOR THE WEEKEND?

• Bake Sale• Review: what did we talk about in the

previous class?• Complete Owners’ Equity Discussions• Application Activity for Weekend Work• Long Term Investments and International

Operations Discussions and Concepts

Retained Earnings, Dividends, and More

• Deficit (loss)– Debit balance in the retained earnings account– Arises from when a corporation’s lifetime losses and

dividends exceed its lifetime earnings• What is a dividend?– Distribution by a corporation to its stockholders– Usually a cash distribution

• Dividends on Preferred Stock are stated either as:– Percentage Rate or Dollar Amount

Stock Dividend

Proportional distribution by a corporation of its own stock to its stockholders• Give part of companies stock to stockholders

Usual Influence on Statements• Increase stock account and decrease retained

earnings• Total equity is unchanged, and no asset or

liability is affected

Reasons for Distributing Dividends

Corporations may choose to distribute stock dividends for the two main following reasons:1. To continue dividends but conserve cash

1. Company may want to keep cash for operations, but want to continue to give some type of dividends

2. To reduce the per-share market price of its stock

1. Increase the supply of stock to lower the market price

2. Objective is to make the stock less expensive and attract more investors

Concluding Terms and Concepts

• What is the Market Value of Stock mean?– Price for which a person could buy or sell a share

of stock• What is the Book Value of Stock mean?– Amount of owners’ equity on the company’s

books for each share of its stock

Ratio Time!

• Rate of Return on Total Assets– Net income plus interest expense divided by average

total assets– Ratio measures a company’s success in using its

assets to earn income for the person who finance the business• Creditors and Stockholders

RRTA = Net income + Interest expense Average total assets

Ratio Time

Rate of Return on Common Stockholders’ Equity• Net income minus preferred dividends, divided

by average common stockholders’ equity• Measure of profitability

RRCSE = Net Income – Preferred Dividends Average common stockholders’

equity

Questions Investors May Have

• What category of stock to buy from?• Is this a safe investment?• Does this company have steady dividends?• Are their dividends increasing or not?• Is the stock price increasing…what is the

trend?• Overall…how to identify a good stock to buy?

Outside Class LearningTake time to study this a little more on your own outside of class. • Class is a learning environment, but not the best…

curiosity with tools opens more understandingIn Teams of 2 to 4 do the following: (due next week)• Find a companies Stock Report/Article/Etc.• Read the report or article• Write 2 paragraphs discussing what you learned

and make a guess whether their stock will be higher or lower in a month. State WHY?

CHAPTER 10!!! Only a few more• Long-Term Investments and International

Operations: Get ready for the interview questions…

What is a short-term investment?• Investment that a company plans to keep for 1

year or lessWhat is a long-term investment?• Keeps for longer than a year

Thinking about Investments

Investment is a diverse/broad word correct?• What are all the types of investments you can

think of?– Stock vs. Bonds– Acquisition of a company vs. Takeovers– Real Estate Sales vs. Rentals and Leases– Jewelry, Antiques, Gold– Other various products– And much more

Long-Term Investments• Why would a business want to buy another

company?– Resources– Skills and Techniques– Growth in the Market– Development of Current Products– Expansion of other Products– More Power and Higher Image in Society– Money and Investments– Numerous More

Purchase of Other Company Concepts

• Controlling:– Ownership of a more than 50% of an investee

company’s voting stock• Parent Company– An investor company that owns more than 50% of

the voting stock of a subsidiary company• Subsidiary Company– An investee company in which a parent company

owns more than 50% of the voting stock

Consolidation AccountingMethod used to combine all the financial statements from each of the companies that are controlled by the same stockholders. • How would this help the investors?– Investors can gain a better perspective on total

operations than if they viewed each company’s financial statements

– Gives investors a better understanding • Statements have columns in each statement

for the “Parent Company” and “Subsidiary Corporation”

Converse about Concepts

Minority Interest:• A subsidiary company’s equity that is held by

stockholders other than the parent company.

I AM STILL HOPING FOR SOME SNOW FOR CHRISTMAS

International Operations?What is the foreign-currency exchange rate?• The measure of one country’s currency against another

country’s currency• Think about the fact of businesses changing the value for

accounting purposes

Two Main factors affect supply and demand for a particular currency:1. The ratio of a country’s imports to its exports2. The rate of return available in the country’s capital

markets

International Concepts Continued

• Strong Currency– A currency whose exchange rate is rising relative to

other nations currencies – What are some examples?

• Weak Currency– A currency whose exchange rate is falling relative to

that of other nations– What are some examples?

Foreign Currency TransactionsHow can companies avoid foreign-currency transaction LOSSES?• Insist that the transaction trade be in their

currency (U.S. Dollar, Yuan, Yen, Euro, etc.)• Hedging:– Protecting yourself from losing money in one

transaction by engaging in a counterbalancing transaction

– Losses from one country may be balanced by gains from a different country

– Future contracts…create a payable to offset a receivable

End International Finance Thoughts• Foreign Currency must be translated back into

dollar amounts – Helps with decisions and more

• International Accounting Standards – Standards must be known for where your company is

located– Standards around the world are different– Some things are similar, but other important details

differ– The better you follow the countries standards, the

more they will be fond of you being there

SEE YOU LATER!

• HAVE A GREAT WEEKEND!

• I am glad to be your teacher and look forward to hearing about what happens next in your chapter of life!

• Give me a shout-out if you want some good coffee, stop by and visit Grace and I.