9.1 Corporate Equity Accounting I

“Keep away from prohibited things and
you will be among the best of

worshippers.”
The great piety is to keep away from sins,

not abundance of worship
Corporations
Accounting
Corporations: Organization and Capital

Stock Transactions:
Acknowledgement:
Most of the slides have been taken from Keise Accounting
Principles, Ninth edition
Some slides have been altered and some new slides
inserted to align with the local regulatory environment in
Pakistan
1. Corporations: An introduction
2. Major characteristics of a corporation.
3. Forming a Corporation
4. Rights of Common Stockholders /
Ordinary Shareholders
Difference between Statutory Corporations
and Companies
Types of Companies
 State Owned Companies
 Listed companies
 Public companies
 Private companies
 The Law:
The Companies Ordinance 1984
The Companies Act 2017
 Regulatory Body:
Securities and Exchange Commission of Pakistan
Others
KSE
SBP
CCP
Others
 Role of ICAP, ICMAP

Characteristics that distinguish corporations from
proprietorships and partnerships.
Corporation acts
Separate Legal under its own name
rather than in the
Existence name of its
stockholders.
SO 1 Identify the major characteristics of a corporation.

Limited to their
investment.
Limited Liability of Limited by shares
Stockholders
Limited by guarantee
Unlimited company

Transferable Shareholders may

sell their stock.
Ownership Rights

Ability to Acquire Corporation can

obtain capital
Capital through the
issuance of stock.

Continuous Life Continuance as a

going concern is not
affected by the
withdrawal, death,
or incapacity of a
stockholder,
employee, or
officer.

Government
Regulations

Corporations pay
income taxes as a
separate legal entity
and in addition,
stockholders pay
taxes on cash
Additional Taxes dividends.

Separation of
ownership and
management prevents
Corporate owners from having
an active role in
Management managing the
company.
[Agency Problem]
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
Issuing Par Value Common Stock for Cash
Illustration: Assume that Hydro-Slide, Inc. issues 1,000
shares of $1 par value common stock at par for. Prepare the
journal entry.
Cash 1,000
Common stock (1,000 x $1) / 1,000
Ord. Shares Capital
SO 3 Record the issuance of common stock.

Issuing Par Value Common Stock for Cash
Illustration: Assume that Hydro-Slide, Inc. issues 2,000
shares of $1 par value common stock. Prepare Hydro-Slide’s
journal entry if (a) 1,000 share are issued for $1 per share,
and (b) 1,000 shares are issued for $5 per share.
a. Cash 1,000
Common stock / (1,000 x $1) 1,000
Ord. Shares Capital
b. Cash 5,000
Common stock (1,000 x $1) 1,000
Ord. Shares Capital
Paid-in capital in excess of par value / 4,000
Ordinary Shares Premium
Illustration 13-7
/ Ord. Shares Capital
/ Ord. Shares Premium
/ Un-appropriated Profit
/ Total Shareholders’ Equity

Issuing Common Stock for Services or
Noncash Assets
Corporations also may issue stock for:
Services (attorneys or consultants).
Noncash assets (land, buildings, and equipment).

Illustration: Assume that attorneys have helped Jordan
Company incorporate. They have billed the company $5,000
for their services. They agree to accept 4,000 shares of $1
par value common stock in payment of their bill.
Organizational expense 5,000

Common stock (4,000 x $1) 4,000
Paid-in capital in excess of par/ 1,000
shares premium

Illustration: Assume that Athletic Research Inc. is an
existing publicly held corporation. Its $5 par value stock is
actively traded at $8 per share. The company issues 10,000
shares of stock to acquire land recently advertised for sale
at $90,000, but negotiated at $80,000 Prepare the journal
entry for this transaction.
Land (10,000 x $8) 80,000
Common stock (10,000 x $5) 50,000
Paid-in capital in excess of par 30,000

Stockholders
Illustration 13-1
Corporation
organization chart Chairman and
(Pakistan) Board of
Directors
CEO
Company GM GM
CFO COO
Secretary Marketing HR
Manager
Manager
Accounts /
Finance /
Budgeting /
Treasurer
Costing
Initial Steps:
File application with the Secretary of State.
Important Documentation
Memorandum of Association
Articles of Association
Prospectus
Certificate of Incorporation

MOA:
Normally six clauses
Name Clause (should know
Situation Clause
Object Clause
Liability Clause
Capital Clause
Signatories

AOA:
Operational management matters like how the
meetings will be conducted, how CEO and
Directors will be appointed / elected, dividends
decisions mechanisms etc. etc.

Certificate of Incorporation:
Issued by SECP upon registering the company
It is the ‘birth certificate’ of the company
having incorporation date

Prospectus:
Required only when shares are to be issued in
public and this is normally done after the
formation of company
Obligatory to publish in relevant newspapers as
well
It contains information like
past financial statements to date
purpose to which the fund shall be used
forecasted financial statements etc.

Stockholders have the right to: Illustration 13-3
1. Vote in election of board of

directors and on actions that
require stockholder approval.
2. Share the corporate earnings

through receipt of dividends.

3. Keep the same percentage ownership when new

shares of stock are issued (preemptive right*).
* A number of companies have eliminated the preemptive right.

4. Share in assets upon liquidation in proportion to

their holdings. This is called a residual claim.

Illustration 13-4 Prenumbered
Class
Class A Class A
COMMON STOCK COMMON STOCK
PAR VALUE PAR VALUE

$1 PER SHARE $1 PER SHARE
Name of corporation
Stockholder’s name
Shares
Stock Certificate
Signature of
corporate official

Authorized Stock
MOA indicates the amount of stock that a
corporation is authorized to sell.
Number of authorized shares is often reported
in the stockholders’ equity section
Does this requires any entry?

 Par Value
 Legal value stated on share certificate
 Issue Price
 May be more or less than par value, depending on
corporate past performance and future prospects
 Market Value
 Is usually variable, should depend on corporate
performance and financial position but also depends on
demand and supply of shares in the stock market
 Book Value (Break-up Value)
 Is the balance sheet value per share, which can be
obtained by dividing T.SHE with # of issued shares
Issuance of Stock
Factors in setting price for a new issue of stock:
1. Company’s past earnings track
2. Company’s anticipated future earnings
3. its expected dividend rate per share
4. its current financial position
5. the current state of the economy
6. the current state of the securities market

Market Value of Stock
Interaction between buyers and sellers determines
the prices per share.
Ideally, prices set by the marketplace tend to
follow the trend of a company’s earnings and
dividends. Investors’ concerns
Why? Because if more buy calls then sales
If more sales calls than buy
Factors beyond a company’s control, may cause day-
to-day fluctuations in market prices.
Speculators’
SO 1 Identify concerns of a corporation.
the major characteristics
Assignment:
1. See the stock quotes for
PTCL share in Business
Recorder and explain
different items in the next
class
2. Obtain quotation report of
PSX and explain quote of
PRL in next class
Common Stock /
Ord. Shares
Capital Paid-in Capital in
Paid-in Capital Assignment:Excess of Par /
Shares Premium
1. Which companies have
Preferred Stock / Account
Preferred Shares issued preferred stock in
Capital Pakistan?
Two Primary Retained Earnings Explore one of them to
Sources of / Un-appropriated see the terms of preferred
Equity Profit & Revenue stock.
Reserves (Ch 14)
Paid-in capital is the total amount of cash and other assets paid in
to the corporation by stockholders in exchange for capital stock.
Paid up capital is the term used in Pakistan to represent par value
of all issued shares
SO 2 Differentiate between paid-in capital and retained earnings.
Common Stock /
Ord. Shares
Capital Paid-in Capital in
Paid-in Capital Excess of Par /
Shares Premium
Preferred Stock / Account
Preferred Shares
Capital
Two Primary Retained Earnings
Sources of / Un-appropriated
Equity Profit & Revenue
Reserves (Ch 14)
Retained earnings is net income that a corporation retains for
future use.
SO 2 Differentiate between paid-in capital and retained earnings.

In reality, the timing of
collection of money
and issue of shares
differs
Therefore, share
applications money
account is involved
Amir Limited has
Rs.1,000,000 of
authorized capital
divided into
ordinary shares of
Rs.10 each
On 1st December, it offers its 50,000 shares to
general public for subscription at price of
Rs.16 per share. It received applications for
80,000 shares (oversubscription)
01/12 Bank 1,280,000

Shares Applications 1,280,000
Working ???
On 15th December, it finalizes its issue of
50000 shares (so the shareholders) through
computerized balloting
15/12 Shares Applications 800,000

Ord. Shares Capital 500,000
Ord. Shares Prem. 300,000
On 21st December, it refunds money to
unsuccessful candidates
21/12 Shares Applications 480,000

Bank 480,000
No entry on 22nd December as shares capital has

already been recorded on 15th December
Practical Mechanism for Issue of Shares
Initial Public Offer (IPO)
Offer for Sale
Book Building
Preferred Stock
Features often, but not necessarily associated with preferred

stock.
1. Preference as to dividends.
2. Preference as to assets in liquidation.
3. Nonvoting.
4. Normally fixed dividends (like interest)
5. Normally cumulative
6. May be participative
7. May be redeemable
8. May be convertible
Accounting for preferred stock at issuance is similar to

that for common stock.
SO 5 Differentiate preferred stock from common stock.
Preferred Stock
Illustration: Stine Corporation issues 10,000 shares of

$10 par value preferred stock for $12 cash per share.
Journalize the issuance of the preferred stock.
Cash 120,000
Preferred stock (10,000 x $10) 100,000
Paid-in capital in excess of par –
Preferred stock 20,000

Preferred Stock
Dividend Preferences
Right to receive dividends before common
stockholders.
Per share dividend amount is stated as a
percentage of the preferred stock’s par value or
as a specified amount.
Cumulative dividend – holders of preferred
stock must be paid (if the cumulative provision is
there) their annual dividend plus any dividends in
arrears before common stockholders receive
dividends.
ACCOUNTING FOR TREASURY STOCK
Treasury stock - corporation’s own stock that it

has reacquired from shareholders, but not retired.
Corporations purchase their outstanding stock:
1. To reissue the shares to officers and employees under
bonus and stock compensation plans.
2. To enhance the stock’s market value.
3. To have additional shares available for use in the
acquisition of other companies.
4. To increase earnings per share.
5. To rid the company of disgruntled investors, perhaps to
avoid a takeover.
SO 4 Explain the accounting for treasury stock.

Purchase of Treasury Stock

Record Treasury Stock for the price paid to reacquire the
shares.
Treasury stock is a contra stockholders’ equity (just like

drawings) account, not an asset.
Purchase of treasury stock reduces stockholders’ equity.

Illustration 13-8
Illustration: On February 1, 2008, Mead acquires 4,000

shares of its stock at $8 per share.
Treasury stock (4,000 x $8) 32,000
Cash 32,000

Stockholders’ Equity with Treasury stock

Illustration 13-9
Both the number of shares issued (100,000), outstanding (96,000), and

the number of shares held as treasury (4,000) are disclosed.

Common Stock
Account
Paid-in Capital in
Paid-in Capital
Excess of Par
Account
Preferred Stock
Account
Two Primary
Sources of Retained Earnings
Account
Equity
Less:
Treasury Stock
Account

Sale of Treasury Stock

Above Cost Only for information
Not covered for exams purpose
Below Cost
Both increase total assets and stockholders’

equity.

Above
ACCOUNTING FOR TREASURY STOCK Cost

shares of its stock at $8 per share. Record the journal
entry for the following transaction: Only for information
Not covered
On July 1, Mead sells for $10 per share for examsofpurpose
1,000 shares its
treasury stock, previously acquired at $8 per share.
July 1 Cash 10,000

Treasury stock 8,000
Paid-in capital (premium)
treasury stock 2,000
A corporation does not realize a gain or suffer a loss from stock
transactions with its own stockholders.

Below

Not covered
On Oct. 1, Mead sells an additional 800 shares for
ofexams purpose
treasury
stock at $7 per share.
Oct. 1 Cash 5,600

Paid-in capital treasury stock 800
Mead uses Paid-in Capital from Treasury Stock, if available, for the
difference between cost and resale price of the shares.

Below

Not covered
On Dec. 1, assume that Mead, Inc. sells for exams
its remaining purpose
2,200
shares at $7 per share.
Dec. 1 Cash 15,400 Limited

to
Paid-in capital treasury stock 1,200 balance
on hand
Retained earnings 1,000

Statement Analysis
Book Value per Share
BV of ordinary share
= [ Total SHE less Preferred Stock ] / # of outstanding ordinary shares
$7
$6.95

Statement Analysis
What information Book Value conveys?
Tips:
See from liquidation perspective
See from market value perspective

ACTIVITY
• Calculate BVS of Sitara Chemicals as on 30th

June 2019
What should be the impact of following in BVS
• Issuing new shares
• Purchasing treasury shares
• Earning income (increasing RE)
• Incurring Losses
• Doing Revaluations
• Recording Impairments
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in the shade of the throne of Allah. (Al-
Isbihani)
whosoever sells a defective product without

disclosing its defect to the purchaser, shall
earn the permanent anger of Almighty Allah
and the angels continuously curse such a
person (Prophet Muhammad (PBUH))
Corporate Accounting: Earnings &

Retained Earnings
Chapter
14-60
Study Objectives
1. Retained Earnings
2. Dividends
3. Statement of Changes in Equity
4. Balance Sheet & Income Statement
5. EPS
Chapter
14-61
Accounting Entry for Retained Earnings
 ?
Chapter
14-62
Dividends
A distribution of cash or stock to stockholders

on a pro rata (proportional) basis.
Types of Dividends:
1. Cash dividends. 3. Stock dividends.
2. Property dividends .
Dividends expressed: (1) as a percentage of the par or

stated value, or (2) as a dollar amount per share.
Chapter
14-63 SO 1 Prepare the entries for cash dividends and stock dividends.
How Dividends are Mentioned
Dividend Rate and Dividend Per Share
Dividends can be mentioned

- In total
- As Dividend per share
- As dividend rate (% of par value)
Let’s see some examples
Chapter
Dividends
• Par Value Rs.10
• Number of shares issued 100,000
• Net Income for the year Rs.60,000
• Dividend amount total: Rs,40000
• Dividend Rate (%): ?
• Per share dividend: ?
Chapter
Dividends
• Par Value Rs.10
• Dividend amount total: ?
• Dividend Rate (%): 20%
Chapter
Dividends
• Par Value Rs.10
• Per share dividend: Rs3.5
Chapter
How Dividends are Mentioned
Dividend Rate and Dividend Per Share
Dividends can be mentioned

- In total
- As Dividend per share
- As dividend rate (% of par value)
However, dividend payout and dividend yield are
also important
Let’s see some examples
Chapter
Dividends
• Par Value Rs.10
• Dividend amount total: Rs,40000
• Dividend Rate (%): ? 4%
• Per share dividend: ? 0.4
• Dividend payout: ? 66.66%
• Market Value Rs.16
• Dividend Yield: ? 2.5%
Chapter
Dividends
• Par Value Rs.10
• Dividend Rate (%): 20%
• Dividend payout: ?
• Dividend Yield: ?
Chapter
Dividends
• Par Value Rs.10
• Per share dividend: Rs3.5
• Dividend payout: ?
• Dividend Yield: ?
Chapter
Dividends
What kind of property dividends a company pay?
1. Cash dividends. 3. Stock dividends.

2. Property dividends .
Example: shares of other investee companies
Chapter
Accounting Entry for Cash Dividends
 When dividends BECOME DUE, entry should

be
 Retained Earnings
 Dividends Payable
On Payment
 Dividend Payable
 Cash / Bank
Chapter
14-73
When Dividends are recorded
The following dates and events are important in

respect of dividend
• Period Closure Date
The date for which financial statements are prepared
(not published, because actual preparation and
publishing takes place much after the effective date)
• Usually, the decision of dividends is made far after this
date
• No entry for dividends
Q: What’s the frequency of financial reporting for

companies in Pakistan?
Chapter
The following dates and events are important
• Dividends Declaration (Results Announcement)

Date, Or BOD Meeting Date:
On this date companies announce their brief results as
to profits and dividends, via fax or email to stock
exchange, after the same being approved (accounts)/ or
recommended (dividends) in BOD meeting
• No entry for dividends
Remember that as per
regulatory environment in
Pakistan, dividends are
approved by shareholders
Chapter
• Shareholder’s meeting [usually AGM] / Approval Date

Date on which shareholders meet to approve dividends
• Entry for dividends is made
Chapter
• Dividend Payment Date

• What entry should be made?
Chapter
Dividends
Cash Dividends
For a corporation to pay a cash dividend, it must have:
1. Retained earnings - Payment of cash dividends
from retained earnings is legal in all states.
2. Adequate cash.
3. A declaration of dividends by the Board of
Directors and approval by shareholders in AGM.
Chapter
Dividends
Illustration: On Dec. 1, the directors of Media General declare a 50¢
per share cash dividend on 100,000 shares of $10 par value common
stock. On December 22nd, the shareholders approved the dividend in
AGM. The dividend is payable on Jan. 20 to shareholders of record on
Dec. 21st?
December 22nd (Declaration Date) Approval Date
Dividends payable 50,000
January 20 (Payment Date)

Dividends payable 50,000
Cash 50,000
Chapter
Dividends
Stock Dividends Illustration 14-3
Pro rata distribution of the corporation’s own stock.
Results in decrease in retained earnings and increase in paid-in capital.

Chapter
Dividends
Stock Dividends
Reasons why corporations issue stock dividends:
1. To satisfy stockholders’ dividend expectations
without spending cash.
2. To increase the marketability of the corporation’s
stock.
3. To emphasize that a portion of stockholders’ equity
has been permanently reinvested in the business.
Chapter
Dividends
Size of Stock Dividends
Small stock dividend (less than 20–25% of the

corporation’s issued stock, recorded at fair
market value) *
Large stock dividend (greater than 20–25% of

issued stock, recorded at par value)
Both are same from regulatory environment in

Pakistan. Both are recorded at Par
Chapter
Dividends
Illustration: HH Inc. has 5,000 shares issued and

outstanding. The per share par value is Rs.10, book value
Rs.32 and market value is Rs.40.
10% stock dividend is declared / approved

Retained earnings (5,000 x 10% x Rs.10) 5000
Common stock dividends distributable 5000
Stock issued
Common stock div. distributable 5000
Common stock (5,000 x 10% x Rs.10) 5000
Chapter
Dividends
Stockholders’ Equity with Dividends Distributable
HH Inc.
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Common stock, $1 par, 5,000 issued
and outstanding $ 5,000
Common stock dividends distributable 500
Paid-in capital in excess of par 64,500
Total stockholders' equity $ 160,000
Chapter
Dividends
Effects of Stock Dividends

HH Inc. Before After Net
Dividend Dividend Change
Paid-in capital
Common stock, $1 par, 5,000 issued
and outstanding $ 5,000 $ 5,500 $ 500
Paid-in capital in excess of par 45,000 45,000 -
Retained earnings 110,000 109,500 (500)
Total stockholders' equity $ 160,000 $ 160,000 0
Outstanding shares 5,000 5,500
Book value per share $ 32 $ 29
Chapter
Not covered for
examination purposes
 Imagine a company’s S H E (31 12 2010)
Common Stock Rs. 500

Premium 100
Retained Earnings 300
Total 900
Book Value: 18
 Let market value = book value (reasonable

assumption), and you purchased 10 shares of
Chapter
this company. What’s your wealth?
14-86
Not covered for
 If the company earned an income of Rs.200
during year 2011, then S H E on 31-12-2011
Premium 100
Total 1100
Book Value: 22
 What’s your wealth?
Chapter
14-87
Not covered for
Premium 100
Total 1100
Book Value: 22
 Assume the company pays out Rs.200 as cash

dividends, how the S H E would change; what’s
Chapter
your wealth ?
14-88
Not covered for
Premium 100
Total 1100
Book Value: 22
 Assume the company pays out Rs.200 as stock

dividends, what’s your wealth ?
Chapter
14-89
Not covered for
 So theoretically, it doesn’t make any difference
whether a company:
Distributes cash dividends
Distribute stock dividends
Does not distribute anything
Chapter
14-90
Dividends
Stock Split
Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of
shares.
Chapter
Dividends
Illustration: HH Inc. has 5,000 shares issued and

outstanding. The per share par value is Rs.1, book
value Rs.32 and market value is Rs.40.
2 for 1 Stock Split
No Entry -- Disclosure that par is now Rs.0.50

and shares outstanding are 10,000.
Chapter
Chapter
14-93
Dividends
Effects of Stock Splits

HH Inc. Before After Net
Split Split Change
Paid-in capital
Common stock $ 5,000 $ 5,000 $ -
Paid-in capital in excess of par 45,000 45,000 -
Retained earnings 110,000 110,000 -
Total stockholders' equity $ 160,000 $ 160,000 $ -
Outstanding shares 5,000 10,000

Book value per share $ 32 $ 16
Chapter
Retained Earnings
Retained earnings is net income that a company

retains for use in the business.
Net income increases Retained Earnings and a

net loss decreases Retained Earnings.
Retained earnings is part of the stockholders’

claim on the total assets of the corporation.
A negative (debit) balance in Retained Earnings

is identified as a deficit.
Chapter
14-95 SO 2 Identify the items reported in a retained earnings statement.
Retained Earnings Restrictions
Restrictions can result from:

1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
Companies generally disclose retained earnings
restrictions in the notes to the financial statements.
In Pakistan usually we make entries as follows:

Retained Earnings Dr. xxxx
Reserve for asset replacement Cr. xxxx
Chapter
Capital And Revenue Reserves
 We studied that Corporate Equity is made up

three components
 Contributed Capital
 Retained Earnings
 Treasury Stock
 However, this classification is not exhaustive, as
it leaves some items, like revaluation surplus,
unclassified
 So a better classification is that corporate equity
is composed of
Chapter
14-97
Capital And Revenue Reserves
 So a better classification is that corporate equity is

composed of two items
 Shares capital (the par value part)
 Reserves
 Reserves can be further classified as
 Capital Reserves
 Revenue Reserves
 Capital Reserves are those items from which dividends
cannot be paid. Examples are shares premium and
revaluation surplus
 Revenue Reserves are those reserves from which
dividends can be legally paid. They are restricted
Chapter
14-98 (appropriated) or unappropriated earnings
Prior Period Adjustments
Not covered for
Corrections of Errors
Result from:
 mathematical mistakes
 mistakes in application of accounting principles
 oversight or misuse of facts
Corrections treated as prior period adjustments

Adjustment made to the beginning balance of
retained earnings
Chapter
Prior Period Adjustments
Not covered for
Woods, Inc. examination purposes
Statement of Retained Earnings
For the Year Ended December 31, 2010
Balance, January 1 $ 1,050,000

Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,110,000
Before issuing the report for the year ended December 31, 2010, you discover a
Rs.50,000 error (net of tax) that caused the 2009 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be
higher in 2009. Would this discovery have any impact on the reporting of the
Statement of Retained Earnings for 2010?
Chapter
Retained Earnings Statement
Not covered for
Woods, Inc. examination purposes
Statement of Retained Earnings
Balance, January 1, as previously reported $ 1,050,000

Prior period adjustment - error correction (50,000)
Balance, January 1, as restated 1,000,000
Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,060,000
Chapter
Not covered for
The company prepares the statement from the
Retained Earnings account.
Illustration 14-13
Chapter
Not covered for
Question examination purposes
All but one of the following is reported in a retained

earnings statement. The exception is:
a. cash and stock dividends.
b. net income and net loss.
c. some disposals of treasury stock below cost.
d. sales of treasury stock above cost.
Chapter
Statement Analysis and Presentation
Illustration 14-15
Chapter
14-105 SO 3 Prepare and analyze a comprehensive stockholders’ equity section.
Stockholders’ Equity Analysis
Return on Net Income Available

Common to Common Stockholders
=
Stockholders’ Average Common
Equity Stockholders’ Equity
This ratio shows how many dollars of net income the

company earned for each dollar invested by the
stockholders.
Chapter
14-106 SO 3 Prepare and analyze a comprehensive stockholders’ equity section.
Income Illustration 14-17
Statement
Presentation
Chapter
14-107 SO 4 Describe the form and content of corporation income statements.
Statements Analysis
 A very important profitability ratio is Return On

Investment. Unlike other ratios, this is a ratio which can
be compared across sectors and industries
 Its generic formula is: Income / Investments (in %)
 Since income and investment have many definitions,
there are many versions of ROI. Two important versions
are
 Return on Assets (ROA) = EBIT / Average Total Assets
 Return on Ordinary Shareholders’ Equity
= Net Income available to ordinary shareholders /
Average Ordinary Shareholders’ Equity
 ROA shows the total return from business, and ROE that
available to ordinary shareholdetrs
 If ROA > ROE, means interest rate > ROA
Chapter
14-108
Income Statement Analysis
Net Income minus

Earnings Preferred Dividends
=
Per Share
Weighted-Average Common
Shares Outstanding
This ratio indicates the net income earned by each

share of outstanding common stock.
Chapter
14-109 SO 5 Compute Earnings Per Share.
Question
The income statement for Nadeen, Inc. shows income
before income taxes Rs.700,000, income tax expense
Rs.210,000, and net income Rs.490,000. If Nadeen
has 100,000 shares of common stock outstanding
throughout the year, earnings per share is:
a. Rs.7.00.
b. Rs.4.90. (Rs.490,000 / 100,000 =
Rs.4.90)
c. Rs.2.10.
d. No correct answer is given.
Chapter
14-110 SO 5 Compute Earnings Per Share.
Copyright
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Chapter
14-111
Changes in Corporate Equity
Income and Comprehensive Income
• We understand that profits increase owners’ equity

• But for some types of business transactions, owners’ equity increases without any increase in
profits
• For example, owners’ equity increases when we revalue assets, but this increase is not reported
in income statement. Other major examples (beyond the scope of this discussion)
• Revaluation surplus
• some exchange gains / losses
• unrealized gains / losses on AFS investments
• Actuarial gains / losses on retirement benefits [DBPs]
• …
• We say that such increases in owners’ equity that are not recorded in income statements are
other comprehensive income
• Remember that we are not talking about increase (or decrease) in owners’ equity because of
capital issue or drawings (dividends)
• Together, the net income and other comprehensive income makes up comprehensive income
• Corporate equity had typically one or more of following accounts

• Shares Capital (par value)
• Shares Premium
• Treasury Stock (at cost)
• Unappropriated Profits (Retained Earnings)
• Appropriated Profits (Restricted Retained Earnings)
• Others (like Revaluation Surplus and some others alike)
• Any increase or decrease in these accounts may be mainly because of
two reasons
• Due to transactions with Owners
• Due to Business Transactions
• Sometimes, there is a third reason
• Due to inter-transfer between equity accounts
• Any increase or decrease in these accounts may be mainly because of two reasons
• Due to transactions with Owners
• Due to Business Transactions
• The major item affecting corporate equity due to business transactions is income or loss
for the year which increases or decreases unappropriated profits. The income or loss
can comes through income statement
• However, there are certain business items that bypass income statement but they affect
shareholders’ equity. Example is revaluation surplus.
• This means income statement do not explain and show all increases or decreases in
shareholders’ equity due to business reasons
• These items are known as Other comprehensive Income as they are due to business
reasons and do change shareholders’ equity, but not part of income statement
• Accounting standards require companies show other comprehensive income also
alongside income statement
Comprehensive Income
All changes in equity during a period except those resulting
from investments by owners and distributions to owners.
Includes:
 all revenues and gains, expenses and losses reported

in net income, and
 all gains and losses that bypass net income but affect
stockholders’ equity (known as other comprehensive
income)
LO 8 Explain how to report other comprehensive income.

Income Statement (in thousands) Other Comprehensive
Sales
Cost of goods sold
$ 285,000
149,000 + Income
Gross profit 136,000  Unrealized gains and
Operating expenses:
losses on available-for-
Selling expenses 10,000
Administrative expenses 43,000
sale securities.
Total operating expense 53,000  Translation gains and
Income from operations 83,000 losses on foreign
Other revenue (expense):
currency.
Interest revenue 17,000
Interest expense (21,000)  Revaluation Surplus
Total other (4,000)
 Plus others
Income before taxes 79,000
Income tax expense 24,000 Detailed discussion of other comprehensive
Net income $ 55,000 income items is beyond the scope of your
syllabus
Review
Gains and losses that bypass net income but affect
stockholders' equity are referred to as
a. comprehensive income.
b. other comprehensive income.
c. prior period income.
d. unusual gains and losses.

Companies must display the components of other
comprehensive income in one of two ways as per IFRS:
1. A second separate income statement;
2. A combined income statement of comprehensive

income; or

Special Reporting Issues
Illustration 4-19
Second income
statement
LO 8
Special Reporting Issues
V. Gill Inc.
Combined Statement of Comprehensive Income
Combined
statement Sales revenue $ 800,000
Cost of goods sold 600,000
Gross profit 200,000
Operating expenses 90,000
Net income 110,000
Unrealized holding gain, net of tax 30,000
Comprehensive income $ 140,000
LO 8
Comprehensive Reporting Income in Pakistan
• Let’s Review
• Sitara Chemical 2019
• Shell Pakistan 2019
• Lucky Cement 2020
Statement of Changes in Equity
• Recall the financial statement “Owners’ Equity Statement”

• Starts with opening balances of all equity accounts
• Shows movements (+/-) for the year
• Closes on closing balances of all equity accounts
• The closing line as such is the Owners’ Equity Statement
• The closing balances appear in the balance sheet
• Opening balances should appear in the last year balance sheet
• As such this statement is also for the period rather than on a date
• Starts with opening balances of all equity accounts

• Shows movements (+/-) for the year
• Closes on closing balances of all equity accounts
• The changes may come from
• Comprehensive Income (Income and Other Comprehensive Income)
• Other transactions usually with owners’ like
• Issue of new shares
• Dividends
• Treasury shares, sale or purchase
• Transfer between equity accounts
• Let’s Review
• Sitara Chemical 2019
• Shell Pakistan 2019
• Lucky Cement 2020
• Note how the opening balances have been restated due to correction
of prior period errors or change in accounting policy

9.1 Corporate Equity Accounting I

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9.1 Corporate Equity Accounting I

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“Keep away from prohibited things and

you will be among the best of

The great piety is to keep away from sins,

Corporations: Organization and Capital

 Role of ICAP, ICMAP

SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

Transferable Shareholders may

SO 1 Identify the major characteristics of a corporation.

Ability to Acquire Corporation can

SO 1 Identify the major characteristics of a corporation.

Continuous Life Continuance as a

SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

SO 3 Record the issuance of common stock.

/ Ord. Shares Capital

/ Ord. Shares Premium

/ Total Shareholders’ Equity

SO 3 Record the issuance of common stock.

SO 3 Record the issuance of common stock.

Organizational expense 5,000

SO 3 Record the issuance of common stock.

SO 3 Record the issuance of common stock.

SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

1. Vote in election of board of

2. Share the corporate earnings

SO 1 Identify the major characteristics of a corporation.

3. Keep the same percentage ownership when new

* A number of companies have eliminated the preemptive right.

SO 1 Identify the major characteristics of a corporation.

4. Share in assets upon liquidation in proportion to

SO 1 Identify the major characteristics of a corporation.

PAR VALUE PAR VALUE

SO 1 Identify the major characteristics of a corporation.

Does this requires any entry?

SO 1 Identify the major characteristics of a corporation.

SO 1 Identify the major characteristics of a corporation.

SO 2 Differentiate between paid-in capital and retained earnings.

01/12 Bank 1,280,000

15/12 Shares Applications 800,000

21/12 Shares Applications 480,000

No entry on 22nd December as shares capital has

Features often, but not necessarily associated with preferred

Accounting for preferred stock at issuance is similar to

Illustration: Stine Corporation issues 10,000 shares of

SO 5 Differentiate preferred stock from common stock.

Treasury stock - corporation’s own stock that it

SO 4 Explain the accounting for treasury stock.

Purchase of Treasury Stock

Treasury stock is a contra stockholders’ equity (just like

Purchase of treasury stock reduces stockholders’ equity.

SO 4 Explain the accounting for treasury stock.

Illustration: On February 1, 2008, Mead acquires 4,000

SO 4 Explain the accounting for treasury stock.

Stockholders’ Equity with Treasury stock

Both the number of shares issued (100,000), outstanding (96,000), and

SO 4 Explain the accounting for treasury stock.

SO 4 Explain the accounting for treasury stock.