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1. Special Types of Liabilities I. Bonds a. Characteristics of Bonds b. Issuance of Bonds Payable c. Types of Bonds d. Advantages of Bonds e. Issuance of Bonds In Between Interest Dates f. Present Value g. Setting Up The Bond Prices h. Prices After Issuance i. Early Retirement ii. Lease Payment Obligations a. Operating Lease b. Capital Lease c. Comparison With Operating Lease d. Leveraged Lease iii. Liabilities For Pensions And Other Postretirement Benefits a. Pension b. Types of Pensions c. Post Retirement Benefits Other Than Pensions iv. Deferred Income Tax v. Commercial Paper vi. Loss Contingencies vii. Understatement of Liabilities/Frauds in Liabilities 2. Special Equity Transactions i. Stock Split ii. Stock Buy Back a. The “Why” of Stock Buy Back b. Conclusion iii. Treasury Stock a. Accumulated Other Comprehensive Income 2. Reporting Unusual Events i. Discontinued Operations ii. Extraordinary Items iii. Unusual Events In Marketing iv. Unusual Situations Created By Media v. Unusual Events At Cash Reserves 01 01 01 04 04 07 07 07 08 08 08 09 09 09 10 10 11 11 11 12 12 12 12 13 14 14 14 15 15 16 20 21 21 21 23 23 23

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In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals. Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds. Bonds must be repaid at fixed intervals over a period of time. Bonds and stocks are both securities, but the major difference between the two is that stockholders have an equity stake in the company (i.e., they are owners), whereas bondholders have a creditor stake in the company (i.e., they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity).

These are some of the most important characteristics of bonds: Nominal, principal or face amount — the amount on which the issuer pays interest, and which, most commonly, has to be repaid at the end. Some structured bonds can have a redemption amount which is different to the face amount and can be linked to performance of particular assets such as a stock or commodity index, foreign exchange rate or a fund. This can result in an investor receiving less or more than his original investment at maturity. Issue price — the price at which investor’s buy the bonds when they are first issued, which will typically be approximately equal to the nominal amount. The net proceeds that the issuer receives are thus the issue price, less issuance fees. Maturity date — the date on which the issuer has to repay the nominal amount. As long as all payments have been made, the issuer has no more obligations to the bond holders after the maturity date. The length of time until the maturity date is often referred to as the term or tenor or maturity of a bond. The maturity can be any length of time, although debt securities with a term of less than one year are generally designated money market instruments rather than bonds. Most bonds have a term of up to thirty

These have very strict covenants.S. This is mainly the case for high-yield bonds. which are construed by courts as contracts between issuers and bondholders. the issuer has to pay a premium. As these bonds are more risky than investment grade bonds. restricting the issuer in its operations. and some even do not mature at all. which means that they pay a coupon every six months. 3. These bonds are referred to as callable bonds. Long term (bonds): maturities greater than ten years. The quality of the issue. that is. On coupon dates the bond holder would give the coupon to a bank in exchange for the interest payment. (Note: . while covenants are the clauses of such an agreement. Indentures and Covenants — an indenture is a formal debt agreement that establishes the terms of a bond issue. see call option. Callability — some bonds give the issuer the right to repay the bond before the maturity date on the call dates. such as actions that the issuer is obligated to perform or is prohibited from performing. In the U. and Europe. the issuer can repay the bonds early. 2. Coupon dates — the dates on which the issuer pays the coupon to the bond holders. Treasury securities. 2. with amendments to the governing document generally requiring approval by a majority (or super-majority) vote of the bondholders. It can also vary with a money market index. federal and state securities and commercial laws apply to the enforcement of these agreements. or it can be even more exotic.K. the so called call premium. These bonds are also called junk bonds. Short term (bills): maturities up to one year. The terms may be changed only with great difficulty while the bonds are outstanding. In the market for U. Some bonds have been issued with maturities of up to one hundred years. it grants option-like features to the holder or the issuer: 1. which influences the probability that the bondholders will receive the amounts promised. there are three groups of bond maturities: 1.3|P ag e years. a market developed in Euros for bonds with a maturity of fifty years. Usually this rate is fixed throughout the life of the bond. To be free from these covenants. 2. In early 2005. most bonds are semi-annual. The name coupon originates from the fact that in the past. Covenants specify the rights of bondholders and the duties of issuers.S.. Optionality: Occasionally a bond may contain an embedded option. 1. see put option. Coupon — the interest rate that the issuer pays to the bond holders. physical bonds were issued which had coupons attached to them. investors expect to earn a higher yield. at the due dates. Most callable bonds allow the issuer to repay the bond at par. In the U. This will depend on a whole range of factors. such as LIBOR. and also in the U. Medium term (notes): maturities between one and ten years. With some bonds. High yield bonds are bonds that are rated below investment grade by the credit rating agencies. Putability — some bonds give the holder the right to force the issuer to repay the bond before the maturity date on the put dates.S. but only at a high cost.

Call dates and put dates—the dates on which callable and putable bonds can be redeemed early. alternatively. Sinking fund provision of the corporate bond indenture requires a certain portion of the issue to be retired periodically. d) A death put is an optional redemption feature on a debt instrument allowing the beneficiary of the estate of the deceased to put (sell) the bond (back to the issuer) in the event of the beneficiary's death or legal incapacitation. . a) A Bermudan callable has several call dates. usually coinciding with coupon dates. Also known as a "survivor's option". There are four main categories. or.4|P ag e "Putable" denotes an embedded put option. then the remainder is called balloon maturity. If that is not the case. b) A European callable has only one call date. Issuers may either pay to trustees. c) An American callable can be called at any time until the maturity date. then return them to trustees. The entire bond issue can be liquidated by the maturity date. purchase bonds in open market. This is a special case of a Bermudan callable.) 3. "Puttable" denotes that it may be putted. which in turn call randomly selected bonds in the issue.

a bond that does not have a certain line of income or piece of property or equipment to guarantee repayment of principal upon the bond's maturity. The most common process of issuing bonds is through underwriting. Primary issuance is arranged by bookrunners who arrange the bond issue. Convertible bond lets a bondholder exchange a bond to a number of shares of the issuer's common stock. Zero-coupon bonds may be created from fixed rate bonds by a financial institution . The coupon rate is recalculated periodically. TYPES OF BONDS Fixed rate bonds have a coupon that remains constant throughout the life of the bond. companies and supranational institutions in the primary markets. speculative grade bond or junk bond) is a bond that is rated below investment grade at the time of purchase. An example of zero coupon bonds is Series E savings bonds issued by the U. These bonds have a higher risk of default or other adverse credit events. The bookrunners willingness to underwrite must be discussed prior to opening books on a bond issue as there may be limited appetite to do so. However government bonds are instead typically auctioned. a high yield bond (non-investment grade bond. More specifically bonds which are secured by the pledge of specific assets are called mortgage bonds. The security firm takes the risk of being unable to sell on the issue to end investors.. A mortgage bond is a bond backed by a pool of mortgages on a real estate asset such as a house. one or more securities firms or banks. Debenture bonds refers specifically to an unsecured corporate bond. In underwriting. For example the coupon may be defined as three month USD LIBOR + 0. In reality. government. have the direct contact with investors and act as advisors to the bond issuer in terms of timing and price of the bond issue. the financial crisis tested the willingness of the securities firms to actually perform underwriting. They are issued at a substantial discount to par value. Floating rate notes (FRNs) have a variable coupon that is linked to a reference rate of interest. Exchangeable bond allows for exchange to shares of a corporation other than the issuer. i.e. In finance. The bondholder receives the full principal amount on the redemption date. typically every one or three months. but typically pay higher yields than better quality bonds in order to make them attractive to investors.S. so that the interest is effectively rolled up to maturity (and usually taxed as such).5|P ag e ISSUANCE OF BONDS PAYABLE Bonds are issued by public authorities. such as LIBOR or Euribor. Zero-coupon bonds pay no regular interest. credit institutions. forming a syndicate. buy an entire issue of bonds from an issuer and re-sell them to investors.20%.

However. as the principal amount grows. the person who has the paper certificate can claim the value of the bond. Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the U. Especially after federal income tax began in the United States. After they have been paid. and assetbacked securities. . government. See IO (Interest Only) and PO (Principal Only). Inflation linked bonds. The most famous of these are the UK Consols. Bearer bond is an official certificate issued without a named holder. corporations stopped issuing bearer bonds in the 1960s. Bearer bonds are very risky because they can be lost or stolen. Some ultra-long-term bonds (sometimes a bond can last centuries: West Shore Railroad issued a bond which matures in 2361 (i. there is a hierarchy of creditors. In other words. the subordinated tranches later.S. Examples of asset-backed securities are mortgage-backed securities (MBS's). The interest rate is normally lower than for fixed rate bonds with a comparable maturity (this position briefly reversed itself for short-term UK bonds in December 2008). Some of these were issued back in 1888 and still trade today. the risk is higher. subordinated bonds usually have a lower credit rating than senior bonds. Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation. Often they are registered by a number to prevent counterfeiting. the payments increase with inflation. added value) or on a country's GDP. the U. collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs). etc. In other words. in which the principal amount and the interest payments are indexed to inflation.6|P ag e separating "stripping off" the coupons from the principal. Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets. The main examples of subordinated bonds can be found in bonds issued by banks. U. The latter are often issued in tranches. although the amounts are now insignificant. The senior tranches get paid back first. then government taxes. the subordinated bond holders are paid. bearer bonds were seen as an opportunity to conceal income or assets. 24th century)) are virtually perpetuities from a financial point of view.S. the separated coupons and the final principal payment of the bond may be traded separately.S. but may be traded like cash. Other indexed bonds. As a result. They have no maturity date. First the liquidator is paid. The United Kingdom was the first sovereign issuer to issue inflation linked Gilts in the 1980s. In case of bankruptcy. The first bond holders in line to be paid are those holding what is called senior bonds.e. which are also known as Treasury Annuities or Undated Treasuries. with the current value of principal near zero. Therefore. Perpetual bonds are also often called perpetuities. for example equity-linked notes and bonds indexed on a business indicator (income.

S. a $100.000. 5-year serial bond would mature in a $20. Territory. Revenue bonds are typically "non-recourse. Serial bond is a bond that matures in installments over a period of time. Some book-entry bond issues do not offer the option of a paper certificate. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued. Some of these redemptions will be for a higher value than the face value of the bond. In effect. Book-entry bond is a bond that does not have a paper certificate. and state and local tax-exempt bearer bonds were prohibited in 1983. but the issuer will redeem randomly selected individual bonds within the issue according to a schedule. the bond holder has no recourse to other governmental assets or revenues. Municipal bond is a bond issued by a state.000 annuity over a 5-year interval. Lottery bond is a bond issued by a state. usually a European state. city. are sent to the registered owner. Revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds." meaning that in the event of default. Registered bond is a bond whose ownership (and any subsequent purchaser) is recorded by the issuer.7|P ag e Treasury stopped in 1982. Interest payments. It is the alternative to a Bearer bond. issuers (and banks that used to collect coupon interest for depositors) have tried to discourage their use. Interest is paid like a traditional fixed rate bond. War bond is a bond issued by a country to fund a war. . or their agencies. U. although municipal bonds issued for certain purposes may not be tax exempt. even to investors who prefer them. or by a transfer agent. and the principal upon maturity. As physically processing paper bonds and interest coupons became more expensive. local government.

Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful "like to like" basis. Investors would not pay Rs. PRESENT VALUE Present value is the value on a given date of a future payment or series of future payments. but they would prefer to purchase even a bond which is priced less than Rs. however. because they would receive no return on their investment over the next ten years. 10. This practice enables the corporation to pay a full six months’ interest on all bonds outstanding at the semiannual interest payment date. bonds are often issued between the specified interest dates.000 ten years from today but will pay no interest in the mean time. Assume for example that a bond will have a maturity value of Rs. The investor is then required to pay the interest accrued to the date of issuance in addition to the stated price of the bond. discounted to reflect the time value of money and other factors such as investment risk. The accrued interest collected from investors who purchase bonds between interest payment dates is thus returned to them on the next interest payment date. DIRECT OPERATIONS This term is used when a central bank purchases bonds directly from its government. So the present value of a future cash receipt is the amount that an investor will pay today for the right to receive that future payment. are not subjected to subtraction in figuring out taxable earnings. 10. .000 from where they could at least expect some return in the form of interest.000 for this bond today. Direct operations work as follows: Governments typically sell bonds when their expenditures exceed revenue from taxes. Its concept is completely based on time value of the money ––– the idea that receiving money today is preferable to receiving money at some later date. Dividends paid to stockholders.8|P ag e ADVANTAGES OF BONDS TAX ADVANTAGE A prime advantage of raising money by issuing bonds instead of stock is that interest disbursements are deductible in formatting income focusing to corporate income taxes. ISSUANCE OF BONDS IN BETWEEN INTEREST DATES The semiannual interest dates are printed on the bond certificates. 10. TRANSFERENCE Corporate bonds can be transferred or traded just like company’s capital stock shares. However.

as interest rates change.e. Duration is a linear measure of how the price of a bond changes in response to interest rate changes. . see Bond duration closed-form formula.is done with reference to other instruments. duration can be formulated as the first derivative of the price function with respect to the interest rate. Continuing the above example. by its convexity. So a 15-year bond with a duration of 7 would fall approximately 7% in value if the interest rate increased by 1% per annum. the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate. The principle reason for retiring bonds early is to relieve the issuing corporation of the obligation to make future interest payments. and. additionally. This fluctuation in the overall price curve generally refers to as “Volatility of Short-term and long-term bonds”. for a more accurate estimate of sensitivity. Bond convexity closedform formula). Convexity is a measure of the "curvature" of price changes.e. and convexity as the second derivative. yield) movements is measured by its duration. in reality. which relate the price of the bond to its coupons. Determining this rate in practice . PRICES AFTER ISSUANCE The sensitivity of a bond's market price to interest rate (i. duration is a linear measure. "pricing" the bond . Once the price or value has been calculated. the price is a convex function of interest rates. whereas. and may be thought of as the elasticity of the bond's price with respect to interest rates. If interest rate decline to the point that a corporation can borrow at an interest rate below that being paid on a particular bond issue. (Specifically.9|P ag e SETTING UP THE BOND PRICES Bond valuation is the process of determining the fair price of a bond. the sensitivity of the price can then be estimated. the convexity score would be added to the value of 7 for duration. can also be determined. and is thus a complement to duration. for small interest rate changes. For example. EARLY RETIREMENT Sometimes bonds are retired before the maturity date. the duration is the approximate percentage by which the value of the bond will fall for a 1% per annum increase in market interest rate. The necessity for this additional measure arises since. Hence. the value of a bond is determined by discounting the bond's expected cash flows to the present using the appropriate discount rate. as mentioned. the various yields. the corporation may benefit from retiring those bonds and issuing new bonds at a lower interest rate. As with any security or capital investment.i. It is approximately equal to the percentage change in price for a given change in yield.

LEASE PAYMENT OBLIGATIONS A lease is a contract conferring a right on one person (called a tenant or lessee) to possess property belonging to another person (called a landlord or lessor) to the exclusion of the owner landlord. Thus. The lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee. OPERATING LEASE An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner. The right to sub-lease can be expressly prohibited by the main lease.g. and all others except with the invitation of the tenant. an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease. The lessee will pay a series of rentals or installments for the use of that asset. A lease can be for a fixed period of time (called the term of the lease) but (depending on the terms of the lease) may be terminated sooner. The relationship between the tenant and the landlord is called a tenancy. though the terminology would be different. This provides a way to lease a vehicle where the cost of the vehicle is known in advance however. and also assumes the residual value risk of the vehicle. paying the last rental. for example. a ship etc. The lessee has the option to acquire ownership of the asset (e. An operating lease is commonly used to acquire equipment on a relatively short-term basis. vehicle. that is the leasing by a tenant in possession to a sub-tenant. Similar principles apply to sub-leasing. The lessor (finance company) will purchase that asset.) being leased. The lessee will have use of that asset during the lease. and the right to possession by the tenant is sometimes called a leasehold interest. software). sometimes referred to as a "master lease". It is a commercial arrangement where: The lessee (customer or borrower) will select an asset (equipment. In the context of cars and other passenger vehicles. CAPITAL (FINANCE) LEASE A finance lease or capital lease is a type of lease. or bargain option purchase price). under an operating lease the lessor leases the vehicle to the lessee for a fixed monthly amount. The consideration for the lease is called rent or the rental. operating leases can be an expensive option as there is a risk premium priced into the monthly payments.10 | P a g e 2. It is a rental agreement between landlord and tenant. . Similar principles apply to real property as well as to personal property.

paying for maintenance. However the lessee has control over the asset providing them the benefits and risks of (economic) ownership. the lender has rights to the asset and the lease payments if the lessor defaults. The term may also refer to a lease agreement wherein the lessor. COMPARISON WITH OPERATING LEASE A finance lease differs from an operating lease in that: In a capital lease the lessee has use of the asset over most of its economic life and beyond (generally by making small 'peppercorn' payments at the end of the lease term). In a capital lease the lessee has the benefits and risks of economic ownership of the asset (e. risk of obsolescence. In a capital lease the lessor will recover all or most of the cost of the equipment from the rentals paid by the lessee.  In an operating lease the lessor has the benefits and risks of owning the asset. LEVERAGED LEASE A leveraged lease is a lease in which the lessor puts up some of the money required to purchase the asset and borrows the rest from a lender.  In an operating lease the lessee only uses the asset for some of the asset's life.11 | P a g e The finance company is the legal owner of the asset during duration of the lease. . The lender is given a senior secured interest on the asset and an assignment of the lease and lease payments. by borrowing funds from a lending institution. Under the loan agreement.g. finances the purchase of the asset being leased. claiming capital allowances/depreciation). who makes payments to the lender. The lessee makes payments to the lessor.  In an operating lease the lessor will have a substantial investment or residual value on completion of the lease. The lessor pays the lending institution back by way of the lease payments received from the lessee.

Typically this requires payments throughout the citizen's working life in order to qualify for benefits later on. Other vehicles (certain lottery payouts.12 | P a g e 3. usually advantageous to employee and employer for tax reasons. Funding can be provided in other ways. A basic state pension is a "contribution based" benefit. Often retirement plans require both the employer and employee to contribute money to a fund during their employment in order to receive defined benefits upon retirement. LIABILITIES FOR PENSIONS AND OTHER POSTRETIREMENT BENEFITS PENSION In general. . Occupational pensions are a form of deferred compensation. or an annuity) may provide a similar stream of payments. and depends on an individual's National Insurance (NI) contribution history. Pensions should not be confused with severance packages. EMPLOYMENT-BASED PENSIONS (RETIREMENT PLANS) A retirement plan is an arrangement to provide people with an income during retirement when they are no longer earning a steady income from employment. Labor unions. 2. Many pensions also contain an additional insurance aspect. the former is paid in regular installments. It is a tax deferred savings vehicle that allows for the tax-free accumulation of a fund for later use as a retirement income. or other organizations may also fund pensions. Pension plans are therefore a form of "deferred compensation". SOCIAL/STATE PENSIONS Many countries have created funds for their citizens and residents to provide income when they retire (or in some cases become disabled). or self-funded schemes. government agencies. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. such as from labor unions. for example. TYPES OF PENSIONS 1. while the latter is paid in one lump sum. a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. the government. since they often will pay benefits to survivors or disabled beneficiaries.

In addition to the employee's remaining regular pay. 5. LOSS CONTINGENCIES Posting of a future loss that may result from some event or happening (e.13 | P a g e 3. resulting from temporary differences between book (accounting) value of assets and liabilities and their tax value. probable damages from a lawsuit). DISABILITY PENSIONS Some pension plans will provide for members in the event they suffer a disability. In addition. POST RETIREMENT BENEFITS OTHER THAN PENSIONS A severance package is pay and benefits an employee receives when they leave employment at a company. Commercial paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations (for example. meaning a future tax liability or asset. there should be footnote references to the nature of the contingency. or timing differences between the recognition of gains and losses in financial statements and their recognition in a tax computation.g. Loss contingencies that are probable should be booked by a charge to the loss account and a credit to the estimated liability. 6. Medical. . payroll). COMMERCIAL PAPER Commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. it may include some of the following: An additional payment based on months of service Payment for unused vacation time or sick leave. and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. dental or life insurance Stock options 4. This may take the form of early entry into a retirement plan for a disabled member below the normal retirement age. DEFERRED INCOME TAX Deferred income tax is an accounting concept.

Borrow money Cash. Don’t record portable contingent liabilities. Record payables in subsequent periods. Incur payroll and accrued liabilities 3. Fraudulent recording in payments (e. Purchase Inventory ACCOUNTS INVOLVED Inventory. Under record liabilities.g. 7. Don’t record liabilities. 2. Sales Revenue. 4. 12. 5. 14. kiting ) 6. Don’t record purchases. 9. 11. Not record accrued liabilities. Accounts Payable FRAUD SCHEMES 1. 18. 6. Warranty or Service Liability 4. Losses Payable . Record unearned revenues as earned revenues (or vice versa when creating cookie jar reserves). Unearned Revenue Warranty (Service) Expense. Borrow against equities in assets. repay deposits or repurchase something in the future (future commitments) 5. Notes payable. The Table below shows some of the blatant use of the frauds/Understatement: TRANSACTION 1. Sell products Payroll Tax Expense. 15. various accrued liabilities. Not record purchase agreements and commitments. Salaries Payable. 3. Salary Expense. 17. Record accrual in later period. Sell services. Payroll Taxes Payable. Record payments made in later periods as being made in earlier period. various expenses. Mortgages Payable. Accounts Receivable. 2. Borrow from related parties at less than arm’s-length transactions. 8. 16. Write off liabilities as forgiven.14 | P a g e UNDERSTATEMENT OF LIABILITIES/FRAUDS IN LIABILITY The easiest way to identify understatement of liability frauds is to identify the various transactions that involve liabilities. 19. Overstate purchase returns and purchase discounts. Record deposits as revenues. 13. etc. Incur contingent liabilities Loss from contingencies. Not record warranty (service) liabilities. 10. Record contingent liabilities at too low an amount. Claim liabilities as personal debt rather than as debt of the equity.

The problem. it has to go back up to where it was!) This is wrong. Companies often use this method when the stock’s price is especially depressed... It can do this one of two ways: It can tender an offer to existing stockholders to buy up to a certain number of shares at a fixed price (usually at a premium over the current market price). half the earnings. if the stock was at $15. (Their thinking goes "Well. This creates a condition where more of the company's stock is bought and sold (this is called "increased liquidity"). STOCK SPLIT A stock split is essentially when a company increases the number of shares. The Washington Post has traded well into the $600 per share range.15 | P a g e SPECIAL EQUITY TRANSACTION 1. and Berkshire Hathaway. and there was a 2-1 stock split. if you owned 25 shares of XYZ at $15 per share. First. remember that each share now represents half of the equity in the company that it did before the split. 2. . This has created the welcome condition of a stable shareholder base. has traded as high as $150. also called repurchases. which was at $8 a share in the 1960's. For example. and now it's at $7. is that the increased activity will also leads to bigger gains and drops in the stock. There is a time limit on the offer. STOCK BUY BACK When a company announces a stock buyback or repurchase. and half of the assets that it once was. The other way is to buy the shares in the open market over a period. it’s time to take a close look at what’s behind the action. The stock is where it was. and see how they work.50 each. That means that each share is entitled to half the dividend. The company wants to purchase outstanding shares of its stock that is shares held by the public outside of its control. you would then own 50 shares worth $7.50. Why do companies issue splits if you still have the same amount of money? Liquidity. in theory. This financial maneuver can be good news for shareholders or a smokescreen to cover pitiful financial ratios. some companies believe that their stock should be inexpensive so more people can buy it. let’s define stock buybacks. Many investors believe splits are a good thing. A few corporations have been famous for their no-split policies.000. making it more volatile.

Companies can do this either of two ways: as dividends or buy buying up outstanding shares. some of them for the benefit of stockholder. both good and bad that a company might do a stock buyback: If a company is sitting on a large sum of cash and must decide how to invest it. the company makes it more difficult for a raider to take control.16 | P a g e That’s the two main ways it is done. one of the options is to distribute part of it to shareholders. Another reason companies buy back stock is to cover large employee stock option programs. CONCLUSION Stock buybacks can be great for stockholders if done because that is the best use of cash and the price is right. was to dilute the stock and shareholder’s equity. but why would a company want to buy back its own shares? THE “WHY” OF STOCK BUYBACKS There are several reasons a company may want to buy back shares of its own stock. while others have less altruistic purposes. However. the EPS looks better. If a company’s stock is suffering from low financial ratios. Key ratios like earnings per share (EPS) and price earnings ratio (PE) look better because they are based on the number of outstanding shares. If the company chooses to buy up shares. By gathering outstanding shares off the open market. stockholders benefit even if they don’t sell by the reduction in outstanding shares. . Buying back shares reduces dilution and increases shareholder value. Reduce the number of shares and even though earnings don’t change. buying back stock can give some of the ratios a temporary boost. which were out of control during the tech boom of the late 1990s. watch out of financial sleight of hand that seeks to cover up weak ratios or poorly managed employee stock option plans. The effect of these programs. Here are some of the reasons. Some companies buy back shares as protection against unfriendly takeovers from other companies.

800 $50. and (2) the par value method. TREASURY STOCK A corporation may choose to reacquire some of its outstanding stock from its shareholders when it has a large amount of idle cash and. There are two methods of recording treasury stock: (1) the cost method. 1. If a corporation reacquires a significant amount of its own stock. the following entry is made: Treasury Stock 2. For example. 10.000 shares issued.900 shares outstanding Paid-in capital in excess of par . the cost of the shares acquired is debited to the account Treasury Stock.000 Cash 2. the corporation's earnings per share may increase because there are fewer shares outstanding.17 | P a g e 3. the shares are called treasury stock. When a corporation holds treasury stock.000 . Treasury stock reflects the difference between the number of shares issued and the number of shares outstanding.000 $28.common Total Paid-in Capital Retained Earnings Subtotal Less: Treasury Stock.10 par. a debit balance exists in the general ledger account Treasury Stock (a contra stockholders' equity account). $0.000 shares authorized.000 $78. If a corporation reacquires some of its stock and does not retire those shares.000 $76.000 Stockholders' equity will be reported as follows: STOCKHOLDERS' EQUITY PAID-IN CAPITAL Common stock. Under the cost method. in the opinion of its directors. 2.000 $ -2. if a corporation acquires 100 shares of its stock at $20 each. the market price of its stock is too low. at cost (100 shares at $20) Total Stockholders' Equity $200 $49.

800 $270 $50. the cost of the shares sold is credited to the stockholders' equity account Treasury Stock. 1. at cost (70 shares at $20) Total Stockholders' Equity $200 $49. the entry will be: Cash (30 shares at $29 selling price) Treasury Stock (30 at $20 cost) Paid-in Capital from Treasury Stock 870 600 270 Recall that the corporation's cost to purchase those shares at an earlier date was $20 per share. Note that the difference does not go to an income statement account.10 par. is reasonable since the corporation operates with total "insider" information.000 shares authorized. 2.870 . STOCKHOLDERS' EQUITY PAID-IN CAPITAL Common stock.930 shares outstanding Paid-in capital in excess of par . The difference of $9 per share ($29 of proceeds minus the $20 cost) time’s 30 shares was credited to another stockholders equity account.common Paid-in Capital from Treasury Stock Total Paid-in Capital Retained Earnings Subtotal Less: Treasury Stock.000 shares issued.400 $ 76. the cash received is debited to Cash. 10. The $20 per share time’s 30 shares equals the $600 that was credited above to Treasury Stock. (This.000 $ 78. as there can be no income statement recognition of gains or losses on treasury stock transactions. and the difference goes to another stockholders' equity account. the corporation cannot report this "gain" on its income statement. of course. $0.) If the corporation sells 30 of the 100 shares of its treasury stock for $29 per share. Instead the $270 goes directly to stockholders' equity in the paid-in capital section as shown below. This leaves a debit balance in the account Treasury Stock of $1. Although the corporation is better off by $9 per share.400 (70 shares at $20 each).270 $28.270 $– 1.18 | P a g e If the corporation were to sell some of its treasury stock. Paid-in Capital from Treasury Stock.

170 $28.000 shares issued.270 . If the "loss" is larger than the credit balance. 10. As mentioned previously. the stockholders' equity section of the balance sheet appears as follows: STOCKHOLDERS' EQUITY PAID-IN CAPITAL Common stock. To illustrate this rule.common Paid-in Capital from Treasury Stock Total Paid-in Capital Retained Earnings Subtotal Less: Treasury Stock. The corporation now sells 25 shares of treasury stock for $16 per share and receives cash of $400. 1. part of the "loss" is recorded in Paid-in Capital from Treasury Stock (up to the amount of the credit balance) and the remainder is debited to Retained Earnings.000 $ 78.800 $170 $50. $0. and the difference ("loss") is debited to Paid-in Capital from Treasury Stock (so long as the balance in that account will not become a debit balance). the cash received is debited to Cash. the $4 "loss" per share ($16 proceeds minus the $20 cost) cannot appear on the income statement.170 $ -900 $ 77.19 | P a g e If the corporation sells any of its treasury stock for less than its cost. Recall that the cost of the corporation's treasury stock is $20 per share. 2. the entire $100 is debited to that account: Cash (25 shares at $16 selling price) Paid-in Capital from Treasury Stock ("loss") Treasury Stock (25 at $20 cost) $400 $100 $500 After making this entry. let's look at several transactions where treasury stock is sold for less than cost. Instead the "loss" goes directly to the account Paid-in Capital from Treasury Stock (if the account's credit balance is greater than the "loss" amount).10 par.000 shares authorized. Since the $270 credit balance in Paid-in Capital from Treasury Stock is greater than the $100 debit. We will continue with our example from above. at cost (45 shares at $20) Total Stockholders' Equity $200 $49.955 shares outstanding Paid-in capital in excess of par . the cost of the shares sold is credited to Treasury Stock.

common Total Paid-in Capital Retained Earnings Total Stockholders' Equity $200 $49.000 shares issued and outstanding Paid-in capital in excess of par . This $360 is too large to be absorbed by the $170 credit balance in Paid-in Capital from Treasury Stock.000 shares authorized. As a result.800 $50. $0. STOCKHOLDERS' EQUITY PAID-IN CAPITAL Common stock. The debit was applied to Paid-in Capital from Treasury Stock for as much as that account's credit balances. Since the cost of those treasury shares was $900 (45 shares at a cost of $20 each) there will be a "loss" of $360. Let's assume that the remaining 45 shares of treasury stock are sold by the corporation for $12 per share and the proceeds total $540. The difference between the cost of the shares sold and their proceeds was debited to stockholders' equity accounts. 10. the first $170 of the "loss" goes to Paid-in Capital from Treasury Stock and the remaining $190 ($360 minus $170) is debited to Retained Earnings as shown in the following journal entry. Cash (45 shares at $12 selling price) Paid-in Capital from Treasury Stock ("loss") Retained Earnings ("loss" too big for PIC TS) Treasury Stock (45 at $20 cost) 540 170 190 900 Again.000 $27. Any "loss" greater than the credit balance is debited to Retained Earnings. 2. the balance in Treasury Stock becomes a debit of $900 (45 shares at their cost of $20 per share). The stockholders' equity section of the balance sheet now appears as follows.10 par.20 | P a g e After the 25 shares of treasury stock are sold. even though the shares were sold for less than their cost. Now let's illustrate what happens when the next sale of treasury stock results in a "loss" and it exceeds the credit balance in Paid-in Capital from Treasury Stock. The Paid-in Capital from Treasury Stock now shows a credit balance of $170.810 . no income statement account was involved with the sale of treasury stock.810 $77.

and unrealized gains and losses on certain investments. 2.000 $85. These items involve things such as foreign currency transactions.000 shares issued and outstanding Paid-in capital in excess of par .000. hedges. STOCKHOLDERS' EQUITY PAID-IN CAPITAL Common stock. Notice that it is reported separately from retained earnings and separately from paid-in capital.810 $8. pension liabilities.800 $50. 10. These items are not common to most corporations.000 $27.21 | P a g e ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income refers to income not reported as net income on a corporation's income statement.10 par. Below is an example of the reporting of Accumulated Other Comprehensive Income of $8. $0.810 .000 shares authorized.common Total Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Total Stockholders' Equity $200 $49.

EXTRAORDINARY ITEMS Extraordinary items include things that are unusual in nature and infrequent in occurrence. For example. but it must be positioned in the main portion of the income statement. The occurrence of atypical items on an income statement is relatively rare and many companies will not have any listed. Sometimes rare or extraordinary events will occur during the income statement's time interval along with the normally recurring events. If an item is unique and significant but it does not meet the criteria for being both "unusual and infrequent. In fact. gains. it's required that you present them in the same order as they appear above (it might help for you to remember the acronym "DEC"). The $40.000 may be shown as a separate line item. Discontinued Operations 2.) 2. oil refinery in that country would be an extraordinary item. Extraordinary Items When recording these items near the bottom of an income statement. 1.000 loss due to a strike by its workers. . expenses. the $40. A loss due to a foreign country taking over a U." the item must remain in the main section of the income statement. A loss due to an earthquake in Wisconsin would certainly be extraordinary. It's helpful to the reader of the statement if these unique items are segregated into a special section near the bottom of either the single-step or multiple-step income statement.22 | P a g e REPORTING UNUSUAL ITEMS/EVENTS Income statements (whether single-step or multiple-step) report nearly all revenues. (Eliminating a small portion of product line does not qualify as a discontinued operation. it can however be shown as a separate line item. such as the sale of an entire division of the company. These unique or rare items are: 1. and losses. it would be most unusual if a company had all three on any given income statement. DISCONTINUED OPERATIONS Discontinued Operations pertain to the elimination of a significant part of a company's business.000 cannot be shown as an extraordinary item since it is not unusual in nature for a strike to occur.S. if a company suffers a $40.

000 $75. and important.000 NON-OPERATING OR OTHER Interest Revenues Gain on Sale of Investments Interest Expense Loss from Lawsuit Total Non-Operating $5. the two unique items would be reduced by the income tax effect associated with each item.23 | P a g e Two additional examples of situations that do not qualify as extraordinary items are (1) The loss from frost damage to a Florida citrus crop (2) The write-down of inventory from cost to a lower amount. unusual.000 $3. income tax expenses would be part of the income statement.000 .000 $3.500 $6. Below is a multiple-step income statement containing discontinued operations and an extraordinary item.) SAMPLE PRODUCTS CO.500) $6.000 $7. it's not unusual for items in inventory to have a current value lower than its cost. they do not belong in the section containing extraordinary items. Similarly.500 $2. (If this were a corporation. INCOME STATEMENT FOR THE FIVE MONTHS ENDED MAY 31. 2009 Sales Cost of Goods Sold Gross Profit $100. Although these things may be significant.000 $25. Apparently the frost in Florida is not unusual in nature and not infrequent.000 $13.000 OPERATING EXPENSES Selling Expenses Advertising Expense Commissions Expense Administrative Expenses Office Supplies Expense Office Equipment Expense Total Operating Expenses $2.000 $5.000 ($500) ($1.

000 $ 21. The bizarreness of the Publicizing event should not be cared about. UNSUAL EVENTS IN MARKETING: Unusual events in marketing concerned with creating new intriguing. 2. It’s quite a blow for the company. And the more unusual the event. It’s a great way to start a market campaign by conducting unusual marketing events. one problem that can damage a business entity’s image is media.000 ($4. This is where the items should appear on both single-step and multiple-step statements. because what seems unusual or even outlandish to one person will seem attractive and intriguing to the next. unique and mindattractive ideas for publicizing/marketing a product. Media can create unwanted negative publicity for the organization. UNSUAL SITUATIONS CREATED BY MEDIA: Sometimes during the era of business crisis. over and over again.000 NET INCOME Note that the two unique items are shown near the bottom of the income statement. because such frauds are very difficult to trace before their happenings and in some cases even after. .000) $7. the key is to develop a low cost a lowcost. 3.24 | P a g e Income before Discontinued Operations and Extraordinary Item Discontinued Operations Extraordinary Item $18. UNUSAL EVENTS AT CASH RESERVES: Some unusual events that could might happen at cash reserves of a company or a bank is their embezzlement off the cash. octopus effect events that put your name out in front of as many people as possible. Some other unusual events are listed below: 1. the more likely it’ll get noticed and have high attendance.

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