14.2 Corporate Earnings and Dividends

‘O Allah indeed I ask You for
beneficial knowledge, and a good

Halal provision, and actions which
are accepted.’
Corporate Accounting: Earnings &

Retained Earnings
Some slides have been taken from Weygandt, Keiso, Kimmel Accounting Principle
Chapter
14-1
Study Objectives
1. Retained Earnings
2. Dividends
3. Statement of Changes in Equity
4. Balance Sheet & Income Statement
5. EPS
Chapter
14-2
Accounting Entry for Retained Earnings
 ?
Chapter
14-3
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 .
Chapter
14-4 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:
Giving out shares of other investee companies
Giving out company’s products
…
Chapter
Accounting Entry for Cash Dividends
 When dividends BECOME DUE, entry should

be
 Retained Earnings
 Dividends Payable
On Payment
 Dividend Payable
 Cash / Bank
Chapter
14-14
Accounting Entry for Cash Dividends
 When dividends BECOME DUE

 Four dates are important
 Accounting Year closure (period closure)
 Results Announcement (BOD Meeting / Dividend
Declaration)
 AGM and Book Closure
 DW Dispatch
Chapter
14-15
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 Rem
to profits and dividends, via fax or email to stock regul
exchange, after the same being approved (accounts)/ or Pak
recommended (dividends) in BOD meeting appro
• Sensitive event for market price as shareholders’
expectations might not be made in eother direction
• No entry for dividends
Chapter
• Shareholder’s meeting [usually AGM] / Approval Date

Date on which shareholders meet to approve dividends
• Entry for dividends is made
• Also known as Book closure date(s) as share transfer books
are closed and shareholders lock for dividends
• Shares trading between BOD meeting date and AGM are
traded On-Dividend, that is, they carry dividends with them
in their price
• Shares trading after AGM (Book closure date) are traded
Ex-Dividend, that is, the dividend is not carried in their
price
Chapter
• Dividend Payment Date

• What entry should be made?
Chapter
Dividends
Cash Dividends
As such, 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?
Retained earnings 50,000

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
Size of Stock dividend determines its accounting treatment in US but not in

Pakistan
In US: Small stock dividend (less than 20–25% of the corporation’s issued stock, recorded
at fair market value)
*
In US: 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
H H In c .
B ala nce S he et (partial)
S to ckh o ld ers' eq u ity
P a id-in capita l
C om m on stock, $ 1 p ar, 5,000 issue d
and outstanding $ 5,000
C o m m o n sto ck d iv id en d s d is trib u tab le 500
P a id-in capita l in excess of par 64,500
Re tained earnings 90,000
T o tal sto ckh o ld ers' eq u ity $ 160,000
Chapter
Dividends
Effects of Stock Dividends

HH Inc. Before After Net
Dividend Dividend Change
Stockholders' equity
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
Dividends
Stock Dividends
As such, 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 unissued shares
3. A declaration of dividends by the Board of

Directors and approval by shareholders in AGM.
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 this
company. What’s your wealth?
Chapter
14-29
Not covered for
 If the company earned an income of Rs.200 during

year 2011, then S H E on 31-12-2011
Common Stock Rs. 500
Premium 100
Retained Earnings 500 [300 old + 200 income]
Total 1100
Book Value: 22
 What’s your wealth?

 Your wealth increased as a result of company earning
income and you holding shares for one year
Chapter
14-30
Not covered for
year 2011, then S H E on 31-12-2011
Common Stock Rs. 500 500 Cash
Premium 100
100 div.
Total 1100 300 paid
900 200
Book Value: 22
 Assume the company pays out Rs.200 as cash dividends,

how the S H E would change; what’s your wealth ?
 Shares Value + Cash Received
Chapter
14-31
Not covered for
year 2011, then S H E on 31-12-2011
Common Stock Rs. 500 700 Stock
Premium 100 100 div.
300 issued
Total 1100
1100 200
Book Value: 22
 Assume the company pays out Rs.200 as stock

dividends, what’s your wealth ?
 Shares Value = New number of shares x new BV
Chapter
14-32
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
14-33
Presenting Stock Dividends
• Known as Bonus Shares in Pakistan
• May be presented as total Value, per share
value or percentage
• Example: OSC 300, OSP 200, RE 400 (250
opening + income for the year was 150)
• Total dividend PKR 100
• Dividend Rate = 33.33%
• Dividend per share = I for 3 stock dividend
• Divided payout = 66.67%
• What else do you need for dividends yield?
Chapter
Dividends
Not covered for
Stock Split assessment purposes
Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of

shares.
Chapter
Dividends
Notissued
Illustration: HH Inc. has 5,000 shares coveredand
for
assessment
outstanding. The per share par value is Rs.1,purposes
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
Not covered for
assessment purposes
Chapter
14-37
Dividends
Not covered for
Effects of Stock Splits assessment purposes
HH Inc. Before After Net
Split Split Change
Stockholders' equity
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
14-39 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
Chapter
14-41
Capital And Revenue Reserves
 Another 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
(appropriated) or unappropriated earnings
 Revenue Reserves are almost always created from
Chapter
14-42 Retained 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
For the Year Ended December 31, 2010
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
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 of Changes in Equity
 Balance Sheet Statement of

Changes in Equity
 Assets …
 Liabilities …
 Shareholders’ Equity 2021 2020
 O Shares Capital Rs. 500 +- 600
O Shares Premium 100 +- 150
Retained Earnings 300 +- 460
Revaluation Surplus 400 +- 500
… …… ……
Total 1500 1860
Chapter
14-48
SCE
 Reflections
 See SCE Lucky
 See SCE Sitara
 See SCE Shell
 See SCE UDL
Chapter
14-49
Statement Analysis and Presentation
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
14-51 SO 5 Compute Earnings Per Share.
Statement Analysis and Presentation
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
14-52 SO 5 Compute Earnings Per Share.

14.2 Corporate Earnings and Dividends

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14.2 Corporate Earnings and Dividends

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‘O Allah indeed I ask You for

beneficial knowledge, and a good

Corporate Accounting: Earnings &

A distribution of cash or stock to stockholders

Dividends can be mentioned

Dividends can be mentioned

What kind of property dividends a company pay?

1. Cash dividends. 3. Stock dividends.

 When dividends BECOME DUE, entry should

 When dividends BECOME DUE

The following dates and events are important in

Q: What’s the frequency of financial reporting for

The following dates and events are important

• Dividends Declaration (Results Announcement)

The following dates and events are important

• Shareholder’s meeting [usually AGM] / Approval Date

The following dates and events are important

• Dividend Payment Date

1. Retained earnings - Payment of cash dividends

3. A declaration of dividends by the Board of

Retained earnings 50,000

January 20 (Payment Date)

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.

Size of Stock Dividends

Size of Stock dividend determines its accounting treatment in US but not in

Illustration: HH Inc. has 5,000 shares issued and

10% stock dividend is declared / approved

Stockholders’ Equity with Dividends Distributable

Effects of Stock Dividends

1. Retained earnings - Payment of cash dividends

2. Adequate unissued shares

3. A declaration of dividends by the Board of

Common Stock Rs. 500

 Let market value = book value (reasonable

 If the company earned an income of Rs.200 during

 What’s your wealth?

 Assume the company pays out Rs.200 as cash dividends,

 Assume the company pays out Rs.200 as stock

Reduces the market value of shares.

No entry recorded for a stock split.

Decrease par value and increase number of

2 for 1 Stock Split

No Entry -- Disclosure that par is now Rs.0.50

Outstanding shares 5,000 10,000

Retained earnings is net income that a company

Net income increases Retained Earnings and a

Retained earnings is part of the stockholders’

A negative (debit) balance in Retained Earnings

Restrictions can result from:

In Pakistan usually we make entries as follows:

 We studied that Corporate Equity is made up

Corrections treated as prior period adjustments

Balance, January 1 $ 1,050,000

Balance, January 1, as previously reported $ 1,050,000

 Balance Sheet Statement of

Income Statement Analysis

Net Income minus

This ratio indicates the net income earned by each

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