Chapter 11

The Corporate Form of Business

Organization: Accounting for
Stockholders’ Equity

Slide 11.1
 Chapter 11 Learning
Objectives
Describe the important characteristics, advantages, and
disadvantages of the corporate form of business
organization.
Identify the key rights and privileges of common and
preferred stockholders.
Define the key information needs of decision makers
regarding stockholders’ equity.
Account for the issuance of corporate stock.
Account for treasury stock transactions, cash and stock
dividends, and stock splits.
Discuss key control activities for stockholders’ equity.
Compute and interpret return on equity.

Slide 11.2
 Corporation:

. . . an artificial being, invisible,

intangible, and existing only in
contemplation of law.

Or,

. . . an association of individuals
created by law and having an
existence apart from its owners as
well as distinct and inherent powers
and liabilities.

Slide 11.3
 Key Advantages and
Disadvantages of the Corporate
Form of Business Organization
Advantages Disadvantages
Limited liability of Double taxation of
stockholders corporate profits
Continuity of existence Extensive regulatory
Ease of transferring oversight
ownership interests Potentially higher level
Access to equity capital of credit risk
Professional
Management

Slide 11.4
Take “stock” of these
terms . . .
Common stock
Preferred stock
Authorized stock
Issued stock
Outstanding stock
Treasury stock
Par value
Stated value

Slide 11.5
 Common stockholders
have the right to . . .

share in the residual assets of a

corporation when it is liquidated
share proportionately in common stock
dividends
maintain their fractional ownership
interest (the “preemptive right”)
vote on key matters facing a
corporation

Slide 11.6
 Preferred stockholders
generally have the right to . . .
receive an annual dividend
before common
stockholders are paid a
dividend
receive the liquidation value of
their stock (upon the
termination of a corporation)
before common stockholders
receive any distribution

Slide 11.7
Preferred stock . . .
optional features

Cumulative
Callable
Convertible

Slide 11.8
 Stockholders’ Equity: Key
Information Needs of Decision
Makers
Stockholder rights and
privileges: particularly
important for
preferred stock
Earnings data: used to evaluate a firm’s
profitability and to forecast its future
profits
Dividend information: key concern of
investors . . . “How much cash will
an investment generate for me in the
future?”

Slide 11.9
 Accounting for
Stockholders’ Equity

Stockholders’ equity
on the corporate
balance sheet
Issuance of corporate stock
Cash dividends
Stock dividends
Stock splits

Slide 11.10
 Stockholders’ Equity on the
Corporate Balance Sheet

Maine Public Service Company

Common Stock, $7 par value:

Authorized 3,000,000 shares;
Issued 1,867,250 shares $13,070,750
Additional Paid-In Capital 38,317
Retained Earnings 30,697,058
Treasury Stock: 250,000 shares (5,714,376)
Total $38,091,749

Slide 11.11
Computing Book Value per
Share . . .

Book Value
per Share = Common Stockholders’ Equity
Shares of Common Stock Outstanding

Book value per share for Maine

Public Service Company:

Common Stockholders’ Equity: $38,091,749

Shares of Common Stock Outstanding: 1,617,250*
Book Value per Share $23.55
*1,867,250 shares issued less 250,000 treasury shares

Slide 11.12
 Sale of Common Stock

1. Collective par value is credited to Common

Stock
2. Difference between proceeds and collective
par value is credited to Additional Paid-In
Capital, Common Stock
3. Example . . . sale of 4,000 shares of $2 par
value common stock for $18 per share:

Cash 72,000
Common Stock 8,000
Additional Paid-In Capital, Common Stock 64,000

Slide 11.13
 Exchange of Common
Stock for a Noncash Asset

1. Either the fair market value of the stock or

the asset, whichever is more evident, is used as
the basis for booking this transaction.
2. Example . . . exchange of 2,000 shares of
untraded $1 par value common stock for a
building with an appraised value of $93,000:

Building 93,000
Common Stock 2,000
Additional Paid-In Capital, Common Stock 91,000

Slide 11.14
 Cash Dividends
Cash dividend: a proportionate
distribution of a company’s prior
earnings to its stockholders made in
the form of cash.

Three necessary conditions for a cash dividend:

1. Sufficient cash
2. Sufficient retained earnings
3. Dividend declaration by the board of directors

Three key dates for a

cash dividend:
1. Declaration date
2. Record date
3. Payment date

Slide 11.15
Cash dividend . . . one example

Company: Gibson, Cobb & Moore, Inc.

Dividend: $1 per share
Declaration date: June 5
Record date: July 16
Payment date July 31
Common shares
outstanding: 480,000

June 5 Dividends 480,000

Dividends Payable 480,000

July 16 No entry

July 31 Dividends Payable 480,000

Cash 480,000

Slide 11.16
“Small” Stock Dividends
Stock dividend:
a proportionate distribution
of a corporation’s own
stock to its stockholders.
Most stock dividends are of the “small”
variety--involve the issuance of 25% or
less additional stock.
A stock dividend does not change a
company’s total stockholders’ equity
. . . or the proportionate ownership interest
of individual stockholders.
A stock dividend may have a positive
economic impact on stockholders . . . if
the stock market “overlooks” it.

Slide 11.17
Small stock dividend . . . one example
Company: Wells Petty, Inc.
Declaration date: May 5
Record date: June 12
Distribution date July 1
Common shares outstanding: 600,000
Dividend size: 5%
Market price, May 5: $25
Par value: $2

May 5 Stock Dividends 750,000

Common Stock Dividend Distributable 60,000
Additional PIC, Common Stock 690,000

June 12 No entry

July 1 C/S Dividend Distributable 60,000

Common Stock 60,000

Slide 11.18
 Key Control Activities for
Stockholders’ Equity

Proper authorization of issuance of

corporate stock by board of directors.
Monitoring compliance with state and
federal securities laws and
regulations.
Maintenance of accurate stockholder
records.

Slide 11.19
 Analyzing Stockholders’
Equity

A key financial ratio used to evaluate a

corporation’s profitability is return on
equity.

Return on Net Income - Preferred Stock Dividends

=
Equity Average Common Stockholders’ Equity

Slide 11.20