ACCT 2610 Lecture 19: Reporting and Interpreting Owners' Equity

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Course Code
Accounting ACCT 2610
Lemayian Zawadi

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Lecture 21-22: Reporting and Interpreting Owners’ Equity I. Owner’s Equity A. Intro to Owners’ Equity 1. Accounting Equation a. Assets = Liabilities + Stockholder’s Equity b. Stockholder’s Equity = shareholder’s equity = owners’ equity 2. Ownership Structures a. Sole proprietorships (single owner) b. Partnerships (more than one owner/partner) c. For both sole proprietorships and partnerships: • Unincorporated business entities • For legal purposes, the owner and the business are not separate entities • For accounting purposes, the entity and the owner are separate entities d. Corporations (can have many owners called stockholders) • Incorporate under the laws of a particular state • For legal purposes, the owners are separate from the corporation • A corporation owns assets, incurs liabilities, can enter into contracts, etc. 3. Organizational Structure B. Common Stock 1. Types of Shares a. Authorized shares • The maximum number of shares a corporation can legally sell to investors b. Issued shares • The total number of shares a corporation has sold to investors c. Outstanding shares • The total number of shares currently held by investors d. If a corporation repurchases shares from investors the shares are still issued but not outstanding e. If there is no APIC account, likely because that company simply doesn’t issue shares with par value f. When assessing how well the corporation is doing, many people examine the earnings per share number and compare it to what analysts are forecasting 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 • 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 # 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 g. Common stock • Basic voting stock issued by the corporation, “owners” of the corporation h. Treasury stock • The corporations’ own stock that has been issued but has subsequently been repurchased by the corporation i. Preferred stock • Stock that has specific rights over common stock 2. Benefits of common stock ownership a. A voice in management – vote in stockholders’ meetings on major issues concerning management of the corporation b. Dividends – receive a proportional share of the distribution of profits c. Residual Claim – receive a proportional share of the distribution of remaining assets upon the liquidation of the company 3. Initial sale of stock a. The first sale of stock to the public is called an initial public offering (IPO) b. All subsequent sales of stock to the public are typically called seasoned equity offerings (SEO) c. Most IPOs and SEOs are used to raise cash for the corporation d. Recording the JE • Dr. Cash, Cr. APIC and Common Stock e. Par Value is the legal capital per share and has no relation to the market value of the common stock • CS = par value * # shares issued, Cash = price * # shares issued • APIC = difference f. JE If a stock has no par value • Dr. Cash, Cr. Common Stock 4. Sale of stock in secondary markets a. When a stock is sold in the secondary market, a corporation should make no journal entry b. The corporation did not give or receive or give up anything in the transaction c. Company still looks at stock prices for company valuation • Also an important metric if CEO or upper manager compensation based on share price/performance 5. Stock issued for employee compensation a. A company may want to issue stock for employee compensation because: • Shareholders want the stock price to increase • To make sure that employees have the same incentives (to do better for firm), they can be given stock based compensation • Most companies offer stock options to their employees b. A stock option gives the holder the right to purchase the stock at a specified price (strike price) regardless of what the stock is currently trading for • Accounting for stock based compensation is beyond the scope of this class • Option is only valuable if price in market is greater than exercise price for options 6. Treasury Stock (repurchase of stock) a. Treasury stock is stock that was previously issued and outstanding but has been repurchased by the corporation b. A company might want to repurchase stock: • To signal that the company is undervalued • To provide shares of stock for an employee bonus plan c. Remember: Outstanding shares = issued – repurchased (treasury) stock d. Treasury stock is recorded based on the repurchase price of the shares and is recorded with the following journal entry • Dr. Treasury Stock (purchase price * # shares repurchased), Cr. Cash • Treasury stock is a contra equity account, NOT an asset e. If treasury stock is resold for more than the repurchase price, then the following jour
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