AFM 101 Textbook and Lecture Notes on Chapter 12:Reporting and interpreting Owners’ Equity AND ARTICLES .docx

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University of Waterloo
Accounting & Financial Management
AFM 101
Donna Psutka

Notes on Chapter 12 – Reporting and interpreting Owners’ Equity Ownership of a Corporation Benefits of Share Ownership - Management voice - Dividends - Residual claim - Notice of annual meeting is accompanied by a management information (or proxy) circular contains pages of info concerning people nominated to be members of the board of directors, also includes a proxy card Authorized, Issued, and Outstanding Shares - Maximum number of shares it can sell to public is authorized number (oftentimes unlimited) - Issued is number of authorized shares issued - Outstanding shares is total number f shares owned by shareholders on any particular date Earnings per share ratio - EPS = Profit available to common shareholders / Average number of common shares outstanding - Higher is better - Investors expect a large EPS number for companies with higher stock prices Common Share Transactions - Common shares are known as residual equity No Par value and Par value Shares - Par value is nominal value per share established in the charter of a corporation; basis for legal capital - No par value shares don’t have nominal value - Legal capital is the permanent amount of capital, defined y law, that must remain invested in the business it serves as a cushion for creditors Initial Sale of Shares - Initial public offering (IPO) - Additional sales of new shares to the public are called seasoned new issues or secondary share offerings Cash (A) (100,000x$22) 2,200,000 Common Shares (SE) 2,200,000 IPO Sale of Shares in Secondary Markets - Company does not make an entry in their books Shares Issued for Non-cash Assets or Services - Start-up companies issue shares to people who can supply them assets and services - Executives will join start-up companies for very low salaries because they also earn compensation in the form of common shares - Acquired items recorded at market value of the shares issued - If market value of shares cannot be determined, market value of consideration received should be used Legal Fees (E) 150,000 Common Shares (SE) 150,000 Issuing of shares for legal services Shares Issued for Employee Compensation - Encourage managers to act in best interests of shareholders with compensation packages - Stock options permit managers to buy shares at a fixed price Repurchase of Shares - To increase market price per share and earnings per share that result from the reduction in the number of outstanding shares - Most companies cancel their shares when they buy them back from shareholders - When shares are cancelled ,appropriate share capital is reduced by an amount that reflects the average issuance price per share - If purchase price is less than avg issuance price, difference is credited to contributed surplus - If purchase price is more than avg issuance price, difference is debited first to contributed surplus for that type of shares and then retained earnings Common shares (SE) (50,000 x $34) 1,700,000 Cash (A) 1,500,000 Contributed Surplus (SE) 200,000 Buyback shares at ($30) lower than average issuance price ($34) Common Shares (SE) (50,000 x $34) 1,700,000 Contributed Surplus (SE) 200,000 Retained Earnings (SE) 100,000 Cash (A) 2,000,000 Buyback shares at ($40) higher than average issuance price ($34) Dividends on Common Shares - Declaration date: approved dividend, creates dividend liability - Date of record: makes list of shareholders, no journal entry - Payment date: entry Dividends declared – Common (SE) 350,920,500 Dividend payable – common (L) 350,920,500 Common Share Dividend declared Dividends payable – common 350,920,500 Cash 350,920,500 Payment of common share dividends - Must have sufficient retained earnings to cover amount of dividend o Payment of dividends must not place the company in a position which would prevent it from paying its liabilities o May surpass retained earnings if more than enough assets
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