MGTB06 Chapter 12 Notes.docx

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Department
Financial Accounting
Course
MGAB02H3
Professor
G.Quan Fun
Semester
Winter

Description
MGTB06 Chapter 12—Reporting and Interpreting Owners’ Equity Understanding the Business corporations can raise large amounts of capital because both large and small investors can easily participate in their ownership because 1) shares can be purchased in small amounts, 2) ownership interest can be easily transferred through the sale of shares, 3) stock ownership provides investors with limited liability contributed capital reflects the amount invested by shareholders, includes both amounts initially received from the sale of shares and contributed surplus which is contributions made by shareholders in excess of amounts credited to share capital retained earning is the cumulative amount of profit earned since the corporation’s organization, less cumulative amount of dividends paid Ownership of a Corporation corporation is a separate entity which enjoys continuous existence, may own assets, incur liabilities, expand and contract in size, sue others, be sued and enter to contracts Benefits of Share Ownership owners of common shares have following benefits: management voice—may vote at shareholders’ meeting on major issues dividends—receive proportionate share of distribution of corporation’s profits residual claim—may receive proportionate share of distribution of remaining assets upon liquidation Authorized, Issued and Outstanding Shares the authorized number of shares is the maximum number of shares that a corporation can issue, as specified in the charter issued shares refers to the number of shares that have been issued outstanding shares refers to the total number of shares that are owned by shareholders on any particular date unissued shares are the number of authorized shares that have never been issued to date treasury shares are shares that have been issued to investors and then reacquired by the issuing corporation Earnings Per Share Ratio earnings per share is a measure of the return on investment that is based on the number of shares outstanding instead of the dollar amount reported on the balance sheet Earnings Per Share = Profit Available to Shareholders/Average # of Outs. Shares EPS can be misleading if there are significant differences in the market values of the shares being compared Common Share Transactions common shares are the basic voting shares issued by a corporation; called residual equity because they rank after preferred shares for dividend and liquidation distributions for common shares the dividend rate is determined by the BOD based on company’s profitability, while for preferred shares it is determined by contract No Par Value and Par Value Shares par value is the nominal value per share specified in the charter and has no relation to market value per share; serves as basis for legal capital no par value shares are shares that have no par value specified in the corporate charter legal capital is the permanent amount of capital, defined by law, that must remain invested in the business; serves as a cushion for creditors when a corporation issues no par value shares, legal capital is the initial amount received from shareholders Initial Sale of Shares initial public offering (IPO) involves the very first sale of a company’s shares to the public company may want to go public to 1) for it to grow and meet consumer demand it must expand productive capacity and for this must need new capital, 2) might want to create a market for its shares once the shares of a company are traded on established markets, additional sales of new shares to the public are called seasoned new issues or secondary share offerings Sales of Shares in Secondary Markets subsequent to the initial sale, investors can sell shares to other investors without directly affecting the corporation Shares Issued for Non-Cash Assets or Services when a company issued shares to acquire assets or services, the acquired items are recorded at the market value of the shares issued at the date of the transaction in accordance with the cost principle, if market value of shares cannot be determined then the market value of the consideration received should be used Shares Issued for Employee Compensation as a form of compensation stock options can be provided to employees that allow them to buy shares at a fixed price; usually offered with an exercise price equal to the current market price per share Repurchase of Shares a corporation may want to purchase its own shares from existing shareholders to increase the market price per share that result from the reduction in the number of outstanding shares when shares are cancelled the share capital account if reduced by an amount that reflects average issuance price per share if purchase price is less than average issuance price then difference is credited to contributed surplus—is not profit for issuing company because they are capital transactions, not operating transactions if purchase price is higher than average issue price then difference is debited to contributed surplus such that CS reaches 0 and the remaining amount is debited to retained earnings  RE is debited because excess of purchase price over contribution made previously by shareholders reflect the company’s profitable operations, which resulted in profit and caused increase in share price—thus the RE amount is seen as a distribution of accumulated profit to RE to shareholders who sold their shares to the company average issue price per share is the balance of common shares account divided by number of common shares outstanding Dividends on Common Shares return on investment for investors can come from appreciation of share price and dividends corporation does not have legal obligation to pay dividends, but when the BOD does declare a dividend, a liability is created dividend declaration three steps:  dividend declaration which is the date on which the BOD officially approved the dividend; creates dividend liability date of record is the date on which the corporation prepares the list of current shareholders as shown on its records; dividends can only be paid to shareholders who own shares on that date payment date is the date on a cash dividend is paid to the shareholders of record time lag between date of declaration and date of payment may be ignored because it does not pose any substantive issues payment of cash dividend: must have accumulated a sufficient amount of retained earnings to cover the amount of the dividend; according to CBCA a corporation may declare and pay
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