Kế toán, kiểm toán - Chapter 13: Accounting for Corporations

Advantages Separate legal entity Limited liability of shareholders Transferable ownership rights Continuous life Lack of mutual agency for shareholders Ease of capital accumulation Disadvantages Governmental regulation Corporate taxation

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Chapter 13Accounting for CorporationsPrivately HeldPublicly HeldOwnership can be Corporate Form of OrganizationExistence is separate from ownersAn entity created by lawHas rights and privilegesC 1Characteristics of CorporationsAdvantagesSeparate legal entityLimited liability of shareholdersTransferable ownership rights Continuous lifeLack of mutual agency for shareholdersEase of capital accumulationDisadvantagesGovernmental regulationCorporate taxationC 1ShareholdersBoard of DirectorsPresident, Vice-President, and Other OfficersEmployees of the CorporationCorporate Organization and ManagementC 1Rights of ShareholdersVote at shareholders’ meetingsSell sharesPurchase additional sharesReceive dividends, if anyShare equally in any assets remaining after creditors are paid in a liquidationC 1Basics of Share CapitalTotal number of shares that a corporation is authorized to sell or issue.Total number of shares that has been sold or issued to shareholders.C 1Par value is an arbitrary amount assigned to each share when it is authorized.Market price is the amount that each share will sell for in the market.Basics of Share CapitalClasses of Shares Par Value No-Par Value Stated ValueC 1Par Value ShareOn September 1, Matrix, Inc. issued 100,000 shares of $2 par value for $25 per share. Let’s record this transaction. Issuing Par Value ShareP 1Issuing Par Value SharesP 1Issuing Shares for Noncash AssetsPar Value SharesOn September 1, Matrix, Inc. issued 100,000 shares of $2 par value for land valued at $2,500,000. Let’s record this transaction. P 1DividendsShareholdersCash DividendsCorporationTo pay a cash dividend, the corporation must have:A sufficient balance in retained earnings; and The cash necessary to pay the dividend.Regular cash dividends provide a return to investors and almost always affect the share’s market value.P 2Accounting for Cash DividendsThree important datesDate of DeclarationRecord liabilityfor dividend.DividendsDate of RecordNo entryrequired.Date of PaymentRecord payment ofcash to shareholders.P 2Date of DeclarationRecord liabilityfor dividend.DividendsAccounting for Cash DividendsOn January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 ordinary shares outstanding. The dividend will be paid on March 19 to shareholders of record on February 19.P 2No entry required on February 19, the date of record.Date of PaymentRecord payment ofcash to shareholders.Accounting for Cash DividendsOn January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 ordinary shares outstanding. The dividend will be paid on March 19 to shareholders of record on February 19.P 2Share Dividends or Bonus IssueWhy a share dividend? Can be used to keep the market price on the shares affordable. Can provide evidence of management’s confidence that the company is doing well.A distribution of a corporation’s own shares to its shareholders without receiving any cash payment in return. Capitalization: Transferring a portion of equity from retained earnings to contributed capital.P 2Ordinary Shares$10 par value100 sharesOldSharesNewSharesOrdinary Shares$5 par value200 sharesShare SplitsA distribution of additional shares to shareholders according to their percent ownership.P 2Preference Shares A separate class of shares, typically having priority over ordinary shares in . . .Dividend distributionsDistribution of assets in case of liquidationUsually has a stated dividend rateNormally has no voting rightsC 2vs.NoncumulativeCumulativeDividends in arrears must be paid before dividends may be paid on ordinary shares. (Normal case)Undeclared dividends from current and prior years do not have to be paid in future years.Preference SharesConsider the following Shareholders’ Equity section of the Balance Sheet. The Board of Directors did not declare or pay dividends in 2010. In 2011, the Board declared and paid cash dividends of $42,000.C2preference sharesC2vs.NonparticipatingParticipatingDividends may exceed a stated amount once common shareholders receive a dividend equal to the preferred stated rate.Dividends are limited to a maximum amount each year. The maximum is usually the stated dividend rate. (Normal case)Preference SharesReasons for Issuing Preference SharesTo raise capital without sacrificing controlTo boost the return earned by ordinary shareholders through financial leverageTo appeal to investors who may believe the ordinary shares are too risky or that the expected return on common stock is too lowC2Treasury SharesTreasury shares are a company’s own shares that have been acquired. Corporations might acquire its own shares to: Use their shares to buy other companies. Avoid a hostile takeover. Reissue to employees as compensation. Support the market price.P 3Purchasing Treasury SharesTreasury shares are shown as a reduction in totalshareholders’ equity on the balance sheet.On May 8, Whitt, Inc. purchased 2,000 of its own shares in the open market for $4 per share. P 3Selling Treasury Shares at CostOn June 30, Whitt sold 100 shares of its treasury shares for $4 per share.P 3Selling Treasury Shares Above CostOn July 19, Whitt, Inc. sold an additional 500 treasury shares for $8 per share.P 3Selling Treasury Shares Below CostOn August 27, Whitt sold an additional 400 treasury shares for $1.50 per share.P 3Statement of Comprehensive Income C3Statement of Changes in Equity C3ReservesMost reserves result from accounting standards to reflect certain measurement changes in equity rather than the income statement, e.g. asset revaluation reserve, foreign currency translation reserve and other statutory reserves.Retained earnings also called revenue reserves.Ending Retained Earnings = Beginning Retained Earnings + Net Income – Dividends A company’s cumulative net income less any net losses and dividends declared since its inception.C3Earnings Per ShareBasic earningsper share=Net income - Preference dividendsWeighted-average ordinary shares outstandingEarnings per share is one of the most widely cited accounting statistics.A 1PRICE–EARNINGS RATIOPrice–Earnings Ratio= Market value per shareEarnings per shareThis ratio reveals information about the stock market’s expectations for a company’s future growth in earnings, dividends, and opportunities.A 2Dividend YieldDividendYield= Annual cash dividends per share Market value per shareTells us the annual amount of cash dividends distributed to ordinary shareholders relative to the share’s market price.A 3BOOK VALUE PER ORDINARY SHAREBook value per ordinary share=Shareholders’ equity applicable to ordinary sharesNumber of ordinary shares outstandingReflects the amount of shareholders’ equity applicable to ordinary shares on a per share basis.A 4End of Chapter 13