Financial Accounting Lecture 6 Notes

Effective interest method

Leasing

• Capital lease ‘lease on almost entirety of useful life and will probably be owner’
• Operating lease ‘only lease for very short period of time and no responsibility after’

Stockholders’ equity

• Treasury stock when the company buys back its capital to obtain more control; rights etc. 
• Contributed capital the stockholders’ investments in the corporation
• Retained earnings earnings of the corporation since its inception, less any losses dividends, or transfers to contributed capital

Par value

Par value is an arbitrary amount assigned to each share. The number of issued shares multiplied with the par value represents the corporation’s legal capital

Any amount in excess of par value received is recorded in the additional paid-in capital

If no par-value is stated, all proceeds are recorded in the relevant capital stock account

Often there is hardly any link between par value and market value. 

Type of stock

• Common stock: basic form
• Preferred stock: pays dividends before common stockholders (stronger rights)

1. Cumulative preferred stock

Preferred dividends from earlier years must be paid before any dividends on common stock are paid

You’re paid from earlier years also if they made losses

So the profit they make goes to you first and after to the stockholders

2. Non-cumulative preferred stock

There is no obligation to make up for missed preferred dividends for earlier years

Also pay you first but don’t pay you for the years where losses were made instead of profits

Authorized shares: maximum numbers of shares that a corporation’s charter allows it to issue (outstanding+treasury+unissued)

Issued shares sold or transferred to stockholders (outstanding+treasury)

Outstanding previously issued but still on circulation on the market

Treasury stock consists of the corporation’s own stock that it has bought back on the open market

But: is treated as a reduction in stockholder’s equity and not as an asset

Because 

Stock dividends 

Proportional distribution of shares of a corporation stock to its stockholders

So you’re paid in more shares, you can make money by selling shares = indirect way of making money

Transformation of stockholders’ equity from retained earnings to contributed capital

Retained earnings is reduced and contributed capital increases so SE does not change but structure is moved

Always better to do this because you have to pay less taxes than on dividends àbetter to chose contributed capital than dividends

Stock dividends = percentage of outstanding shares, not all shares!!!!

Close stock dividends with retained earnings!

Stock splitwith a stock split, the corporation increases the number of shares issued and outstanding

Par or stated value is reduced proportionally

Why? Because shares have become to expensive. There is no more liquidity for their shares so chose to have stock splits to make it easier to buy/sell

Slide 31:

When you give stock dividends, you issue stock ànew shares

Dividends to shareholders so additional paid-in capital increases

Only thing that changes is redistribute money from retained earnings to paid-in-capital and common stock but total SE stays the same

Very likely problem with stock dividend on exam: basically only change in structure

Slide 33:

When a stock split takes place, all shared double, but also the shares in Treasury. 

Issued shares, outstanding shares and treasury shares double.

Statement of stockholders’ equity, reveals more information than the statement of retained earnings.

Balance beginning of the year

Net income

Sale of treasury stock

Issue of stock dividends

Balance  end of the year

--> everything that happened in SE