© the mcgraw-hill companies, inc., 2003 mcgraw-hill/irwin slide 11-1 11 reporting and analyzing...

© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin

Slide 11-1

11

Reporting andAnalyzing Equity


Slide 11-2

Privately HeldPrivately HeldPrivately HeldPrivately Held

Publicly HeldPublicly HeldPublicly HeldPublicly Held

Ownership can be

Characteristics of Corporations

Existence is separate from

owners.

Existence is separate from

owners.

An entity created by law.

An entity created by law.

Has rights and privileges.

Has rights and privileges.


Slide 11-3

Separate Legal EntitySeparate Legal Entity Limited Liability of StockholdersLimited Liability of Stockholders Ownership Rights Are TransferableOwnership Rights Are Transferable Continuous LifeContinuous Life Stockholders Are Not Corporate AgentsStockholders Are Not Corporate Agents Ease of Capital AccumulationEase of Capital Accumulation Governmental RegulationGovernmental Regulation Corporate TaxesCorporate Taxes

Separate Legal EntitySeparate Legal Entity Limited Liability of StockholdersLimited Liability of Stockholders Ownership Rights Are TransferableOwnership Rights Are Transferable Continuous LifeContinuous Life Stockholders Are Not Corporate AgentsStockholders Are Not Corporate Agents Ease of Capital AccumulationEase of Capital Accumulation Governmental RegulationGovernmental Regulation Corporate TaxesCorporate Taxes

Characteristics of Corporations


Slide 11-4

Exh. 11.1

StockholdersStockholders

Board of DirectorsBoard of Directors

President, Vice-President, President, Vice-President, and Other Officersand Other Officers

Employees of the CorporationEmployees of the Corporation

Organizing and Managing a Corporation


Slide 11-5

C orpo ra te O rgan iza tion C hart

Secretary V ice P residentF inance

V ice P residentP roduction

V ice P residentMarketing

President

Board of D irectors

S tockholdersUltimate control

Ultimate control

Stockholders usually meet once a year

Stockholders usually meet once a year

Selected by a vote of the

stockholders

Selected by a vote of the

stockholders

Overall responsibility for managing the company

Overall responsibility for managing the company

Organizing and Managing a Corporation


Slide 11-6

Vote at stockholders’ meetings. Sell stock. Purchase additional shares of stock. Share equally with other common

stockholders in any dividends. Share equally in any assets remaining

after creditors are paid in a liquidation of corporate assets.

Vote at stockholders’ meetings. Sell stock. Purchase additional shares of stock. Share equally with other common

stockholders in any dividends. Share equally in any assets remaining

after creditors are paid in a liquidation of corporate assets.

Rights of Stockholders


Slide 11-7

Each unit of ownership is

called a share of stock.

A stock certificate serves as proof

that a stockholder has purchased

shares.

Each unit of ownership is

called a share of stock.

A stock certificate serves as proof

that a stockholder has purchased

shares.

Stock Certificates and Transfer

When the stock is sold, the stockholder

signs a transfer endorsement on the back of the

stock certificate.

When the stock is sold, the stockholder

signs a transfer endorsement on the back of the

stock certificate.


Slide 11-8

Basics of Capital Stock

Total amount of stock that a Total amount of stock that a corporation’s charter authorizes it to sell.corporation’s charter authorizes it to sell.

Total amount of stock that a Total amount of stock that a corporation’s charter authorizes it to sell.corporation’s charter authorizes it to sell.


Slide 11-9

Basics of Capital Stock

Total amount of stock that has been Total amount of stock that has been issued to stockholders.issued to stockholders.

Total amount of stock that has been Total amount of stock that has been issued to stockholders.issued to stockholders.


Slide 11-10

Par valuePar value is an is an arbitrary amount arbitrary amount assigned to each assigned to each

share of stock when share of stock when it is authorized.it is authorized.

Par valuePar value is an is an arbitrary amount arbitrary amount assigned to each assigned to each

share of stock when share of stock when it is authorized.it is authorized.

Market priceMarket price is the is the amount that each amount that each share of stock will share of stock will

sell for in the market.sell for in the market.

Market priceMarket price is the is the amount that each amount that each share of stock will share of stock will

sell for in the market.sell for in the market.

Issuing Stock


Slide 11-11

Par, No Par, and StatedValue Common Stock

Par, No Par, and StatedValue Common Stock

Classes of Stock


Slide 11-12

Par Value Stock

On September 1, 2002, Matrix, Inc. issued 100,000 shares of $2 par value stock for $25 per

share. Let’s record this transaction.

Par Value Stock



Record:The cash received.

The number of shares issued × the par value per share in the Common Stock account.

The remainder is assigned to Contributed Capital in Excess of Par.

Record:The cash received.

The number of shares issued × the par value per share in the Common Stock account.

The remainder is assigned to Contributed Capital in Excess of Par.

Issuing Par Value Stock


Slide 11-13


Par Value Stock



Par Value Stock




Slide 11-14



Slide 11-15

Exh. 11.3

Stockholders’ Equity


Slide 11-16

A separate class of stock, typically having priority A separate class of stock, typically having priority over common shares in . . .over common shares in . . .

Dividend distributions.Dividend distributions. Distribution of assets in case of liquidation.Distribution of assets in case of liquidation.

A separate class of stock, typically having priority A separate class of stock, typically having priority over common shares in . . .over common shares in . . .

Dividend distributions.Dividend distributions. Distribution of assets in case of liquidation.Distribution of assets in case of liquidation.

Usually has a stated Usually has a stated dividend rate.dividend rate.

Usually has a stated Usually has a stated dividend rate.dividend rate.

Normally has no voting Normally has no voting rights.rights.

Normally has no voting Normally has no voting rights.rights.

Preferred Stock


Slide 11-17

NoncumulativeCumulative

Dividends in arrears must be paid before

dividends may be paid on common

stock.

Dividends in arrears must be paid before

dividends may be paid on common

stock.

Undeclared dividends from current and prior

years do not have to be paid in future years.

Undeclared dividends from current and prior

years do not have to be paid in future years.

Cumulative or Noncumulative Dividend

Most preferred stock is cumulative.

Most preferred stock is cumulative.


Slide 11-18

Example: Consider the following partial Statement of Stockholders’ Equity

The Board of Directors did not declare or pay dividends in 2001. In 2002, the Board of Directors

declare and pay cash dividends of $42,000.



Slide 11-19

Preferred CommonIf Preferred Stock is Noncumulative :Year 2001 No dividend paid $ -0- $ -0-

Year 2002 Step 1: Current preferred dividend 9,000$

Step 2: Remainder to common shareholders 33,000$

If Preferred Stock is Cumulative :Year 2001 No dividend paid $ -0- $ -0-

Year 2002 Step 1: Dividends in arrears 9,000$ Step 2: Current preferred dividend 9,000 Step 3: Remainder to common shareholders 24,000$ Totals 18,000$ 24,000$



Slide 11-20

NonparticipatingParticipating

Dividends may exceed a stated amount once common stockholders

receive a dividend equal to the preferred

stated rate.

Dividends may exceed a stated amount once common stockholders

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.

Dividends are limited to a maximum amount

each year. The maximum is usually the

stated dividend rate.

Participating or Nonparticipating Dividend

Most preferred stock is nonparticipating.

Most preferred stock is nonparticipating.


Slide 11-21

To pay a cash dividend, the

corporation must have a sufficient

balance in retained earnings

and the cash necessary to pay

the dividend.

To pay a cash dividend, the

corporation must have a sufficient

balance in retained earnings

and the cash necessary to pay

the dividend.

Cash Dividend Types and Frequency

73%

23%

0%

20%

40%

60%

80%

100%

Common Preferred

Cash Dividends


Slide 11-22

Regular cash dividends provide a return to investors and almost always affect the stock’s market value.

Regular cash dividends provide a return to investors and almost always affect the stock’s market value.

Dividends

Stockholders

June30

Cash Dividends

Corporation


Slide 11-23

Three important datesThree important datesThree important datesThree important dates

Date of Declaration

Record liabilityfor dividend.

Dividends

Date of Record

No entryrequired.

Date of Payment

Record payment ofcash to stockholders.

Entries for Cash Dividends


Slide 11-24

GENERAL JOURNALDate Description Debit Credit

Jan 19 Retained Earnings 10,000

Common Dividend Payable 10,000

Date of Declaration

Record liabilityfor dividend.

Dividends

On January 19, a $1 per share cash dividend On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common is declared on Dana, Inc.’s 10,000 common

shares outstanding. shares outstanding.



Slide 11-25


Feb 19

On January 19, a $1 per share cash dividend is On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares declared on Dana, Inc.’s 10,000 common shares outstanding. The date of record is February 19. outstanding. The date of record is February 19.

No Entry RequiredDate of Record

No entryrequired.



Slide 11-26

On January 19, a $1 per share cash dividend is On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares declared on Dana, Inc.’s 10,000 common shares

outstanding. The date of record is February 19. The outstanding. The date of record is February 19. The dividend is paid on March 19. dividend is paid on March 19.

Date of Payment

Record payment ofcash to stockholders.



Mar 19 Common Dividend Payable 10,000

Cash 10,000


Slide 11-27

Created when a company incurs cumulative losses or pays dividends greater than total

profits earned in other years.

Deficits and Cash Dividends


Slide 11-28

The corporation distributes additional shares of The corporation distributes additional shares of its own stock to its stockholders without its own stock to its stockholders without

receiving any payment in return.receiving any payment in return.

The corporation distributes additional shares of The corporation distributes additional shares of its own stock to its stockholders without its own stock to its stockholders without

receiving any payment in return.receiving any payment in return.

HotAir, Inc.HotAir, Inc.Common StockCommon Stock

100 Shares

$1 par value

Stock Dividends

Why a stock dividend?Why a stock dividend?

Can be used to keep the marketCan be used to keep the marketprice on the stock affordable.price on the stock affordable.

Can provide evidence ofCan provide evidence ofmanagement’s confidence thatmanagement’s confidence that

the company is doing well.the company is doing well.

Why a stock dividend?Why a stock dividend?

Can be used to keep the marketCan be used to keep the marketprice on the stock affordable.price on the stock affordable.

Can provide evidence ofCan provide evidence ofmanagement’s confidence thatmanagement’s confidence that

the company is doing well.the company is doing well.


Slide 11-29

Small Stock DividendDistribution is

25% of the previously outstanding shares.

Capitalize retained earnings for the market value of the shares to be distributed.

Small Stock DividendDistribution is


Capitalize retained earnings for the market value of the shares to be distributed.

Large Stock DividendDistribution is >


Capitalize retained earnings for the minimum amount required by state law, usually par or stated value of the shares.

Large Stock DividendDistribution is >


Capitalize retained earnings for the minimum amount required by state law, usually par or stated value of the shares.

Entries for Stock Dividend


Slide 11-30

Here is the stockholders’ equity section of Here is the stockholders’ equity section of Quest’s balance sheet prior to the declaration Quest’s balance sheet prior to the declaration

of a stock dividend.of a stock dividend.

Here is the stockholders’ equity section of Here is the stockholders’ equity section of Quest’s balance sheet prior to the declaration Quest’s balance sheet prior to the declaration

of a stock dividend.of a stock dividend.

Entries for Stock Dividend


Slide 11-31

On December 31, 2002, Quest declared a 2% stock On December 31, 2002, Quest declared a 2% stock dividend, when the stock was selling for $10 per share. dividend, when the stock was selling for $10 per share.

The stock will be distributed to stockholders on The stock will be distributed to stockholders on January 20, 2003. Let’s make the December 31 entry.January 20, 2003. Let’s make the December 31 entry.

On December 31, 2002, Quest declared a 2% stock On December 31, 2002, Quest declared a 2% stock dividend, when the stock was selling for $10 per share. dividend, when the stock was selling for $10 per share.

The stock will be distributed to stockholders on The stock will be distributed to stockholders on January 20, 2003. Let’s make the December 31 entry.January 20, 2003. Let’s make the December 31 entry.

Recording a Small Stock Dividend


Dec 31 Retained Earnings 20,000

Common Stock Dividend Distributable 2,000

Contributed Capital in Excess of Par Value 18,000

100,000 × 2% = 2,000 × $10 = $20,000 2,000 × $1 par = $2,000

100,000 × 2% = 2,000 × $10 = $20,000 2,000 × $1 par = $2,000


Slide 11-32

Before theBefore thestockstock

dividend.dividend.

After theAfter thestockstock

dividend.dividend.


Slide 11-33

Router, Inc. shows the following stockholders’ equity Router, Inc. shows the following stockholders’ equity section just prior to issuing a large stock dividend.section just prior to issuing a large stock dividend.

Router, Inc. shows the following stockholders’ equity Router, Inc. shows the following stockholders’ equity section just prior to issuing a large stock dividend.section just prior to issuing a large stock dividend.

Recording a Large Stock Dividend


Slide 11-34

On December 31, 2002, Router declared a 40% On December 31, 2002, Router declared a 40% stock dividend, when the stock was selling for $8 stock dividend, when the stock was selling for $8

per share. State law requires that large stock per share. State law requires that large stock dividends be capitalized at par value per share.dividends be capitalized at par value per share.

On December 31, 2002, Router declared a 40% On December 31, 2002, Router declared a 40% stock dividend, when the stock was selling for $8 stock dividend, when the stock was selling for $8

per share. State law requires that large stock per share. State law requires that large stock dividends be capitalized at par value per share.dividends be capitalized at par value per share.


Dec 31 Retained Earnings 20,000

Common Stock Dividend Distributable 20,000

50,000 × 40% = 20,000 shares × $1 par value = $20,00050,000 × 40% = 20,000 shares × $1 par value = $20,000

Recording a Large Stock Dividend


Slide 11-35

A distribution of additional shares of stock to A distribution of additional shares of stock to stockholders according to their percent ownership.stockholders according to their percent ownership.

A distribution of additional shares of stock to A distribution of additional shares of stock to stockholders according to their percent ownership.stockholders according to their percent ownership.

Common Stock

$10 par value

100 shares

OldShares

NewShares Common Stock

$5 par value

200 shares

Stock Splits


Slide 11-36

Thomas, Inc. has the following stockholders’ equity Thomas, Inc. has the following stockholders’ equity section just prior to a 2-for-1 stock split.section just prior to a 2-for-1 stock split.

Thomas, Inc. has the following stockholders’ equity Thomas, Inc. has the following stockholders’ equity section just prior to a 2-for-1 stock split.section just prior to a 2-for-1 stock split.

Stock Splits


Slide 11-37

AfterAfter the 2-for-1 split the stockholders’ equity the 2-for-1 split the stockholders’ equity section of the balance sheet looks like this . . .section of the balance sheet looks like this . . .AfterAfter the 2-for-1 split the stockholders’ equity the 2-for-1 split the stockholders’ equity section of the balance sheet looks like this . . .section of the balance sheet looks like this . . .

No accountingNo accountingentry is made.entry is made.No accountingNo accountingentry is made.entry is made.

Stock Splits


Slide 11-38

Treasury Stock


Slide 11-39

Corporations acquire shares of their own stock.

Why would aWhy would acompany docompany do

that?that?

Why would aWhy would acompany docompany do

that?that?Use the shares to acquireUse the shares to acquire

control of another corporation.control of another corporation.

To avoid a hostile takeover.To avoid a hostile takeover.

Use the shares forUse the shares foremployee stock options.employee stock options.

Use the shares to acquireUse the shares to acquirecontrol of another corporation.control of another corporation.

To avoid a hostile takeover.To avoid a hostile takeover.

Use the shares forUse the shares foremployee stock options.employee stock options.

Treasury Stock


Slide 11-40

On May, 8, 2002, Whitt, Inc. purchased 2,000 of its own On May, 8, 2002, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $8,000. shares of stock in the open market for $8,000.

On May, 8, 2002, Whitt, Inc. purchased 2,000 of its own On May, 8, 2002, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $8,000. shares of stock in the open market for $8,000.

Purchasing Treasury Stock


May 8 Treasury Stock, Common 8,000

Cash 8,000

Treasury stock is shown as a reduction in totalTreasury stock is shown as a reduction in totalstockholders’ equity on the balance sheet.stockholders’ equity on the balance sheet.

Treasury stock is shown as a reduction in totalTreasury stock is shown as a reduction in totalstockholders’ equity on the balance sheet.stockholders’ equity on the balance sheet.


Slide 11-41

On June 30, 2002, Whitt sold 100 shares of its On June 30, 2002, Whitt sold 100 shares of its treasury stock for $4 per share. treasury stock for $4 per share.

On June 30, 2002, Whitt sold 100 shares of its On June 30, 2002, Whitt sold 100 shares of its treasury stock for $4 per share. treasury stock for $4 per share.

Selling Treasury Stock at Cost


Jun 30 Cash 400

Treasury Stock, Common 400

$8,000 $8,000 ÷ 2,000 shares = $4 cost per treasury share÷ 2,000 shares = $4 cost per treasury share$8,000 $8,000 ÷ 2,000 shares = $4 cost per treasury share÷ 2,000 shares = $4 cost per treasury share


Slide 11-42

On July 19, 2002, Whitt, Inc. sold an additional 500 On July 19, 2002, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per share.shares of its treasury stock for $8 per share.

On July 19, 2002, Whitt, Inc. sold an additional 500 On July 19, 2002, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per share.shares of its treasury stock for $8 per share.


Jul 19 Cash 4,000

Treasury Stock, Common 2,000

Contributed Capital, Treasury Stock 2,000

Selling Treasury Stock Above Cost


Slide 11-43

On August 27, 2002, Whitt sold an additional 400 On August 27, 2002, Whitt sold an additional 400 shares of its treasury stock for $1.50 per share.shares of its treasury stock for $1.50 per share.

On August 27, 2002, Whitt sold an additional 400 On August 27, 2002, Whitt sold an additional 400 shares of its treasury stock for $1.50 per share.shares of its treasury stock for $1.50 per share.

Selling Treasury Stock Below Cost


Aug 27 Cash 600

Contributed Capital, Treasury Stock 1,000

Treasury Stock 1,600


Slide 11-44

Net IncomeNet IncomeNet IncomeNet Income

Reporting Income Information

ContinuingContinuingOperationsOperations

ExtraordinaryExtraordinaryItemsItems

DiscontinuedDiscontinuedSegmentsSegments

Change inChange inAccountingAccounting

PrinciplePrinciple


Slide 11-45

Revenues, expensesand income generated

by the company’scontinuing operations.

Revenues, expensesand income generated

by the company’scontinuing operations.


ContinuingContinuingOperationsOperations



Slide 11-46

Income fromIncome fromoperating theoperating thediscontinued discontinued

segmentsegmentprior to its disposalprior to its disposalandand gain or loss on gain or loss on the sale of the netthe sale of the net

assets of the assets of the segment.segment.

Income fromIncome fromoperating theoperating thediscontinued discontinued

segmentsegmentprior to its disposalprior to its disposalandand gain or loss on gain or loss on the sale of the netthe sale of the net

assets of the assets of the segment.segment.


DiscontinuedDiscontinuedSegmentsSegments



Slide 11-47

A gain or loss thatA gain or loss thatis is unusual unusual in naturein nature

and and infrequent infrequent ininoccurrence.occurrence.

A gain or loss thatA gain or loss thatis is unusual unusual in naturein nature

and and infrequent infrequent ininoccurrence.occurrence.


ExtraordinaryExtraordinaryItemsItems



Slide 11-48

The increase or decrease in The increase or decrease in income when changing fromincome when changing from

one generally acceptedone generally acceptedaccounting principle to another.accounting principle to another.

The increase or decrease in The increase or decrease in income when changing fromincome when changing from

one generally acceptedone generally acceptedaccounting principle to another.accounting principle to another.


Change inChange inAccountingAccounting

PrinciplePrinciple Net IncomeNet IncomeNet IncomeNet Income


Slide 11-49



Slide 11-50

Campus, Inc. prepared the following schedule in Campus, Inc. prepared the following schedule in connection with its change from double-declining connection with its change from double-declining

balance to straight-line depreciation.balance to straight-line depreciation.

Campus is subject toCampus is subject toa 20% income tax ratea 20% income tax rateCampus is subject toCampus is subject toa 20% income tax ratea 20% income tax rate

Changes in Accounting Principles


Slide 11-51

Earnings per share is one of the most widely cited Earnings per share is one of the most widely cited items of accounting information.items of accounting information.

Earnings per share is one of the most widely cited Earnings per share is one of the most widely cited items of accounting information.items of accounting information.

Earnings Per Share

Basicearningsper share

= Net income - Preferred dividends Weighted-average common shares outstanding


Slide 11-52

Derby, Inc. reports net income of $75,000 and paid Derby, Inc. reports net income of $75,000 and paid preferred dividends of $10,000 during 2002. The preferred dividends of $10,000 during 2002. The company started the year with 10,000 shares of company started the year with 10,000 shares of

common stock outstanding. Derby sold an additional common stock outstanding. Derby sold an additional 4,000 share of stock on March 31, and purchased 4,000 share of stock on March 31, and purchased 2,000 treasury shares on September 30, 2002. 2,000 treasury shares on September 30, 2002.



Changes in Shares Outstanding


Slide 11-53

EPS = $75,000 - $10,000

12,500= $5.20

Changes in Shares Outstanding






Slide 11-54

Capital structure includes Capital structure includes dilutive securities such as:dilutive securities such as:

Stock options (rights to Stock options (rights to purchase common purchase common stock).stock).

Preferred stock Preferred stock convertible into convertible into common stock.common stock.

These items may reduce These items may reduce the basic earnings per the basic earnings per

share.share.

The company may be required to report basic and diluted earnings per share on the face of the

income statement.

Complex Capital Structure


Slide 11-55

The right to purchase common stock at a fixed The right to purchase common stock at a fixed price over a specified period of time. As the price over a specified period of time. As the

stock’s price rises above the fixed option price, stock’s price rises above the fixed option price, the value of the option increases.the value of the option increases.

The right to purchase common stock at a fixed The right to purchase common stock at a fixed price over a specified period of time. As the price over a specified period of time. As the

stock’s price rises above the fixed option price, stock’s price rises above the fixed option price, the value of the option increases.the value of the option increases.

Optionpurchaseprice $30 per share.

Marketprice of

stock $75 per share.

Stock Options


Slide 11-56

Options are given to key employees to Options are given to key employees to motivate them to:motivate them to:

focus on company performance,focus on company performance, take a long-run perspective, andtake a long-run perspective, andremain with the company.remain with the company.

Options are given to key employees to Options are given to key employees to motivate them to:motivate them to:

focus on company performance,focus on company performance, take a long-run perspective, andtake a long-run perspective, andremain with the company.remain with the company.

Stock Options


Slide 11-57

Total cumulative amount of reported net income Total cumulative amount of reported net income less any net losses and dividends declared less any net losses and dividends declared

since the company started operating.since the company started operating.

Total cumulative amount of reported net income Total cumulative amount of reported net income less any net losses and dividends declared less any net losses and dividends declared

since the company started operating.since the company started operating.

Retained Earnings


Slide 11-58

LegalLegal ContractualContractual

Most states restrictMost states restrictthe amount ofthe amount oftreasury stocktreasury stock

purchases to thepurchases to theamount of retainedamount of retained

earnings.earnings.

Most states restrictMost states restrictthe amount ofthe amount oftreasury stocktreasury stock

purchases to thepurchases to theamount of retainedamount of retained

earnings.earnings.

Loan agreementsLoan agreementscan includecan include

restrictions on payingrestrictions on payingdividends below adividends below acertain amount ofcertain amount ofretained earnings.retained earnings.

Loan agreementsLoan agreementscan includecan include

restrictions on payingrestrictions on payingdividends below adividends below acertain amount ofcertain amount ofretained earnings.retained earnings.

Restricted Retained Earnings


Slide 11-59

A corporation’s directors can voluntarily limit A corporation’s directors can voluntarily limit dividends because of a special need for cash dividends because of a special need for cash

such as the purchase of new facilities.such as the purchase of new facilities.

A corporation’s directors can voluntarily limit A corporation’s directors can voluntarily limit dividends because of a special need for cash dividends because of a special need for cash

such as the purchase of new facilities.such as the purchase of new facilities.

Appropriated Retained Earnings


Slide 11-60

Correction of material errors in past years’ financial Correction of material errors in past years’ financial statements. If an amount is incorrectly expensed, add statements. If an amount is incorrectly expensed, add

amount to Retained Earnings.amount to Retained Earnings.

Prior Period Adjustments


Slide 11-61

Many items reported in the financial statements Many items reported in the financial statements are based on estimates. If new information are based on estimates. If new information

comes to light that would cause us to change comes to light that would cause us to change our estimate, we show the impact of the our estimate, we show the impact of the

change in current and future periods.change in current and future periods.

Many items reported in the financial statements Many items reported in the financial statements are based on estimates. If new information are based on estimates. If new information

comes to light that would cause us to change comes to light that would cause us to change our estimate, we show the impact of the our estimate, we show the impact of the

change in current and future periods.change in current and future periods.

What do you thinkbad debts should be?

Changes in Accounting Estimates


Slide 11-62

(In millions) Retained

Shares Amount Earnings TotalBalance at January 1, 2002 821 2,500$ 9,500$ 12,000$ Stock sales 17 500 500 Stock repurchases and retirement (17) (260) (925) (1,185) Cash dividends declared (150) (150) Other, net 70 70 Net income 5,100 5,100 Balance at December 31, 2002 821 2,740$ 13,595$ 16,335$

Common stock and capital in excess of par

Matrix, Inc.

Statement of Changes in Stockholders' Equity

December 31, 2002

(In millions) Retained

Shares Amount Earnings TotalBalance at January 1, 2002 821 2,500$ 9,500$ 12,000$ Stock sales 17 500 500 Stock repurchases and retirement (17) (260) (925) (1,185) Cash dividends declared (150) (150) Other, net 70 70 Net income 5,100 5,100 Balance at December 31, 2002 821 2,740$ 13,595$ 16,335$

Common stock and capital in excess of par

Matrix, Inc.

Statement of Changes in Stockholders' Equity

December 31, 2002

Statement of Changes in Stockholders’ Equity


Slide 11-63

Annual amount of cash dividends distributed to common stockholders relative to the stock’s market price.

Annual amount of cash dividends distributed to common stockholders relative to the stock’s market price.

DividendYield

= Annual cash dividends per share

Market value per share

Dividend Yield

Dividend Yield

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Airlines Utilities Software

2002 2001


Slide 11-64

This ratio reveals information about the stock market’s expectations for a company’s future growth in

earnings, dividends, and opportunities.

This ratio reveals information about the stock market’s expectations for a company’s future growth in

earnings, dividends, and opportunities.

Price-Earnings

= Market value per share

Earnings per share

If earnings go up,will the market priceof my stock follow?

Price Earnings


Slide 11-65

Now Playing: Common Not Preferred!Now Playing: Common Not Preferred!

End of Chapter 11

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