9-1 financing activities electronic presentation by douglas cloud pepperdine university chapter f9
TRANSCRIPT
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Financing Financing ActivitiesActivitiesFinancing Financing ActivitiesActivities
Electronic Presentation by Douglas Cloud
Pepperdine University
Electronic Presentation by Douglas Cloud
Pepperdine University
Chapter Chapter F9F9
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1. Identify information that companies report about obligations to lenders and explain the transactions affecting long-term debt.
2. Describe appropriate accounting procedures for contingencies and commitments, including capital leases.
3. Identify information reported in the stockholders’ equity section of a corporate balance sheet and distinguish contributed capital from retained earnings.
ObjectivesObjectivesObjectivesObjectives
Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:
Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:
ContinuedContinuedContinuedContinued
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4. Explain transactions affecting stockholders’ equity and describe how these transactions are reported in a company’s financial statements.
5. Distinguish between preferred stock and common stock, and discuss why corporations may issue more than one type of stock.
ObjectivesObjectivesObjectivesObjectives
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Liabilities are an organization’s obligations to deliver payments, goods,
or services in the future.
Liabilities are an organization’s obligations to deliver payments, goods,
or services in the future.
Notes PayableAccounts PayableInterest PayableWages PayableUnearned Revenue
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Three attributes define a liability for
an organization.
Three attributes define a liability for
an organization.
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(1) A present responsibility exists to transfer resources to another entity at some future time.
Attributes of a Attributes of a LiabilityLiability
Attributes of a Attributes of a LiabilityLiability
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(1) A present responsibility exists to transfer resources to another entity at some future time.
(2) The organization cannot choose to avoid the transfer.
Attributes of a Attributes of a LiabilityLiability
Attributes of a Attributes of a LiabilityLiability
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(1) A present responsibility exists to transfer resources to another entity at some future time.
(2) The organization cannot choose to avoid the transfer.
(3) The event creating the responsibility has already occurred.
Attributes of a Attributes of a LiabilityLiability
Attributes of a Attributes of a LiabilityLiability
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11ObjectiveObjectiveObjectiveObjective
Identify information that companies report about obligations to lenders and explain the transactions affecting long-term debt.
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Debt ObligationsDebt ObligationsDebt ObligationsDebt Obligations
A firm’s short-term and long-term borrowings are obligations to creditors.
A firm’s short-term and long-term borrowings are obligations to creditors.
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Debt ObligationsDebt ObligationsDebt ObligationsDebt Obligations
As you can see in the next two slides, Mom’s Cookie Company, debt is separated into current- and
long-term amounts.
As you can see in the next two slides, Mom’s Cookie Company, debt is separated into current- and
long-term amounts.
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Debt ObligationsDebt ObligationsDebt ObligationsDebt Obligations
December 31, 2005 2004December 31, 2005 2004
Liabilities:Current liabilities:
Accounts payable $ 16,260$ 9,610Wages payable 3,590-0-Unearned revenue 2,7704,250Interest payable 810650Notes payable, current 6,000 5,000
Total current liabilities 29,43019,510
Notes payable, long-term 80,200 73,200
Total liabilities $109,630$92,710
Current debt for Mom’s Current debt for Mom’s Cookie CompanyCookie Company
Current debt for Mom’s Current debt for Mom’s Cookie CompanyCookie Company
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Debt ObligationsDebt ObligationsDebt ObligationsDebt Obligations
December 31, 2005 2004December 31, 2005 2004
Liabilities:Current liabilities:
Accounts payable $ 16,260$ 9,610Wages payable 3,590-0-Unearned revenue 2,7704,250Interest payable 810650Notes payable, current 6,000 5,000
Total current liabilities 29,43019,510
Notes payable, long-term 80,200 73,200
Total liabilities $109,630$92,710
Long-Term Debt for Mom’s Long-Term Debt for Mom’s Cookie CompanyCookie Company
Long-Term Debt for Mom’s Long-Term Debt for Mom’s Cookie CompanyCookie Company
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Long-term debt includes notes and
bonds payable.
Long-term debt includes notes and
bonds payable.
Debt ObligationsDebt ObligationsDebt ObligationsDebt Obligations
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Notes and bonds payable are contracts between borrowers
and creditors.
Notes and bonds payable are contracts between borrowers
and creditors.
Debt ObligationsDebt ObligationsDebt ObligationsDebt Obligations
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Company debts secured by specific company assets are
referred to as secured debts. Major
companies often issue debentures, or
unsecured debts.
Company debts secured by specific company assets are
referred to as secured debts. Major
companies often issue debentures, or
unsecured debts.
Debt ObligationsDebt ObligationsDebt ObligationsDebt Obligations
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Most corporate bonds are repaid at the end
of a fixed period.
Most corporate bonds are repaid at the end
of a fixed period.
What about bonds that require a portion of the bond
to be repaid each year?
What about bonds that require a portion of the bond
to be repaid each year?
Those are commonly issued by governments and are referred to as
serial bonds.
Those are commonly issued by governments and are referred to as
serial bonds.
Debt ObligationsDebt ObligationsDebt ObligationsDebt Obligations
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Callable bonds require holders of this type of debt to resell the bonds to the issuing company
if the issuer chooses to repurchase the bonds.
Callable bonds require holders of this type of debt to resell the bonds to the issuing company
if the issuer chooses to repurchase the bonds.
Debt ObligationsDebt ObligationsDebt ObligationsDebt Obligations
Yes, these bonds not only include specific dates for repurchasing,
but specific prices that the issuer must pay to reacquire them.
Yes, these bonds not only include specific dates for repurchasing,
but specific prices that the issuer must pay to reacquire them.
Don’t these bonds have to be outstanding for a specified period before they can be repurchased?
Don’t these bonds have to be outstanding for a specified period before they can be repurchased?
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Debt TransactionsDebt TransactionsDebt TransactionsDebt Transactions
Mom’s Cookie Company issued $20,000 of five-year bonds on
January 1, 2005. The bonds pay 8% annually at the end of each year.
Mom’s Cookie Company issued $20,000 of five-year bonds on
January 1, 2005. The bonds pay 8% annually at the end of each year.
maturity value or face value Stated rate
of interest
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Debt TransactionsDebt TransactionsDebt TransactionsDebt Transactions
If Mom’s Cookie Company’s bonds are issued at a price to provide the investor
with a 9% return, then this return is known as the effective rate of interest.
If Mom’s Cookie Company’s bonds are issued at a price to provide the investor
with a 9% return, then this return is known as the effective rate of interest.
How is the issue price of Mom’s 8% bonds determined if the
effective rate of interest is 9%?
How is the issue price of Mom’s 8% bonds determined if the
effective rate of interest is 9%?
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Debt TransactionsDebt TransactionsDebt TransactionsDebt Transactions
PV of bonds = PV of annuity + PV of single amount
PV of bonds = $1,600 x 3.88965 + $20,000 x 0.64993
$20,000 x .08$20,000 x .08$20,000 x .08$20,000 x .085 periods, 9%5 periods, 9%5 periods, 9%5 periods, 9%Face value of Face value of
bondbondFace value of Face value of
bondbond 5 periods, 9%5 periods, 9%5 periods, 9%5 periods, 9%
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Debt TransactionsDebt TransactionsDebt TransactionsDebt Transactions
PV of bonds = PV of annuity + PV of single amount
PV of bonds = $1,600 x 3.88965 + $20,000 x 0.64993
PV of bonds = $6,223 + $12,999 (rounded)
PV of bonds = $19,222
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Exhibit 3Exhibit 3 Example of the Relationship of Bond Cash Flows to Present Value
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Debt TransactionsDebt TransactionsDebt TransactionsDebt Transactions
To determine transactions recorded for the bonds, we
need to develop an amortization table for Mom’s
Cookie Company.
To determine transactions recorded for the bonds, we
need to develop an amortization table for Mom’s
Cookie Company.
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Exhibit 4Exhibit 4 Bond Amortization Table
Mom’s Cookie Company
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Debt TransactionsDebt TransactionsDebt TransactionsDebt Transactions
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
1/1 Cash 19,222Bonds Payable 19,222
Mom’s Cookie Company would record the bond sale on January 1, 2005.
Mom’s Cookie Company would record the bond sale on January 1, 2005.
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Exhibit 4Exhibit 4 Bond Amortization Table
Mom’s Cookie Company
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Debt TransactionsDebt TransactionsDebt TransactionsDebt Transactions
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
12/31 Interest Expense –1,730Bonds Payable 130Cash –1,600
At the end of 2005, Mom’s Cookie Company would record the amount
paid and the interest expense.
At the end of 2005, Mom’s Cookie Company would record the amount
paid and the interest expense.
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Debt TransactionsDebt TransactionsDebt TransactionsDebt Transactions
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
12/31 Bonds Payable –20,000Cash –20,000
When the bond matures on December 31, 2009, the liability is removed when the
face value of the bond is paid.
When the bond matures on December 31, 2009, the liability is removed when the
face value of the bond is paid.
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Financial Reporting of DebtFinancial Reporting of DebtFinancial Reporting of DebtFinancial Reporting of Debt
Balance SheetLiabilities:
Long-term debt
$19,352 Income StatementNonoperating expenses:
Interest expense
1,730 Statement of Cash FlowsCash flow from operating activities:
Interest paid
(1,600)Cash flow from financing activities:
Long-term debt issued
19,222
Dec. 31, 2005Dec. 31, 2005Dec. 31, 2005Dec. 31, 2005
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Balance SheetLiabilities:
Long-term debt
$19,494Income StatementNonoperating expenses:
Interest expense
1,742 Statement of Cash FlowsCash flow from operating activities:
Interest paid
(1,600)
Financial Reporting of DebtFinancial Reporting of DebtFinancial Reporting of DebtFinancial Reporting of Debt
Dec. 31, 2006Dec. 31, 2006Dec. 31, 2006Dec. 31, 2006
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After recording the fifth interest payment and related interest expense, Mom’s Cookie
Company records paying the creditors the maturity value of the bonds:
Financial Reporting of DebtFinancial Reporting of DebtFinancial Reporting of DebtFinancial Reporting of Debt
Dec. 31, 2009Dec. 31, 2009Dec. 31, 2009Dec. 31, 2009
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Balance SheetLiabilities:
Long-term debt
---- Income StatementNonoperating expenses:
Interest expense
$ 1,783 Statement of Cash FlowsCash flow from operating activities:
Interest paid
(1,600)Cash flow from financing activities:
Debt repaid
(20,000)
Financial Reporting of DebtFinancial Reporting of DebtFinancial Reporting of DebtFinancial Reporting of Debt
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22Describe appropriate accounting procedures for contingencies and commitments, including capital leases.
ObjectiveObjectiveObjectiveObjective
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ContingenciesContingenciesContingenciesContingencies
A contingency is an existing condition that may result in an economic effect
if a future event occurs.
A contingency is an existing condition that may result in an economic effect
if a future event occurs.
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ContingenciesContingenciesContingenciesContingencies
If a contingency probably will result in a loss, and the amount of the loss can be
reasonable estimated, it should be included as a liability on a company’s balance sheet.
If a contingency probably will result in a loss, and the amount of the loss can be
reasonable estimated, it should be included as a liability on a company’s balance sheet.
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CommitmentsCommitmentsCommitmentsCommitments
A commitment is a promise to engage in some future activity that
will have an economic effect.
A commitment is a promise to engage in some future activity that
will have an economic effect.
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Operating leases are expensed in the period
in which the leased assets are used.
Operating leases are expensed in the period
in which the leased assets are used.
CommitmentsCommitmentsCommitmentsCommitments
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Capital leases are recorded as liabilities, and the
related leased resources are recorded as assets.
Capital leases are recorded as liabilities, and the
related leased resources are recorded as assets.
Capital LeasesCapital LeasesCapital LeasesCapital Leases
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Mom’s Cookie Company signs a lease on January
1, 2005 to acquire computer equipment. The lease is for three
years, the assumed life of the equipment. The
company agrees to pay $10,000 a year, including
8% interest.
Mom’s Cookie Company signs a lease on January
1, 2005 to acquire computer equipment. The lease is for three
years, the assumed life of the equipment. The
company agrees to pay $10,000 a year, including
8% interest.
Capital LeasesCapital LeasesCapital LeasesCapital Leases
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Using a table:
PVA = A x IF (Table 4)
PVA = $10,000 x 2.57710
$25,771 = $10,000 x 2.57710
Using Excel:
Enter: =PV(0.08,3,-10000)
Capital LeasesCapital LeasesCapital LeasesCapital Leases
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ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
1/1 Leased Assets 25,771Capital Lease Obligation 25,771
Mom’s Cookie Company records the present value of lease payments.
Mom’s Cookie Company records the present value of lease payments.
Capital LeasesCapital LeasesCapital LeasesCapital Leases
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ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
12/31 Capital Lease Obligation –7,938Interest Expense –2,062Cash –10,000
Mom’s Cookie Company records the $10,000 payment, which includes interest expense.
Mom’s Cookie Company records the $10,000 payment, which includes interest expense.
Capital LeasesCapital LeasesCapital LeasesCapital Leases
$25,771 x .08$25,771 x .08
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33Identify information reported in the stockholders’ equity section of a corporate balance sheet and distinguish contributed capital from retained earnings.
ObjectiveObjectiveObjectiveObjective
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December 31, 2006 2005December 31, 2006 2005Common stock, $1 par value,
50,000 shares authorized,20,000 and 10,000 issued $ 20,000 $ 10,000
Paid-in capital in excess of par 190,000 90,000 Retained earnings 130,417 42,990 Treasury stock, 1,000 shares
at cost (12,000) 0Total stockholders’ equity $328,417 $142,990
Exhibit 8Exhibit 8Exhibit 8Exhibit 8 Stockholders’ Equity for Mom’s Cookie Company
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Stockholders’ EquityStockholders’ EquityStockholders’ EquityStockholders’ Equity
Contributed Capital is the direct investment made by stockholders
in a corporation.
Contributed Capital is the direct investment made by stockholders
in a corporation.
Treasury stock is stock repurchased by a company
from its stockholders.
Treasury stock is stock repurchased by a company
from its stockholders.
Retained earnings is the accumulation of profits
reinvested in a corporation.
Retained earnings is the accumulation of profits
reinvested in a corporation.
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Contributed CapitalContributed CapitalContributed CapitalContributed Capital
Corporations primarily issue shares of stock in exchange for cash. Common stock or
capital stock represents the ownership rights of investors in a corporation.
Corporations primarily issue shares of stock in exchange for cash. Common stock or
capital stock represents the ownership rights of investors in a corporation.
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Contributed CapitalContributed CapitalContributed CapitalContributed Capital
A charter is the legal right granted by a state that permits
a corporation to exist.
A charter is the legal right granted by a state that permits
a corporation to exist.
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Contributed CapitalContributed CapitalContributed CapitalContributed Capital
What is meant by par value?
What is meant by par value?
The par value of stock is the value assigned to each share by a
corporation in its corporate charter.
The par value of stock is the value assigned to each share by a
corporation in its corporate charter.
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Contributed CapitalContributed CapitalContributed CapitalContributed Capital
Paid-in capital in excess of par value is the
amount in excess of the stock’s par value
received by a corporation from the sale of its stock.
Paid-in capital in excess of par value is the
amount in excess of the stock’s par value
received by a corporation from the sale of its stock.
Issued shares are shares that have been sold by a corporation to
investors.
Issued shares are shares that have been sold by a corporation to
investors.
Outstanding shares are shares currently held by investors.
Outstanding shares are shares currently held by investors.
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Retained EarningsRetained EarningsRetained EarningsRetained Earnings
YearYearNet Net
IncomeIncome DividendsDividends
Increase in Increase in Retained Retained EarningsEarnings
Balance of Balance of Retained Retained EarningsEarnings
2004 $ 0 2005 $ 52,990 $10,000 $42,990 42,990 2006 107,427 20,000 87,427 130,417
Mom’s Cookie Company for 2005 and 2006.Mom’s Cookie Company for 2005 and 2006.
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44Explain transactions affecting stockholders’ equity and describe how these transactions are reported in a company’s financial statements.
ObjectiveObjectiveObjectiveObjective
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Exhibit Exhibit 1010Exhibit Exhibit 1010 Examples of Transactions That Affect Common Stockholders’ Equity
ContinuedContinuedContinuedContinued
*An increase in treasury stock decreases stockholders’ equity.
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Transfers net Transfers net income earned income earned during 2005 to during 2005 to
Retained EarningsRetained Earnings..
Transfers net Transfers net income earned income earned during 2005 to during 2005 to
Retained EarningsRetained Earnings..
Exhibit Exhibit 1010Exhibit Exhibit 1010 Examples of Transactions That Affect Common Stockholders’ Equity
Deducts the amount Deducts the amount of dividends paid of dividends paid during 2005 from during 2005 from
Retained EarningsRetained Earnings..
Deducts the amount Deducts the amount of dividends paid of dividends paid during 2005 from during 2005 from
Retained EarningsRetained Earnings..
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Exhibit Exhibit 1010Exhibit Exhibit 1010 Examples of Transactions That Affect Common Stockholders’ Equity
Records the Records the purchase of purchase of
treasury stock.treasury stock.
Records the Records the purchase of purchase of
treasury stock.treasury stock.
Records the Records the amount received amount received from the sale of from the sale of common stock.common stock.
Records the Records the amount received amount received from the sale of from the sale of common stock.common stock.
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Equity TransactionsEquity TransactionsEquity TransactionsEquity Transactions
A company cannot earn profit from equity transactions.
A company cannot earn profit from equity transactions.
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Cash DividendsCash DividendsCash DividendsCash DividendsThree dates are important for dividend transactions:1) The date of declaration is the date on
which a corporation’s board of directors announces that dividends will be paid.
2) The date of record is the date used to determine who will receive the dividend.
3) The date of payment is the date on which the dividends are mailed.
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Issuing New StockIssuing New StockIssuing New StockIssuing New Stock
The right to maintain the same percentage of ownership when new
shares are issued is the stockholder’s preemptive right.
The right to maintain the same percentage of ownership when new
shares are issued is the stockholder’s preemptive right.
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Issuing New StockIssuing New StockIssuing New StockIssuing New Stock
When a new stock issue is prepared, stock rights are issued to existing
owners. These rights authorize the recipient to purchase new shares.
When a new stock issue is prepared, stock rights are issued to existing
owners. These rights authorize the recipient to purchase new shares.
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Stock DividendsStock DividendsStock DividendsStock Dividends
So, we had 1,000 shares before the stock dividend.
Now we have 1,050.
So, we had 1,000 shares before the stock dividend.
Now we have 1,050.
Stock dividends are shares of stock distributed by the company to the
stockholders without any charge. Druid Company distributed a 5% stock dividend.
Stock dividends are shares of stock distributed by the company to the
stockholders without any charge. Druid Company distributed a 5% stock dividend.
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Stock DividendsStock DividendsStock DividendsStock Dividends
An important point about issuing stock dividends is that the firm’s total stockholders’
equity does not change.
An important point about issuing stock dividends is that the firm’s total stockholders’
equity does not change.
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Stock SplitStock SplitStock SplitStock Split
When a corporation issues a stock split, it issues a multiple
of the number of shares of stock outstanding before the split.
When a corporation issues a stock split, it issues a multiple
of the number of shares of stock outstanding before the split.
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55Distinguish between preferred stock and common stock, and discuss why corporations may issue more than one type of stock.
ObjectiveObjectiveObjectiveObjective
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Preferred StockPreferred Stock
Preferred stock is stock with a higher claim on
dividends and assets than common stock.
Preferred stock is stock with a higher claim on
dividends and assets than common stock.
Cash dividends must be paid to preferred
stockholders before they can be paid to common
stockholders.
Cash dividends must be paid to preferred
stockholders before they can be paid to common
stockholders.
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Preferred StockPreferred Stock
Preferred stockholders
normally do not have voting rights in a
corporation.
Preferred stockholders
normally do not have voting rights in a
corporation.
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Preferred StockPreferred Stock
Some companies issue redeemable preferred stock. This is stock the issuing company
plans to repurchase at a particular time
in the future.
Some companies issue redeemable preferred stock. This is stock the issuing company
plans to repurchase at a particular time
in the future.
Redeemable preferred stock is not included
as part of stockholders’ equity.
It is reported as a separate item between
liabilities and stockholders’ equity.
Redeemable preferred stock is not included
as part of stockholders’ equity.
It is reported as a separate item between
liabilities and stockholders’ equity.
Preferred stock that can be converted
into shares of common stock are
referred to as convertible
preferred stock.
Preferred stock that can be converted
into shares of common stock are
referred to as convertible
preferred stock.
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THE ENDTHE END
CCHAPTERHAPTER F9 F9
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