ACCT 2113 1st Edition Lecture 10 Outline of Last Lecture II Financing alternatives A Debt financing B Equity financing III Bond A Definition of private placement B Characteristics C Secured unsecured term serial callable convertible IV Pricing and recording a bond A Face amount discount premium V Amortization schedules for bonds VI Retirement of bonds VII Other long term liabilities A Installment notes B Leases VIII Long term liability ratios A Debt to equity ratio B Times interest earned ratio Outline of Current Lecture II Stockholders Equity A Paid in capital B Retained earnings C Treasury stock III Corporations A Articles of incorporation B Public or private C Advantages and disadvantages IV Common stock A Par Value B Accounting for common stock issues C Preferred stock D Accounting for preferred stock issues V Treasury stock These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute A Accounting for treasury stock VI Retained earnings and dividends A Stock dividends and stock splits VII Reporting and analyzing stockholders equity A Return on Equity Current Lecture Chapter 10 stockholders equity Stated another way equity is equal to what we own assets minus what we owe liabilities Because assets represent resources of the company and liabilities are creditors claims to those resources equity represents the owners residual claim to those resources Stockholders equity consists of three primary sections paid in capital retained earnings and treasury stock Paid in capital is the amount stockholders have invested in the corporation Retained earnings is the amount of earnings the corporation has retained that is the earnings not paid out in dividends Treasury stock is the corporation s own stock that it has reacquired Primary Sections of Stockholders Equity Paid in capital Invested Capital Corporationso Articles of incorporation or corporate charter describe a the nature of the firm s business activities Retained Earnings b the shares to be issued c the initial board of directors o Corporation s stockholders control the corporation By voting their shares they determine the makeup of the board of directors which in turn appoints the management to run the corporation Stages of Equity Financing o The progression leading to a public offering might include some or all of these steps o Investment by the founders of the business o Investment by friends and family of the founders o Outside investment by angel investors wealthy individuals in the business community willing to provide investment funds and venture capital firms provide additional financing for a percentage ownership in the corporation o Initial public offering IPO the first time a corporation issues stock to the public Public or Private Corporations may be either public or private Public Stocks trade on a stock exchanges such as NYSE AMEX NASDAQ or by over the counter OTC trading Regulated by the Securities and Exchange Commission SEC Examples Wal Mart Microsoft Intel Private Does not allow investment by the general public and has fewer stockholders Not regulated by the Securities and Exchange Commission SEC and do not need to file financial statements with it Examples Cargill agricultural commodities Koch Industries oil and gas Chrysler cars Stockholder Rights Whether public or private stockholders are the owners of the corporation and have certain rights o Right to vote o Right to receive dividends o Right to share in distribution of assets o Preemptive right allows a stockholder to maintain his or her percentage share of ownership Advantages and disadvantages of a corporation A corporation offers three primary advantages Limited Liability Because of limited liability even in the event of bankruptcy stockholders in a corporation can lose no more than the amount they invested in the corporation Ability to Raise Capital A corporation is better suited to raising capital than is a sole proprietorship or a partnership Attracting outside investment is easier for a corporation Lack of Mutual Agency Another favorable aspect of investing in a corporation is the lack of mutual agency Individual partners in a partnership each have the power to bind the business to a contract A corporation has two primary disadvantages Additional Taxes Corporations have double taxation As a legal entity separate from its owners a corporation pays income taxes on its earnings Then when it distributes the earnings to stockholders in dividends the stockholders the company s owners pay taxes a second time on the corporate dividends they receive More Paperwork To protect the rights of those who buy a corporation s stock or who lend money to a corporation the federal and state governments impose expensive reporting requirements on the corporation Common Stock If a corporation has only one kind of stock it usually is labeled as common stock A common has three types authorized issued and outstanding stock Authorized stock is the total number of shares available to sell stated in the company s articles of incorporation Issued stock is the number of shares that have been sold to investors Outstanding stock is the number of shares held by investors Par Value Par value is the legal capital per share of stock that s assigned when the corporation is first established and frankly has no significant meaning today Par value has no relationship to the market value of the common stock No par value stock is common stock that has not been assigned a par value In some cases a corporation assigns a stated value to the shares Stated value is treated and recorded in the same manner as par value shares Accounting for Common Stock Issues When a corporation receives cash from issuing common stock it debits cash If it issues no par value stock the corporation credits the equity account entitled common stock The journal entry reflects that the corporation issues 1 000 shares of no par value common stock at 30 per share Cash 1 000 shares x 30 30 000 Common Stock 30 000 Issue no par value common stock The entry changes slightly if the corporation issues par value stock rather than no par value stock In that case we credit two equity accounts We credit the common stock account for the number of shares issued times the par value per share and we credit additional paid in capital for the portion of the cash proceeds above par value Lets assume that the corporation issues 1 000 shares of its 0