LESSON6OWNER'SEQUITY6Aims:1.Todescribethecharacteristicsoflimitedcompany.2.Todifferentiateamongauthorized,issued,andoutstandingshares.3.Tounderstandpreferredstock,andcommonstock.4.Tomeasuretheeffectofissuingstockonacompany'sfinancialposition.5.Toaccountfordividendsandmeasuretheirimpactonacompany.6.Tounderstanddifferentvaluesofastock.7.Toreportstockholders‘equitytransactionsontheCashFlowStatements.Alimitedcompanyisanorganizationcreatedbylawwhichhasatleasttwoownerscalledshareholders.Itistheshareholders'liabilitythatislimitedtotheamounttheyhavepaid,oragreedtopay,fortheirshares,hencethetermlimitedliability.Directorsmanageacompanyandareresponsibleandaccountabletotheshareholders.Toprotectshareholdersandcreditorsthefinalaccountsofmostlimitedcompaniesaresubjecttoastatutoryaudit.6.1Introduction:LimitedCompanyTherearetwotypesoflimitedcompany,publicandprivate.LimitedcompaniesincludeeitherPLC(publiclimitedcompany)orLTD(privatelimitedcompany)intheirtitle.Themaindifferencebetweenthetwotypesofcompanyliesintherestrictionsplacedontheissueortransferoftheirshares.6.2TwoTypesofLimitedCompanyThecapitalofalimitedcompanyisdividedintosharesthathaveanominal/parvalue.Theissuedsharecapitalisthenumberandvalueofsharesissuedtodate.Thetwomainclassesofsharesareordinaryshares,(orequity),andpreferenceshares.Preferencesharestakepriorityforpaymentofdividends.6.3ShareCapitalIfacorporationissuesonlyoneclassortypeofstock,eachsharegivesitsownertherightto:(1)Voteatstockholders'meetings.(2)Shareinearningsdistributions.(3)Purchaseadditionalsharesinproportiontotheowner'spresentholding,ifmoresharesareissuedbythecorporation.(4)Shareintheassetsifthecorporationliquidatessuchstockiscalledcommonstock.6.4CommonStockTheissuanceofstockincreasesassets(usuallycash)andstockholders'equity.Thefollowingentriesaremadefortheissuanceofstock:1)Stockissuedatparvalue:

CashXXCommon(Preferred)StockXX2)Stockissuedatapriceabovepar:

CashXXCommon(Preferred)StockXXPaid-inCapitalinExcessofParXX6.5MeasuretheEffectofIssuingStockon

aCompany'sFinancialPosition3)No-parstockissued:CashXXCommon(Preferred)StockXX4)Stockissuedforassetsotherthancash:AssetXXCommon(Preferred)StockXXPaid-inCapitalinExcessofParXX6.5MeasuretheEffectofIssuingStockon

aCompany'sFinancialPositionPreferredstockisstockthatgivesitsownercertainpreferencesorrightssuperiortothoseofcommonstock.Usuallythesepreferencespertaintodividendsortodistributionofassetsatliquidation.Forexample,preferredstockownerstypicallyhavenovotingrights.Theownersofpreferredstockusuallyhavetherighttodividendsofacertainamountbeforeownersofcommonstockcanreceiveanydividends.6.6PreferredStockThedividendpreferenceisusuallystatedasadollaramountpershareorasapercentageofparvalue.Forexample,preferredstockmightbedescribedas“$50par,$4preferredstock,”or"$50par,8%preferredstock”.6.6PreferredStockToillustrate,assumethatKFCCompanyhas4O00sharesof$50par,$4preferredstock,and4000sharesof$10parcommonstockoutstanding.Theamountavailablefordividendsfortheyearis$28000.This$28000wouldbeallocatedbetweenthepreferredandcommonsharesasfollows:Totalamountavailablefordividends$28000Dividendtopreferredstock:4000sharesX$4$16000Amountavailableforcommonstock$12000Dividendspershare:Preferredstock$4Commonstock($12000÷4000shares)$36.7AnExampleofDividendDistributionPreferredstockonwhichanyunpaiddividendsaccumulatefromyeartoyeariscalledcumulativepreferredstock.Preferredstockonwhichdividendclaimsdonotaccumulatefromyeartoyeariscallednon-cumulativepreferredstock.Ifinoneyeardividendsarenotdeclared,thereisnocarryoverofdividendstothefollowingyears.6.8CumulativeandNon-cumulativePreferredStockThecapitalstructureofalimitedcompanyistherelationshipbetweenitsvarioussourcesoflongtermcapital.Gearingistherelationshipbetweendebt(longtermfixedinterestcapital)andequity(ordinarysharecapitalandreserves).Theimportanceofthegearingratioisthatitprovidesinformationaboutanorganization’sfinancialrisk.6.9CapitalStructureTheproposeddividendwillbeshownasacurrentliabilityontheBalanceSheetasitwillnotbepaiduntilaftertheBalanceSheetdate.Journalentriesareillustratedasfollows(1)Ondeclarationdate.RetainedEarningsXXDividendsPayableXX(2)Onpaymentdate.

DividendsPayableXXCashXX6.10CashDividendsAstockdividendisaproportionaldistributionbyacorporationofitsownstocktoitsownstockholders.

RetainedEarningsXXCommonStockXXPaid-inCapitalinExcessofParXX6.11StockDividendandStockSplitThemarketvalueofastockisitscurrentsellingprice.Marketvalueismoreimportanttostockholdersthananyoftheothervaluesmentionedhere.Theredemptionvalueofastockisthepricethecorporationpaystobuybackitspreferredstock.Redeemablepreferredstockisaliability,becausethecorporationhastheobligationtoredeempreferredstockattheoptionofthestockholder.Thebookvalueofastockmeasurestheamountofnetassetsorstockholders'equitypershare.6.12TheDifferentValuesofaStockStockholdersequitytransactionsarefinancingactivities.Thesefinancingtransactionsinclude:(1)Issuancesofstock;(2)Purchaseoftreasurystockorretirementofstock;(3)Paymentofdividends.Companiesuseavarietyofterminologyandformatsinreportingstockholders‘equity.6.13ReportingStockholders’EquityTransactionsontheStatementofCashFlowsMindMapsShareholder

Outstandingshares

Preferredstock

Commonstock

Issuingstock

Limitedcompany

PLC(publiclimitedcompany)

LTD(privatelimitedcompany)

Stockexchange

Nominal/parvalue

Retainedprofits

Earningsdistribution

Preemptiveright

Issueprice

TermsandPhrasesMarketprice

Atapriceabovepar

No-parstock

Paid-inCapitalinExcessofParCumulativepreferredstock

Non-cumulativepreferredstock

Participatingpreferredstock

Non-participatingpreferredstock

Reserve

Redeemable

Gearingratio

Treasurystock

RetirementofstockTermsandPhrasesShareholder