Accounting and its Relationship to Shareholder Value and Business PERTEMUAN III Dr Rilla Gantino, SE., AK., MM MM-FEB

  

Accounting and its Relationship to

Shareholder Value and Business

PERTEMUAN III Dr Rilla Gantino, SE., AK., MM MM-FEB

KEMAMPUAN AKHIR YANG DIHARAPKAN

  Mahasiswa mampu menguraikan hubungan antara akuntansi dengan nilai perusahaan melalui pemahaman atas konsep value based mmanagement accounting dan strategy serta konsep organization structure C 1

  Corporate Form of Organization

  An entity An entity created by law created by law

  Privately Held

  Privately Held Existence is Existence is Ownership separate from separate from can be owners owners Has rights and Has rights and privileges privileges

  Publicly Held

  Publicly Held Characteristics of

Corporations

  Advantages

   Separate legal entity

   Limited liability of stockholders

   Transferable ownership rights

   Continuous life

   Lack of mutual agency for stockholders

   Ease of capital accumulation Disadvantages

   Governmental regulation  Corporate taxation ^{C 1}

  Stockholders

  Stockholders

  Board of Directors

  Board of Directors

  President, Vice-President,

  President, Vice-President,

  and Other Officers

  and Other Officers

  Employees of the Corporation

  Employees of the Corporation Corporate Organization and

  Management ^{C 1} C 1

  Corporate Organization and Management

  

C o r p o r a t e O r g a n iz a t io n C h a r t

Stockholders Ultimate

  

S t o c k h o ld e r s

usually meet control once a year

  Selected by a

  B o a r d o f D i r e c t o r s Overall

  vote of the responsibility stockholders for managing

  

P r e s id e n t

  the company

  S e c r e t a r y V i c e P r e s i d e n t V ic e P r e s id e n t V i c e P r e s i d e n t F i n a n c e P r o d u c t i o n M a r k e t i n g C 1

  Rights of Stockholders

  Vote at stockholders’ meetings Sell stock  Purchase additional shares of stock Receive dividends, if any Share equally in any assets remaining after creditors are paid in a liquidation

Transfer

  Each unit of ownership is called a share of stock . A stock certificate serves as proof that a stockholder has purchased shares.

  Stock Certifcates and

  When the stock is sold, the stockholder signs a transfer ^{C 1}

  Basics of Capital Stock

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

  Total amount of stock that has been issued or sold to stockholders. ^{C 1} C 1

  Basics of Capital Stock

  Par value is an Market price is the arbitrary amount amount that each assigned to each share of stock will share of stock when sell for in the market. it is authorized.

  

 Classes of Stock  Par Value  No-Par Value  Stated Value P 1

  Issuing Par Value Stock

Par Value Stock

  On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for $25 per share. Let’s record this transaction.

  Dr Cr Sept. 1 Cash 2,500,000 Common Stock, $2 par value

  200,000 Paid-in Capital in Excess of Par Value, Common 2,300,000 Issuing Par Value Stock ^{P 1}

P 1

  Issuing Stock for Noncash Assets

Par Value Stock

  On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for land valued at $2,500,000. Let’s record this transaction.

   Dr Cr Sept. 1 Land 2,500,000 Common Stock, $2 par value

  200,000 Paid-in Capital in Excess 2,300,000 of Par Value, Common P 2

  Cash Dividends

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

  Corporation Dividends Stockholders %of Corporations Paying Divends To pay a cash dividend, the _100% corporation must have: _{80% 75%}

  1. A sufficient balance in _{40% 60%} retained earnings; and _{20% 22%}

  2. The cash necessary to _0%

  Accounting for Cash Dividends

  Three important dates Three important dates

  Date of Declaration Record liability for dividend. ^{Div ide nds}

Date of Record

  

No entry

required.

  Date of Payment Record payment of cash to stockholders. ^{P 2}

  Date of Declaration

  Record liability for dividend. ^{Div ide nds} Dr Cr Jan. 19 Retained Earnings 10,000 Common Dividend Payable 10,000

  Accounting for Cash

Dividends

  On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The dividend will be paid on March 19 to stockholders of record on February 19. ^{P 2}

Dividends

  

No entry required on February 19, the date of record.

   Dr Cr Mar. 19 Common Dividends Payable 10,000 Cash 10,000

  Date of Payment

  

Record payment of

cash to stockholders.

  Accounting for Cash

  On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The dividend will be paid on March 19 to stockholders of record on February 19. ^{P 2}

Defcits and Cash Dividends

  A deficit is created when a company incurs cumulative losses or pays dividends greater than total profits earned in other years. ^{P 2} P 2

  Stock Dividends

  

A distribution of a corporation’s own shares to its stockholders

without receiving any payment in return.

  Why a stock dividend?

 Can be used to keep the market price on the stock affordable.

   Can provide evidence of management’s confidence that the company is doing well.

  Small Stock Dividend

Distribution is  25% of the previously outstanding shares.

  

Large Stock Dividend

Distribution is > 25% of the previously outstanding shares.

_{100 shares}

HotAir, Inc.

  

Common Stock

_{$1 par}

  _{P 2} Recording a Small Stock Dividend

  Simmons has 100,000 shares of $1 par value stock outstanding. On December 31, 2011, Simmons declared a 2% stock dividend, when the stock was selling for $10 per share. The stock will be distributed to

stockholders on January 20, 2012. Let’s prepare the December 31 entry.

  Capitalize retained earnings for the market value of the shares to be distributed. (100,000 × 2% = 2,000 × $10 = $20,000) 2,000 × $1 par Dr Cr Dec. 31 Retained Earnings 20,000 Common Stock Dividend Distributable 2,000 Paid-In Capital in Excess of Par Value 18,000

Declared a 2,000 share (2%) stock dividend. Before the Before the stock stock dividend. dividend.

  After the After the stock stock dividend. dividend. ^{P 2} Recording a Large Stock Dividend

  Dr Cr Dec. 31 Retained Earnings 20,000 Common Stock Dividend Distributable 20,000 Declared a 20,000 share (40%) stock dividend. Capitalize retained earnings for the minimum amount required

by state law, usually par or stated value of the shares.

  

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

Router, Inc. has 50,000 shares of $1 par value stock outstanding. On December 31, 2009, Router declared a 40% stock dividend, when the stock was selling for $8 per share.

  The stock will be distributed to stockholders on January 20,

2010. Let’s prepare the December 31 entry.

^{P 2}

  Common Stock $10 par value 100 shares

  Old Shares New Shares

  Common Stock $5 par value

  Stock Splits

  

A distribution of additional shares of stock to

stockholders according to their percent ownership. ^{P 2} C 2

  Preferred Stock

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

• – Dividend distributions
• – Distribution of assets in case of liquidation

  

Usually has a stated Normally has no

dividend rate voting rights

Preferred Stock

  vs. Noncumulative Cumulative Dividends in arrears must be paid before dividends may be paid on common stock. (Normal case) Undeclared dividends from current and prior years do not have to be paid in future years.

  Consider the following Stockholders’ Equity section of the Balance Sheet. The Board of Directors did not declare or pay dividends in 2010. In 2011, the Board declared and paid cash dividends of $42,000 . ^C2

  

If Preferred Stock is Noncumulative : Preferred Common

Year 2010: No dividends paid.

• $ - $ Year 2011:

  1. Pay 2011 preferred dividend. 9,000 $ 2. Remainder goes to common.

  33,000 $

If Preferred Stock is Cumulative: Preferred Common

Year 2010: No dividends paid.

• $ - $ Year 2011:

  1. Pay 2010 preferred dividend in arrears. 9,000 $

  2. Pay 2011 preferred dividend. 9,000 3. Remainder goes to common.

  24,000 $ Totals 18,000 $ 24,000 $

  Preferred Stock ^C2 C2

  Preferred Stock Participating vs. Nonparticipating Dividends may exceed a Dividends are limited to a stated amount once maximum amount each year. common stockholders The maximum is usually the receive a dividend equal to stated dividend rate. the preferred stated rate. (Normal case) Reasons for Issuing Preferred Stock

   To raise capital without sacrificing control  To boost the return earned by common stockholders

  through financial leverage

   To appeal to investors who may believe the common

  stock is too risky or that the expected return on P 3

Treasury Stock

  

Treasury stock represents shares of a company’s own

stock that has been acquired. Corporations might acquire its own stock to: 1. Use their shares to buy other companies.

  2. Avoid a hostile takeover.

  3. Reissue to employees as compensation.

  4. Support the market price.

  Purchasing Treasury Stock

  8,000

Purchase 2,000 treasury shares

at $4 per share.

  On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $4 per share. ^{P 3}

Treasury stock is shown as a reduction in total Treasury stock is shown as a reduction in total stockholders’ equity on the balance sheet. stockholders’ equity on the balance sheet. Treasury stock is shown as a reduction in total Treasury stock is shown as a reduction in total stockholders’ equity on the balance sheet. stockholders’ equity on the balance sheet. Dr Cr May 8 Treasury stock, common 8,000 Cash

  Selling Treasury Stock at Cost

  Dr Cr June 30 Cash 400 Treasury stock, common 400

  

Sold 100 shares of treasury

for $4 per share.

  On June 30, Whitt sold 100 shares of its treasury stock for $4 per share. ^{P 3} P 3

  Selling Treasury Stock Above Cost

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

  Dr Cr July 19 Cash 4,000 Treasury Stock, common 2,000 Paid-In Capital, Treasury Stock 2,000 Sold 500 treasury shares for $8 per share. Selling Treasury Stock Below Cost

  Dr Cr Aug. 27 Cash 600 1,000 Treasury Stock, Common

  1,600

Sold 500 treasury shares for $1.50 per share.

Paid-in Captial, Treasury Stock

  On August 27, Whitt sold an additional 400 shares of its treasury stock for $1.50 per share. ^{P 3} C 3

  Statement of Retained Earnings

  Retained earnings is the total cumulative amount of reported net income less any net losses and dividends declared since the company started operating. Restricted Retained Earnings Legal Restriction Contractual Restriction Most states restrict Loan agreements the amount of can include treasury stock restrictions on paying purchases to the dividends below a amount of retained certain amount of earnings. retained earnings.

  Appropriated Retained

Earnings

  A corporation’s directors can voluntarily limit dividends because of a special need for cash such as the purchase of new facilities. ^{C 3}

Prior Period Adjustments

  Prior period adjustments are corrections of material errors in past years’ financial statements that result in a change in the beginning balance of retained earnings. ^{C 3}

Stockholders’ Equity

  (In millions) Retained Shares Amount Earnings Total Balance at December 31, 2010 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, 2011 821 2,740 $ 13,595 $ 16,335 $ Common stock and capital in excess of par Matrix, Inc. Statement of Stockholders' Equity For the Year Ended December 31, 2011 (In millions)

  Retained Shares Amount Earnings Total Balance at December 31, 2010 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, 2011 821 2,740 $ 13,595 $ 16,335 $ Common stock and capital in excess of par Matrix, Inc. Statement of Stockholders' Equity For the Year Ended December 31, 2011

  Statement of

  This is a more inclusive statement than the statement of ^{C 3}

  Option purchase price $30 per share.

  Stock Options

  Market price of stock $75 per share.

  

The right to purchase common stock at a fixed price over a

specified period of time. As the stock’s price rises above

the fixed option price, the value of the option increases.

  

Options are given to key employees to motivate them to:

 focus on company performance,

   take a long-run perspective, and ^{C 3}

  Earnings Per Share

  Basic earnings per share

  =

  Net income - Preferred dividends Weighted-average common shares outstanding Earnings per share is one of the most widely

cited accounting statistics.

^{A 1}

  If earnings go up, will the market price of my stock follow? Price–Earnings Ratio

  =

  This ratio reveals information about the stock market’s expectations for a company’s future growth in earnings, dividends, and opportunities. ^{A 2}

Price– Earnings Ratio

Market value per share Earnings per share

  Dividend Yield

  Dividend Yield = Annual cash dividends per share Market value per share Tells us the annual amount of cash dividends distributed to common stockholders relative to the stock’s market price. ^{A 3} A 4

  Book Value per Share– Common

  Reflects the amount of stockholders’ equity applicable to common shares on a per share basis. Stockholders’ equity applicable Book value per Book value per to common shares common share = common share Number of common shares outstanding Book Value per Share– Preferred

  Book value per preferred share = Stockholders’ equity applicable to preferred shares Number of preferred shares outstanding Reflects the amount of stockholders’ equity applicable to preferred shares on a per share basis. ^{A 4}

  

Global View

U.S. GAAP and IFRS have similar procedures for issuing common

U.S. GAAP and IFRS have similar procedures for issuing common

stock at par, at a premium, at a discount, and for noncash assets.

stock at par, at a premium, at a discount, and for noncash assets.

  

Accounting for and reporting cash dividends, stock dividends, and

Accounting for and reporting cash dividends, stock dividends, and

stock splits, are consistent under both U.S. GAAP and IFRS.

stock splits, are consistent under both U.S. GAAP and IFRS.

  

Accounting for treasury stock is consistent under both U.S. GAAP and

Accounting for treasury stock is consistent under both U.S. GAAP and

  

IFRS. Companies do not report gains or losses on transactions

  

IFRS. Companies do not report gains or losses on transactions

involving their own stock.

involving their own stock.

  

Preferred stock that is redeemable at the option of the preferred

Preferred stock that is redeemable at the option of the preferred

stockholder is reported between liabilities and equity under U.S. GAAP,

stockholder is reported between liabilities and equity under U.S. GAAP,

but it is reported as a liability under IFRS. Also, the issue price of

but it is reported as a liability under IFRS. Also, the issue price of

convertible preferred stock (and bonds) is recorded entirely under

convertible preferred stock (and bonds) is recorded entirely under

preferred stock (or bonds), and none to the conversion feature under

preferred stock (or bonds), and none to the conversion feature under

  

U.S. GAAP. However, IFRS requires that a portion of the issue price be

U.S. GAAP. However, IFRS requires that a portion of the issue price be