Chapter 14-1 Chapter 14 Corporations: Dividends, Retained Earnings, and Income Reporting Chapter 14-2 Accounting Principles, Ninth Edition Study Study Objectives Objectives Prepare the entries for cash dividends and stock dividends Identify the items reported in a retained earnings statement Prepare and analyze a comprehensive stockholders’ equity section Describe the form and content of corporation income statements Compute earnings per share Chapter 14-3 Corporations: Corporations: Dividends, Dividends, Retained Retained Earnings, Earnings, and and Income Income Reporting Reporting Dividends Cash dividends Stock dividends Stock splits Chapter 14-4 Retained Earnings Retained earnings restrictions Prior period adjustments Retained earnings statement Statement Presentation and Analysis Stockholders’ Equity Presentation Stockholders’ Equity Analysis Income Statement Presentation Income Statement Analysis Dividends Dividends A distribution of cash or stock to stockholders on a pro rata (proportional) basis Types of Dividends: Cash dividends Stock dividends Property dividends Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share Chapter 14-5 SO Prepare the entries for cash dividends and stock dividends Dividends Dividends Dividends require information concerning three dates: Chapter 14-6 SO Prepare the entries for cash dividends and stock dividends Dividends Dividends Cash Dividends For a corporation to pay a cash dividend, it must have: Chapter 14-7 Retained earnings - Payment of cash dividends from retained earnings is legal in all states Adequate cash A declaration of dividends by the Board of Directors SO Prepare the entries for cash dividends and stock dividends Dividends Dividends Illustration: On Dec 1, the directors of Media General declare a 50¢ per share cash dividend on 100,000 shares of $10 par value common stock The dividend is payable on Jan 20 to shareholders of record on Dec 22? December (Declaration Date) Retained earnings Dividends payable December 22 (Date of Record) 50,000 50,000 No entry January 20 (Payment Date) Dividends payable Cash Chapter 14-8 50,000 50,000 SO Prepare the entries for cash dividends and stock dividends Dividends Dividends Allocating Cash Dividends Between Preferred and Common Stock Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends Chapter 14-9 SO Prepare the entries for cash dividends and stock dividends Dividends Dividends Illustration: On December 31, 2010, IBR Inc has 1,000 shares of 8%, $100 par value cumulative preferred stock It also has 50,000 shares of $10 par value common stock outstanding At December 31, 2010, the directors declare a $6,000 cash dividend Prepare the entry to record the declaration of the dividend Retained earnings 6,000 Dividends payable 6,000 Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000 Chapter 14-10 SO Prepare the entries for cash dividends and stock dividends Chapter 14-24 Dividends Dividends Effects of Stock Splits HH Inc Before Split Stockholders' equity Paid-in capital Common stock Paid-in capital in excess of par Retained earnings Total stockholders' equity Outstanding shares Book value per share Chapter 14-25 $ 5,000 45,000 110,000 $ 160,000 $ 5,000 32 After Split $ 5,000 45,000 110,000 $ 160,000 Net Change $ $ - 10,000 $ 16 SO Prepare the entries for cash dividends and stock dividends Retained Retained Earnings Earnings Retained earnings is net income that a company retains for use in the business Net income increases Retained Earnings and a net loss decreases Retained Earnings Retained earnings is part of the stockholders’ claim on the total assets of the corporation A debit balance in Retained Earnings is identified as a deficit Chapter 14-26 SO Identify the items reported in a retained earnings statement Retained Retained Earnings Earnings Restrictions Restrictions Restrictions can result from: Legal restrictions Contractual restrictions Voluntary restrictions Companies generally disclose retained earnings restrictions in the notes to the financial statements Chapter 14-27 SO Identify the items reported in a retained earnings statement Prior Prior Period Period Adjustments Adjustments Corrections of Errors Result from: mathematical mistakes  mistakes in application of accounting principles  oversight or misuse of facts  Corrections treated as prior period adjustments Adjustment made to the beginning balance of retained earnings Chapter 14-28 SO Identify the items reported in a retained earnings statement Prior Prior Period Period Adjustments Adjustments Before issuing the report for the year ended December 31, 2010, you discover a $50,000 error (net of tax) that caused the 2009 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2009 Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2010? Chapter 14-29 SO Identify the items reported in a retained earnings statement Retained Retained Earnings Earnings Statement Statement Chapter 14-30 SO Identify the items reported in a retained earnings statement Retained Retained Earnings Earnings Statement Statement The company prepares the statement from the Retained Earnings account Illustration 14-13 Chapter 14-31 SO Identify the items reported in a retained earnings statement Retained Retained Earnings Earnings Statement Statement Question All but one of the following is reported in a retained earnings statement The exception is: Chapter 14-32 a cash and stock dividends b net income and net loss c some disposals of treasury stock below cost d sales of treasury stock above cost SO Identify the items reported in a retained earnings statement Statement Statement Analysis Analysis and and Presentation Presentation Illustration 14-15 Chapter 14-33 SO Prepare and analyze a comprehensive stockholders’ equity section Statement Statement Analysis Analysis and and Presentation Presentation Stockholders’ Equity Analysis Return on Common Stockholders’ Equity = Net Income Available to Common Stockholders Average Common Stockholders’ Equity This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders Chapter 14-34 SO Prepare and analyze a comprehensive stockholders’ equity section Statement Statement Analysis Analysis and and Presentation Presentation Income Statement Presentation Chapter 14-35 Illustration 14-17 SO Describe the form and content of corporation income statements Statement Statement Analysis Analysis and and Presentation Presentation Income Statement Analysis Earnings Per Share = Net Income minus Preferred Dividends Weighted-Average Common Shares Outstanding This ratio indicates the net income earned by each share of outstanding common stock Chapter 14-36 SO Compute Earnings Per Share Statement Statement Analysis Analysis and and Presentation Presentation Question The income statement for Nadeen, Inc shows income before income taxes $700,000, income tax expense $210,000, and net income $490,000 If Nadeen has 100,000 shares of common stock outstanding throughout the year, earnings per share is: Chapter 14-37 a $7.00 b $4.90 c $2.10 d No correct answer is given ($490,000 / 100,000 = $4.90) SO Compute Earnings Per Share Copyright Copyright “Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 14-38 .. .Chapter 14 Corporations: Dividends, Retained Earnings, and Income Reporting Chapter 14- 2 Accounting Principles, Ninth Edition Study Study Objectives... Dividends payable Chapter 14- 12 50,000 50,000 SO Prepare the entries for cash dividends and stock dividends Chapter 14- 13 Dividends Dividends Stock Dividends Illustration 14- 3 Pro rata distribution... amount per share Chapter 14- 5 SO Prepare the entries for cash dividends and stock dividends Dividends Dividends Dividends require information concerning three dates: Chapter 14- 6 SO Prepare the