Chapter 11: Summary Cheat Sheet

Common Stock and Dividends Corporate Advantages and Disadvantages • • Advantages: Includes limited liability, separate legal entity, transferable ownership, continuous life, no mutual agency, and easier capital accumulation. Disadvantages: Higher regulation and double taxation of income. Issuing Common Stock • • • • At Par Value: The stock is issued at a price equal to the par value. Above Par Value: The stock is issued at a price higher than the par value; the excess is credited to Paid-In Capital in Excess of Par Value. No-Par Stock: Stock issued without a par value, directly recorded as Common Stock. Stated Value Stock: No-par stock with an assigned stated value. Dividends on Common Stock • • Cash Dividends: o Date of Declaration: Liability is created. o Date of Record: Identifies shareholders eligible for the dividend; no journal entry. o Date of Payment: Cash dividend is paid, reducing cash and dividend payable. Stock Dividends: o Small Stock Dividend (≤ 25%): Retained earnings reduced by the market value of shares distributed. o Large Stock Dividend (> 25%): Retained earnings reduced by the par or stated value of shares distributed. o Stock Split: Increases shares outstanding and reduces par value per share, but no journal entry is made. Preferred Stock and Treasury Stock Preferred Stock • • Cumulative Preferred Stock: Accumulated unpaid dividends (dividends in arrears) must be paid before common stock dividends. Noncumulative Preferred Stock: Only the current-period dividends are paid, with no claim to past unpaid dividends. Treasury Stock • • Definition: Reacquired shares by the corporation, which reduces equity and does not receive dividends. Transactions: o Selling at Cost: Reversal of the initial purchase entry. o Selling Above Cost: Credit Paid-In Capital, Treasury Stock for the excess. o Selling Below Cost: Debit Paid-In Capital, Treasury Stock for any shortfall, and then Retained Earnings if needed. Key Financial Ratios Earnings per Share (EPS) • • Formula: EPS=Net Income−Preferred DividendsWeightedAverage Common Shares Outstanding Example Calculation: If net income is $75,000 with 19,000 shares outstanding, and no preferred stock, EPS is: 75,00019,000=3.95 Price-Earnings (PE) Ratio • • • Formula: PE Ratio=Market Value per ShareEarnings per Share Example Calculation: With a market value of $85 per share and EPS of $5: PE Ratio=855=17.0 Interpretation: A high PE ratio indicates high growth expectations, while a low PE ratio suggests slower growth. Dividend Yield • • • Formula: Dividend Yield=Annual Dividends per ShareMarket Value per Share Example Calculation: With dividends of $0.81 per share and a market price of $45: Dividend Yield=0.8145=1.8% Interpretation: High dividend yields indicate income stocks, while low or zero yields indicate growth stocks.