Financial and Managerial Accounting, 8e
11-1
CHAPTER 11
CORPORATE REPORTING AND ANALYSIS
Student Learning Objectives
Questions
Quick Studies*
Exercises*
Problems*
AA and
BTN
C3. Explain the items reported
in retained earnings.
11-19
11-13, 11-14,
11-2, 11-4,
GL 11-1,
GL 11-2
AA 11-3, BTN 11-1,
BTN 11-3
C1. Identify characteristics of
corporations and their
1, 2, 3, 4
11-1
11-1, 11-2
SP
BTN 11-3
A1 Compute earnings per
share and describe its use.
13
11-20, 11-21
11-16, 11-17
BTN 11-6
A2. Compute price-earnings
ratio and describe its use
11-22
AA 11-2, BTN 11-2,
BTN 11-6
A3. Compute dividend yield
and explain its use in
11-23
11-19
AA 11-2, BTN 11-6
A4. Compute book value and
14
11-24
11-1, 11-5
AA 11-1, AA 11-2
AA 11-1, AA 11-2,
AA 11-3, BTN 11-2,
P1. Record the issuance of
corporate stock.
11-2, 11-3,
11-4, 11-5,
11-17
11-3, 11-4,
11-5, 11-13
11-1, SP
stock dividends, and stock
11-8, 11-9,
11-10, 1-16
11-4, GL11-1,
GL11-2
P3. Record purchases and
sales of treasury stock.
12
11-17
11-2, 11-4,
GL 11-1,
GL 11-2
BTN 11-4
P2. Record transactions
8, 9, 10, 11
11-6, 11-7,
11-6, 11-7,
11-2, 11-3,
BTN 11-5
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
2:03
Dividend Preference of Preferred Stock
3:48
1:17
2:06
C3
Statement of Retained Earnings
1:18
0:29
Compute earnings per share and describe its use.
Basic Earnings per Share
1:00
Compute price-earnings ratio and describe its use in analysis.
Financial and Managerial Accounting, 8e
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available
in Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated
PowerPoints without the video and audio functions for the Guided Examples are also available in the Connect
Need-to-Know Videos
Need–to-Know
Title
Time
11-1
Recording Stock Issuance
2:21
11-2
Recording Dividends
3:48
11-3
Allocating Cash Dividends
4:32
11-4
Recording Treasury Stock
2:48
Concept Overview Videos
LO
Title
Time
C1
Identify characteristics of corporations and their organization.
Organization of Corporations
0:56
Corporate Advantages and Disadvantages
2:39
Corporate Stockholders
3:10
Financial and Managerial Accounting, 8e
11-3
Price-Earnings Ratio
0:48
Price-Earnings Ratio — Illustration
1:31
A3
Compute dividend yield and explain its use in analysis.
Dividend Yield
0:54
Dividend Yield — Illustration
1:20
A4
Compute book value and explain its use in analysis.
Book Value per Share
1:15
Book Value per Share — Illustration
2:24
P1
Record the issuance of corporate stock.
Issuing Par Value Stock
2:29
Issuing No-Par Value Stock
1:49
Issuing Stock for Noncash Assets
1:28
Issuing Stock for Organization Expenses
1:10
P2
Record transactions involving cash dividends, stock dividends, and stock splits.
Cash Dividends
2:12
Cash Dividends – Illustration
0:43
Small Stock Dividends
2:42
Large Stock Dividends
1:18
Stock Splits
1:07
P3
Record purchases and sales of treasury stock.
1:25
4:02
Synopsis of Chapter Revisions
NEW opener—Yelp and entrepreneurial assignment.
New Decision Insight on bots investing in stocks based on erroneous news.
New AT&T stock quote explanation.
New graphic visually depicting key cash dividend dates.
Continued 5-step process for stock dividends.
Financial and Managerial Accounting, 8e
11-4
Chapter Outline
I. Corporate Form of Organization—An entity that is separate from its owners and has many of the
same rights and privileges as individuals. Owners are called stockholders. A publicly held corporation
offers its stock for public sale (organized stock market) whereas a privately held (closely held)
corporation does not.
A. Corporate Advantages
above, which helps corporations collect large sums of money.
1. Separate legal entity—a corporation has many of the same rights, duties, and responsibilities as
a person. Takes actions through its agents, who are officers and managers.
2. Limited liability—stockholders are not liable for corporate actions or debt.
B. Corporation Disadvantages
2. Corporate taxation—corporate income is taxed; and when income is distributed to shareholders
as dividends, it is taxed a second time as personal income (double taxation).
1. Governmental regulation—must follow a state’s incorporation laws.
C. Corporate Organization and Management
2. Organization Expenses (organization costs)—costs to start the corporation and include legal
1. Incorporation—A corporation is created by getting a charter from a state government. A charter
application, signed by prospective stockholders (incorporators or promoters) must be filed with
the state and fees must be paid.
D. Corporate Stockholders
1. Rights of Stockholders—Specific rights are granted by the charter and general rights by state
laws. State laws vary but common stockholders general rights usually include right to:
a. Vote at stockholders’ meeting.
Financial and Managerial Accounting, 8e
11-5
2. Stock Certificates and Transfer
a. Stock certificate is sometimes received as proof of share ownership.
3. Registrar and Transfer Agents—if stock is traded on a stock exchange, the corporation has a
registrar and transfer agent (usually large banks or financial institutions).
E. Corporate Stock —shares issued to obtain capital (owner financing).
2. Selling (Issuing) stock—can be sold directly/indirectly to stockholders.
3. Market value of stock—the price at which a stock is bought and sold.
1. Authorized stock—the total amount of stock that the charter authorizes for sale. No journal
entry is required for stock authorization.
a. Outstanding stock is stock held by stockholders.
4. Classes of stock
a. Common—the name of stock when all classes have same rights and privileges.
5. Par value stock—a class of stock that is assigned a value per share by the corporation in its
6. No-par value stock—not assigned a value per share by the corporate charter.
7. Stated value stock—no–par stock that is assigned a “stated” value per share by the directors.
This stated value becomes legal capital.
8. Stockholders’ (Shareholders’) Equity—has two parts:
II. Common Stock—Issuance of stock affects only paid-in capital accounts, not retained earnings
accounts.
A. Issuing Par Value Stock
Financial and Managerial Accounting, 8e
11-6
2. Issuing Par Value Stock at a Premium—Premium on stock is an amount paid in excess of par by
the purchasers of newly issued stock.
3. Issuing Par Value Stock at a Discount— Discount occurs when stock is sold for less than its par
value (prohibited by most states).
B. Issuing No-Par Value Stock
When no-par stock is issued, the entire amount received is credited to a no-par value stock account.
C. Issuing Stated Value Stock
The stated value is credited to the stock account. Any amount above the stated value, is credited to
Paid-In Capital in Excess of Stated Value, Common Stock.
D. Issuing Stock for Noncash Assets
1. Issuing par value stock for other assets
III. Dividends
A. Cash Dividends—decision to pay dividends rest with the board of directors and is based on
evaluating the amounts of retained earnings and cash as well as many other factors.
1. Accounting for Cash Dividends—involves three important dates.
a. Date of Declaration—date the directors vote to pay a dividend (legal liability created).
Financial and Managerial Accounting, 8e
11-7
3. Deficits and Cash Dividends—a debit (abnormal) balance in retained earnings is called a
retained earnings deficit.
B. Stock Dividends—Distribution of additional shares of stock to stockholders without receipt of any
payment in return. They do not reduce assets or total equity, just the components of equity.
1. Reasons for Stock Dividends
Excess of Par (any capitalization above par).
2. Accounting for Stock Dividends—transfers a portion of equity from retained earnings to
contributed capital (called capitalizing retained earnings)
a. Small stock dividend is 25% or less of the issuing corporation’s previously outstanding
shares; the market value of the shares to be distributed is capitalized.
C. Stock Splits
The distribution of additional shares of stock to stockholders according to their percent of
ownership. Involves “calling in” the outstanding shares of stock and replacing them with a larger
number of shares that have a lower par value.
4. Reverse stock splits reduce number of shares and increase par value.
1. Reason for stock splits is similar to those for stock dividends.
IV. Preferred Stock—Has special rights that give it priority over common stock in one or more areas such
as preference for receiving dividends and in liquidation of assets. Usually does not have right to vote.
A. Issuance of Preferred Stock
Usually has a par value; can be sold at a price different from par.
1. Separate contributed capital accounts are used to record preferred stock.
Financial and Managerial Accounting, 8e
11-8
B. Dividend Preference of Preferred Stock
Preferred stockholders are allocated their dividends before any dividends are allocated to common
stockholders.
1. Cumulative or Noncumulative
a. Cumulative preferred stock has a right to be paid both current and all prior periods’ unpaid
2. Participating or Nonparticipating
C. Reasons for Issuing Preferred Stock
1. To raise money without giving up control of the corporation.
2. To boost the return earned by common stockholders on corporate assets. Also called financial
leverage.
V. Treasury Stock—A corporation buys back their own shares for several reasons such as to acquire
another company, to avoid a takeover, to give to employees as compensation, or to maintain a strong
market for their stock.
A. Purchasing Treasury Stock—Cost Method
4. A company never reports a loss or gain from the sale of
treasury stock.
1. Reduces the corporation’s assets and stockholders’ equity by equal amounts.
D. Reissuing Treasury Stock
1. Selling Treasury Stock at Cost—Treasury stock is reduced (credited) for the cost of the
reissued shares and Cash is debited for the amount received.
Financial and Managerial Accounting, 8e
11-9
VI. Reporting of Equity
A. Statement of Retained Earnings—Retained Earnings is the total cumulative amount of reported net
income minus any net losses and dividends declared. It is part of stockholders’ equity (claim to the
assets) and does not mean that any certain amount of cash or other assets actually exists.
1. Restrictions and Appropriations
period.
2. Prior Period Adjustments
a. Corrections of material errors made in past period financial statements.
3. Closing Process
a. Close credit balances in revenue accounts to Income Summary
B. Statement of Stockholders’ Equity
VII. Decision Analysis—Earnings per Share, Price-Earnings Ratio, Dividend Yield, and Book Value
per Share
A. Earnings per Share (EPS)
1. Amount of income earned by each share of outstanding common stock; reported on the income
B. Price-Earnings Ratio (PE ratio)
1. Used to gain understanding of the market’s expected receipts for the stockholders.
C. Dividend Yield
2. Calculated as annual cash dividends per share divided by market value per share.
1. Used to determine whether a company’s stock is an income stock (pays large and regular
Financial and Managerial Accounting, 8e
11-10
D. Book Value per Share—stockholders’ claim to the assets on a per share basis.
1. Book value per common share
a. If only one class outstanding, equals total stockholders’ equity divided by the number of
Financial and Managerial Accounting, 8e
11-11
Chapter 11 Alternate Demonstration Problem #1
Uzi Company received a charter granting the right to issue 200,000 shares of $1
par value common stock and 10,000 shares of 8% cumulative and
nonparticipating, $50 par value preferred stock that is callable at $80 per share.
Selected transactions are presented below.
2019
Feb.
19
Issued 45,000 shares of common stock at par for cash.
22
and machinery, $125,000.
Gave the corporation’s promoters 30,000 shares of common
stock for their services in getting the corporation organized. The
directors valued the services at $50,000.
2020
Jan.
12
Issued 1,000 shares of preferred stock at $75 per share.
earned.
2021
Jan.
31
Paid the previously declared dividends.
Required:
1. Prepare general journal entries to record the selected transactions.
Financial and Managerial Accounting, 8e
11-12
Chapter 11 Solution: Alternate Demonstration Problem #1
Part 1
2019
Feb.
19
Cash …………………………………………………….
45,000
Common Stock ………………………………..
45,000
22
Organizational Expense ………………………..
50,000
Common Stock ………………………………..
30,000
Value, Common Stock ………………….
20,000
30
25,000
Buildings ………………………………………………
Machinery …………………………………………….
Common Stock
Value, Common Stock ………………….
Dec.
31
Retained Earnings …………………………………
25,000
Income Summary …………………………….
25,000
2020
Jan.
12
Cash …………………………………………………….
75,000
Preferred Stock ……………………………….
50,000
Paid–In Capital in Excess of Par
Value, Preferred Stock ………………….
25,000
Dec.
15
Retained Earnings …………………………………
21,500
Common Dividend Payable ………………
17,500
Preferred Dividend Payable ……………..
31
Income Summary ………………………………….
69,000
Retained Earnings …………………………...
69,000
2021
Jan.
31
Preferred Dividend Payable …………………..
Common Dividend Payable ……………………
17,500
21,500
Financial and Managerial Accounting, 8e
Part 2
Stockholders’ Equity
Preferred stock, $50 par value, 8% cumulative and
nonparticipating, 10,000 shares authorized, 1,000
shares issued ………………………………………………………
Common stock, $1 par value, 200,000 shares
authorized, 175,000 issued ……………………………………
Total Paid-in capital …………………………………………………..
Retained earnings ……………………………………………………..
Part 3
Book value per preferred share = call value (or par value if stock does not have
a call value) plus any dividends in arrears if cumulative stock. There are no
arrears.
Financial and Managerial Accounting, 8e
11-14
Chapter 11 Alternate Demonstration Problem #2
At the beginning of 2019, Austin Corporation’s stockholders’ equity consisted
of the following:
24,000 shares issued ……………………………………………………..
Retained earnings ……………………………………………………………….
During the year, the company completed these transactions:
June
6
Purchased 1,000 shares of treasury stock at $40 per share.
23
the stock was $40 per share.
The directors voted a $0.50 per share cash dividend payable
on July 25 to the July 20 stockholders of record.
Required:
1. Prepare general journal entries to record the transactions.
Financial and Managerial Accounting, 8e
11-15
Chapter 11 Solution: Alternate Demonstration Problem #2
Part 1
June
6
Treasury Stock, Common ………………………
40,000
Cash ………………………………………………..
40,000
23
Retained Earnings …………………………………
11,500
Common Dividend Payable ………………
11,500
25
Common Dividend Payable ……………………
11,500
Cash ………………………………………………..
11,500
Aug.
10
Cash ……………………………………………………..
22,500
Treasury Stock, Common
20,000
Transactions ………………………………..
2,500
Oct.
20
Cash ……………………………………………………..
19,000
Paid–In Capital, Treasury Stock
Transactions ………………………………..
1,000
Treasury Stock, Common …………………
20,000
Dec.
15
Retained Earnings …………………………………
31,200
Common Dividend Payable ………………
12,000
Common Stock Dividend Distributable.
12,000
Common Stock ………………………………..
7,200
31
Income Summary ………………………………….
60,000
Retained Earnings …………………………...
60,000
Financial and Managerial Accounting, 8e
Part 2
AUSTIN CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2019
Retained earnings, January 1, 2019 ……………………
$230,000
Additions:
Total …………………………..…………………………….
Deductions:
Cash dividends declared ………………………………
Retained earnings, December 31, 2019 ……………….
$247,300
Stockholders’ Equity
Common stock, $25 par value, 30,000 shares authorized,
24,000 shares issued ………………………………………………….
$600,000
Common stock dividend distributable, 480 shares ……………….
Total common stock issued and to be issued …………………
Total capital paid-in by common stockholders …………
Other Paid-in capital: …………………………………………………………..
Total Paid-in capital ………………………………………………..
Retained earnings ……………………………………………………………….
Total stockholders’ equity ……………………………………….
$958,000