Financial and Managerial Accounting, 9th Edition
CHAPTER 11
CORPORATE REPORTING AND ANALYSIS
Student Learning Objectives
Questions
Quick Studies*
Exercises*
Problems*
AA, BTN, DA
C1. Identify characteristics of
corporations and their
organization.
1, 2, 3, 4
11-1
11-1, 11-2
SP
BTN 11-3
between, common and
preferred stock.
11-17, 11-19
BTN 11-5
11-16, 11-17,
11-18, 11-19,
GL 11-1,
GL 11-2
BTN 11-3
A1. Analyze earnings per
share, price-earnings ratio
and dividend yield.
12
11-22, 11-23,
11-24, 11-25
11-20, 11-21,
11-22, 11-23
AA 11-1, AA 11-2,
AA 11-3, BTN 11-2
corporate stock.
stock dividends, and stock
splits.
11-8, 11-9,
11-10, 11-18
11-9, 11-10,
11-21, 11-24
11-4, GL11-1,
GL11-2
P3. Record purchases and
sales of treasury stock.
11
11-15, 11-16,
11-19
11-13, 11-14,
11-2, 11-4,
GL 11-2
BTN 11-4
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
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.
Financial and Managerial Accounting, 9th Edition
11-2
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
o Connect also provides algorithmic versions for Quick Study, Exercises, and Problems.
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
Preferred Stock
Req. 1
4:21
Req. 2
5:16
Req. 3
3:01
Req. 4
2:00
Concept Overview Videos
LO
Title
Time
C1
Identify characteristics of corporations and their organization.
Organization of Corporations
0:39
Corporate Advantages and Disadvantages
2:19
3:33
1:37
Dividend Preference of Preferred Stock
3:21
1:20
C3
Explain the items reported in retained earnings.
Statement of Retained Earnings
1:02
Statement of Stockholders’ Equity
0:18
Analyze earnings per share, price-earnings ratio, and dividend yield.
Basic Earnings per Share
0:47
Basic Earnings per Share — Illustration
1:19
Financial and Managerial Accounting, 9th Edition
11-3
Price-Earnings Ratio
0:36
Price-Earnings Ratio — Illustration
1:31
Dividend Yield
0:39
Dividend Yield — Illustration
1:20
P1
Record the issuance of corporate stock.
Issuing Par Value Stock
2:29
Issuing No-Par Value Stock
1:32
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
Small Stock Dividends
2:42
Large Stock Dividends
1:00
Stock Splits
1:07
P3
Record purchases and sales of treasury stock.
1:25
3:13
Synopsis of Chapter Revisions
NEW opener—Eventbrite and entrepreneurial assignment.
Streamlined analytical learning objectives.
New Analytics Insight on bots investing in stocks based on erroneous news.
Financial and Managerial Accounting, 9th Edition
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:
Financial and Managerial Accounting, 9th Edition
2. Stock Certificates and Transfer
a. Stock certificate is sometimes received as proof of share ownership.
a. Registrar—keeps a list of stockholders for stockholders’ meetings and dividend payments.
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).
b. Transfer agent—assists with purchases and sales of shares.
E. Corporate Stock —shares issued to obtain capital (owner financing).
1. Authorized Stock—the total amount of stock that the charter authorizes for sale. No journal
entry is required for stock authorization.
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.
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
charter.
a. Printed on the stock certificate.
b. In many states, used to establish minimum 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, 9th Edition
11-6
1. Issuing Par Value Stock at Par—debit Cash for # shares issued × market price and credit
Common Stock for # shares issued × par value
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.
premium)
3. Issuing Par Value Stock at a Discount— Discount occurs when stock is sold for less than its par
value (prohibited by most states).
c. Debit Discount on Common Stock, a contra to the common stock account (for the amount of
a. Debit Cash (# shares issued × market price)
The stated value is credited to the stock account. Any amount above the stated value, is credited to
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
D. Issuing Stock for Noncash Assets
c. Record the amount that market value exceeds par value or stated value of stock in the Paid–
1. Issuing par value stock for other assets
a. Record the transaction at the market value of the noncash asset as of the transaction date.
2. Issuing par value stock for organizational costs—stock is issued in exchange for the promoters’
work in organizing the corporation
a. Record the transaction at the market value of the services received debiting this amount to
this in Paid-In Capital in Excess account.
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).
b. Date of Record—date specified for identifying stockholders (owners on this date will
Financial and Managerial Accounting, 9th Edition
11-7
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.
3. Paid-in in Excess of Par Value, Preferred Stock is used to record any value received above the
1. Separate contributed capital accounts are used to record preferred stock.
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
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
Financial and Managerial Accounting, 9th Edition
11-8
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.
B. 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.
2. Selling Treasury Stock above Cost—the amount received in excess of cost is credited to Paid-
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
account and describes the changes that occurred during the
period.
2. Prior Period Adjustments
a. Corrections of material errors made in past period financial statements.
B. Statement of Stockholders’ Equity
1. Provided by most companies rather than a separate statement of retained earnings; the
statement of stockholders’ equity includes changes in retained earnings.
Financial and Managerial Accounting, 9th Edition
11-9
VII. Decision Analysis—Earnings per Share, Price-Earnings Ratio, and Dividend Yield
A. Earnings per Share (EPS)
2. Basic earnings per share is computed by dividing the net income less preferred dividends by
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.
2. Calculated as market value per share divided by earnings per share.
Financial and Managerial Accounting, 9th Edition
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.
2021
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.
2022
Jan.
12
earned.
2023
Jan.
31
Issued 1,000 shares of preferred stock at $75 per share.
Required:
1. Prepare general journal entries to record the selected transactions.
11–11
Chapter 11 Solution: Alternate Demonstration Problem #1
Part 1
2021
Feb.
19
Cash
…………………………………………………………….
…………………………………………………………….
45,000
Common Stock ……………………………….
45,000
22
Organizational Expense ………………………..
50,000
Common Stock ……………………………….
30,000
Paid–In Capital in Excess of Par
Value, Common Stock ………………….
20,000
Mar.
30
Land ……………………………………………………
25,000
Buildings ……………………………………………..
100,000
Machinery …………………………………………….
125,000
Common Stock
100,000
Paid–In Capital in Excess of Par
Value, Common Stock ………………….
150,000
31
Retained Earnings ………………………………..
25,000
Income Summary …………………………….
25,000
2022
Jan.
12
Cash
…………………………………………………………….
…………………………………………………………….
75,000
Preferred Stock ……………………………….
50,000
Paid–In Capital in Excess of Par
Value, Preferred Stock …………………
25,000
15
Retained Earnings ………………………………..
21,500
Common Dividend Payable ……………..
17,500
Preferred Dividend Payable ……………..
31
Income Summary ………………………………….
69,000
Retained Earnings …………………………..
69,000
2023
31
Preferred Dividend Payable …………………..
Common Dividend Payable …………………..
17,500
21,500
Financial and Managerial Accounting, 9th Edition
11–12
Part 2
Stockholders’ Equity
Preferred stock, $50 par value, 8% cumulative and
nonparticipating, 10,000 shares authorized, 1,000
shares issued ………………………………………………………
$ 50,000
Common stock, $1 par value, 200,000 shares
authorized, 175,000 issued …………………………………..
$175,000
Total Paid-in capital …………………………………………………..
Retained earnings ……………………………………………………..
Financial and Managerial Accounting, 9th Edition
Chapter 11 Alternate Demonstration Problem #2
At the beginning of 2021, 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:
2. Prepare a retained earnings statement for the year and the stockholders’
equity section of the company’s year-end balance sheet.
Financial and Managerial Accounting, 9th Edition
11–14
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, 9th Edition
11–15
Part 2
AUSTIN CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2021
Retained earnings, January 1, 2021 ……………………
$230,000
Additions:
Total …………………………..…………………………...
Deductions:
Cash dividends declared ……………………………..
Retained earnings, December 31, 2021 ………………
$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 ……………………………………………………………….
$958,000