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Typology: Essays (university)
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Learning Objective 1 Describe business financing through stock issuances. Describe business financing through stock issuances.
PepsiCo, Inc.’s Stockholders’ Equity The stockholders’ equity section of PepsiCo’s balance sheet contains two sections:
Contributed Capital Represents (^) Cumulative cash inflows received from the issuance of various classes of stock (^) Less the net cash paid out to repurchase a company’s own stock from the market (^) Includes (^) Two classes of stock (^) Common stock (^) Preferred stock (^) Additional paid-in capital (also labeled as Paid-in capital in excess of par )
Common Stock (^) The primary ownership unit in a company (^) Common shareholders have voting rights (^) Par value (^) An arbitrary value often assigned to each share of stock (^) Specified in the corporate charter at the time the corporation is formed (^) Specifies the allocation of proceeds from stock issuances between common stock and additional paid-in capital on the balance sheet
Number of Shares of Stock How many shares are there?^ How many shares are there? Authorized Shares (^) The upper limit on the number of shares that the corporation can issue (^) Established in the articles of incorporation (^) Can be increased by affirmative shareholder vote Issued Shares (^) Actual number of shares that have been issued to shareholders Outstanding Shares (^) Number of issued shares less the number of shares repurchased as treasury stock
Features of Preferred Stock Call feature (^) Provides the issuer the right, but not obligation, to repurchase the preferred shares at a specified price (^) Conversion feature (^) Allows preferred shareholders to convert their shares into common shares at their option at a predetermined conversion ratio (^) Participation feature (^) Allows preferred shareholders to share ratably with common stockholders in dividends
PepsiCo’s Preferred Stock Disclosure PepsiCo, Inc. reported the following information on its preferred stock in its 2014 annual report:
Accounting for Stock Issuances (^) Used to obtain cash and other assets for use in the business (^) Creates an increase in assets and stockholders’ equity (^) Common or preferred stock account increases by Par value × Number of shares sold (^) Additional paid-in capital account increases by Remainder of issue price (^) No effect on the income statement The first issuance of stock by a company is called an initial public offering—an IPO. The first issuance of stock by a company is called an initial public offering—an IPO.
Stock Issuance Example Phelps Swimming, Inc. issued 500 shares of $1 par value common stock at $15 per share.
Balance Sheet Income Statement Transaction Cash Asset
Noncash Asset = Liabilities + Contrib. Capital
Earned Capital
+7, Cash =
Common Stock
+7, Additional Paid-in Capital
Accounting for Treasury Stock (^) Never results in a gain or loss on the income statement (^) Difference between the cost of the stock and the resale price is an adjustment to additional paid-in capital Treasury stock account is a contra stockholders’ equity account (^) Deducted from total stockholders’ equity on the balance sheet
IFRS Reporting Insight (^) IFRS and U.S. GAAP are similar (^) IFRS allows a stock repurchase to also be recorded as a decrease to (^) Common equity (^) Additional paid-in capital (^) Retained earnings
Treasury Stock Purchase Example Phelps Swimming, Inc. repurchased 100 shares of its own common stock for $22 per share.
Balance Sheet Income Statement Transaction Cash Asset
Noncash Asset = Liabil- ities
Contrib. Capital
Earned Capital ‒ Contra Equity
Treasury Stock Reissue Example Phelps Swimming, Inc. reissued 80 shares of the treasury shares for $24 per share.
Balance Sheet Income Statement Transaction Cash Asset
Noncash Asset = Liabilities^ + Contrib. Capital
Earned Capital ‒ Contra Equity
Additiona l Paid-in Capital