FINANCIAL ACCOUNTING
Fifth Edition
CHAPTER 11
Reporting and Analyzing
Stockholders’ Equity
©Cambridge Business Publishers, 2017
Thomas Dyckman Michelle Hanlon
Robert Magee Glenn Pfeiffer
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FINANCIAL ACCOUNTING
Fifth Edition
CHAPTER 11
Reporting and Analyzing
Stockholders’ Equity
Thomas Dyckman Michelle Hanlon
Robert Magee Glenn Pfeiffer
Learning Objective 1 Describe business financing through stock issuances. Describe business financing through stock issuances.
PepsiCo, Inc. and Subsidiaries' Consolidated Balance Sheet
Amounts in millions Dec. 27, 2014
Stockholders' Equity
Preferred Stock, no par value $ 41
Repurchased Preferred Stock (181)
Common stock, par value 1 2/3¢ per share (authorized
3,600 shares, issued, net repurchased, 1,
shares) 25
Capital in excess of par 4,
Repurchased common stock, at cost (24,985)
Retained earnings 49,
Accumulated other comprehensive loss (10,669)
Noncontrolling interests 110
Total Stockholder Equity $ 17,
PepsiCo, Inc.’s Stockholders’ Equity The stockholders’ equity section of PepsiCo’s balance sheet contains two sections:
Contributed
Capital
Contributed
Capital
Earned
Capital
Earned
Capital
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:
Note 12 — Preferred Stock
As of December 27, 2014 and December 28, 2013, there were 3 million
shares of convertible preferred stock authorized. The preferred stock
was issued for an ESOP established by Quaker and these shares are
redeemable for common stock by the ESOP participants. The preferred
stock accrues dividends at an annual rate of $5.46 per share. As of
December 27, 2014 and December 28, 2013, there were 803,
preferred shares issued and 145,453 and 167,053 shares outstanding,
respectively. The outstanding preferred shares had a fair value of $
million as of December 27, 2014 and $69 million as of December 28,
2013. Each share is convertible at the option of the holder into 4.
shares of common stock. Under certain conditions, the preferred
shares may be called by us upon written notice at $78 per share plus
accrued and unpaid dividends. Quaker made the final award to its
ESOP in June 2001.
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.
Cash (+A) 7,
Common stock (+SE) 500
Additional paid-in capital (+SE) 7,
Cash (A) Common Stock (SE)
Balance Sheet Income Statement Transaction Cash Asset
Noncash Asset = Liabilities + Contrib. Capital
Earned Capital
- Revenues – Expenses = Net Income
Issue common
stock with a $
par value for
$15 per share
+7, Cash =
Common Stock
+7, Additional Paid-in Capital
Additional Paid-in Capital (SE)
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.
Treasury stock (+XSE, –SE) 2,
Cash (–A) 2,
Treasury Stock (XSE) Cash (A)
Balance Sheet Income Statement Transaction Cash Asset
Noncash Asset = Liabil- ities
Contrib. Capital
Earned Capital ‒ Contra Equity
- Revenues – Expense s = Net Income
Repurchase
100 common
shares for $
per share
- 2,
Cash
Treasury
Stock – =
Treasury Stock Reissue Example Phelps Swimming, Inc. reissued 80 shares of the treasury shares for $24 per share.
Cash (+A) 1,
Treasury stock (–XSE, +SE) 1,
Additional paid-in capital (+SE) 160
Cash (A) Treasury Stock (XSE)
80 × $24 per share = $1,
Additional Paid-in Capital (SE)
Balance Sheet Income Statement Transaction Cash Asset
Noncash Asset = Liabilities^ + Contrib. Capital
Earned Capital ‒ Contra Equity
- Revenues – Expense s = Net Income
Reissue 80
treasury shares
for $24 per
share
Cash
Additiona l Paid-in Capital
- 1,