TAILIEUCHUNG - Lecture Financial accounting in an economic context (9th edition): Chapter 12 – Jamie Pratt

Chapter 12 - Stockholders’ equity. In this chapter students will be able to: List the three forms of financing and distinguish debt from equity, define and distinguish contributed capital from earned capital, define and distinguish preferred stock from common stock. | 1 2 Chapter 12 Shareholders’ Equity 2 How to Finance a Corporation: Borrow Notes, Bonds, Leases The debt holders are legally entitled to repayment of their principal and interest claims Issue Equity Common and Preferred Stock The shareholders, as owners, have voting rights, limited liability, and a residual interest in the corporate assets Retained Earnings (profitable operations) 3 Shareholders’ Equity 3 Relative Importance of Liabilities, Contributed Capital, and Earned Capital 4 Figure 12-2 The relative importance of liabilities, contributed capital, and retained earnings (percentage of total assets) 4 Debt and Equity Distinguished - Characteristics 5 Debt Equity Formal legal contract No legal contract Fixed maturity date No fixed maturity date Fixed periodic payments Discretionary dividends Security in case of default Residual asset interest No voice in management Voting rights - common Interest expense deductible Dividends not deductible Double taxation 5 Distinctions Between Debt and Equity 6 Interested Party Debt Equity Investors / Creditors Lower investment risk Higher investment risk Management Fixed cash receipts Variable cash receipts Contractual future cash payments Dividends are discretionary Effects on credit rating Effects of dilution/ takeover Interest is tax deductible Dividends are not tax deductible Accountants/ Auditors Liabilities section of the balance sheet Shareholders’ equity of the balance sheet Income statement effects from debt No income statement effects from equity 6 The Economic Consequences Associated with Accounting for Shareholders’ Equity Key business ratios rely on Shareholders’ equity which affects credit ratings and analysts evaluation of a company 7 Figure 12-5 Shareholders’ equity section of balance sheet 7 Preferred Stock vs. Common Stock Preferred Stock Common Stock Advantages Preference over common in liquidation Voting Rights Stated dividend Rights to residual profits (after preferred) Preference over common in .

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