1、Lesson Six:Owners Equity Aims:1.To describe the characteristics of limited company.2.To differentiate among authorized,issued,and outstanding shares.3.To understand preferred stock,and common stock.4.To measure the effect of issuing stock on a companys financial position.5.To account for dividends a
2、nd measure their impact on a company.6.To understand different values of a stock.7.To report stockholders equity transactions on the Cash Flow Statements.6.1Introduction:Limited Company A Limited Company is an organization created by law which has at least two owners called shareholders.Directors ma
3、nage a company and are responsible and accountable to the shareholders.A limited company is also regulated by the Companies Acts and has a legal personality separate and distinct from the shareholders.6.2Two Types of Limited Company There are two types of limited company,public and private.The main
4、difference between the two types of company lies in the restrictions placed on the issue or transfer of their shares.6.3Share Capital The capital of a limited company is divided into shares that have a nominal/par value.The two main classes of shares are ordinary shares,(or equity),and preference sh
5、ares.6.4Common Stock(1)Vote at stockholders meetings.(2)Share in earnings distributions.(3)Purchase additional shares in proportion to the owners present holding,if more shares are issued by the corporation.(4)Share in the assets if the corporation liquidates.6.5Measure the Effect of Issuing Stock o
6、n a Companys Financial Position Corporations issue stock to raise capital to finance operations.1.A corporation issues(sells)all or part of the stock that is authorized in the corporate charter.2.Stock may be sold either to an underwriter or directly to shareholders.The price that the stockholder pa
7、ys is called the issue price.6.6Preferred Stock Preferred stock is stock that gives its owner certain preferences or rights superior to those of common stock.Usually these preferences pertain to dividends or to distribution of assets at liquidation.Preferred stock owners typically have no voting rig
8、hts.6.7An Example of Dividend Distribution To illustrate,assume that KFC Company has 4 000 shares of$50 par,$4 preferred stock,and 4 000 shares of$10 par common stock outstanding.The amount available for dividends for the year is$28 000.This$28 000 would be allocated between the preferred and common
9、 shares as follows:1.Total amount available for dividends$28 000 2.Dividend to preferred stock:4 000 shares$4$16 000 3.Amount available for common stock$12 000 Dividends per share:Preferred stock$4 Common stock($12 0004 000 shares)$36.8Cumulative and Non-cumulative Preferred Stock Preferred stock on
10、 which any unpaid dividends accumulate from year to year is called cumulative preferred stock.Preferred stock on which dividend claims do not accumulate from year to year is called non-cumulative preferred stock.6.9Capital Structure The capital structure of a limited company is the relationship betw
11、een its various sources of long term capital.Gearing is the relationship between debt and equity.The importance of the gearing ratio is that it provides information about an organizations financial risk.6.10Cash Dividends Cash dividends are distributions made by a company to its shareholders.6.11Sto
12、ck Dividend and Stock Split A stock dividend is a proportional distribution by a corporation of its own stock to its own stockholders.Stock dividends do not transfer assets to stockholders and therefore only affect stockholders equity and stockholders equity accounts.A stock split is an increase in
13、the number of shares coupled with a proportionate reduction in the par value of the stock.Stock splits are recorded with a memorandum entry because no account balances are affected.Stock splits reduce the market price of the stock.6.12The Different Values of a Stock The market value of a stock is it
14、s current selling price.The redemption value of a stock is the price the corporation pays to buy back its preferred stock.The book value of a stock measures the amount of net assets or stockholders equity per share.6.13Reporting Stockholders Equity Transactions on the Statement of Cash Flows Stockholders equity transactions are financing activities.These financing transactions include:(1)Issuances of stock;(2)Purchase of treasury stock or retirement of stock;(3)Payment of dividends.
