Accounting: Generally Accepted Accounting Principles and Net Income Essay

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Reporting and Interpreting Owners’ Equity

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Objectives
• Review the Equity Account and its components • Describe the characteristics of Common Stock and analyze transactions affecting Common Stock • Explain the role of Stock in the capital structure • Understand and apply the Earnings Per Share ratio and other financial ratios • Understand Dividends and report payment transactions • Report Stock Dividends and Stock Splits

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Statement of Changes in Equity
• Components of equity
Share Capital Additional Paid-in Capital Reserves
Retained Earnings Total

• Transactions that affect equity
Equity Beginning Balance + Net earnings + or – Accumulated other comprehensive income - Dividends + Issuance of shares - Repurchase of shares Equity Ending Balance
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Corporation Characteristics
A Corporation is a separate legal entity. It can:
•Own assets •Sue and be sued •Enter into contracts •Incur liabilities

ADVANTAGES

DISADVANTAGES

• Can raise more capital • Continuous life • Ease of transferring ownership • Limited liability of shareholders
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• Separation of ownership and management • Corporate taxation • Government regulation

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Organizing a Corporation
• Corporate organizers (incorporators) obtain a charter from the state – Charter includes authorization to issue shares • Incorporators: – Pay fees – Sign the charter – File documents with the state – Agree to set of bylaws

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Corporate Structure
Shareholders

Board of Directors

Chief Executive Officer (CEO)

Chief Operating Officer (COO)
Director, Sales Director, Manufacturing Chief Financial Officer Director, Personnel Company Secretary

Controller
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Treasurer
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Ownership of a Corporation
Voting (in person or by proxy).  Proportionate distributions of profits (dividends).
 Proportionate distributions of assets in a liquidation.

Stockholders’ Rights

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Classes of Shares
ORDINARY or COMMON • Basic form of share capital • Has three basic rights • Shareholders benefit most if corporation succeeds
– Take more risk

PREFERRED or PREFERENCE

• Has advantages over common
– Receive dividends first – Receive assets first in liquidation

• Shareholders earn a fixed dividend • Very few corporations issue
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Initial Sale of Stock
Initial public offering (IPO) “Seasoned” new issue

The first time a corporation sells stock to the public.

Subsequent sales of new stock to the public.
Wesfarmers issues new stock.

Wesfarmers

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Par Value and No-Par Value
• Par Value
– Arbitrary amount assigned to a share – Usually set low to avoid legal issues

• No-Par shares – May have a stated value – Do not record “Additional Paid in Capital”

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Par Value ≠ Market Value!

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Initial Sale of Stock – Par Value
On July 6, Wesfarmers issued 100,000 shares of $1 par value common stock for $20 per share. Prepare the journal entry to record this transaction.
100,000 shares × $1 par value = $100,000 100,000 shares × $20 per share = $2,000,000
GENERAL JOURNAL
Date July 6 Cash (+A) Common stock (+SE) Additional Paid In Capital (+SE)
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Description

Debit 2,000,000

Credit 100,000 1,900,000

BALANCE SHEET
(000's omitted)

ASSETS Current Assets Cash

DR

CR

2,000,000

Accounts Receivable Inventory

LIABILITIES Current Liabilities Accounts Payable Short-Term Debt Non-Current Liabilities Long Term Debt STOCKHOLDERS EQUITY Capital Stock Additional Paid In Capital

DR

CR

Total Current Assets
Non-Current Assets Property/Plant/Equipment (Accumulated Depreciation) Net Property/Plant/Equipment

100,000 1,900,000

Total Assets
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2,000,000

Retained Earnings Beginning Balance Net Income (Dividends) Change in Retained Earnings Retained Earnings Ending Balance 2,000,000 Total Liabs + Equity

Initial Sale of Stock – no par
On July 6, Wesfarmers issued 100,000 shares of no par value common stock for $20 per
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