The document discusses the structure and types of shares that make up shareholders' equity for corporations, including common shares which provide voting rights and rights to dividends and liquidation proceeds, and preferred shares which have preference over common shares for dividends. It also covers how share capital is recorded when shares are issued at par value, as well as the conditions for paying dividends to shareholders from retained earnings.
The document discusses the structure and types of shares that make up shareholders' equity for corporations, including common shares which provide voting rights and rights to dividends and liquidation proceeds, and preferred shares which have preference over common shares for dividends. It also covers how share capital is recorded when shares are issued at par value, as well as the conditions for paying dividends to shareholders from retained earnings.
The document discusses the structure and types of shares that make up shareholders' equity for corporations, including common shares which provide voting rights and rights to dividends and liquidation proceeds, and preferred shares which have preference over common shares for dividends. It also covers how share capital is recorded when shares are issued at par value, as well as the conditions for paying dividends to shareholders from retained earnings.
The document discusses the structure and types of shares that make up shareholders' equity for corporations, including common shares which provide voting rights and rights to dividends and liquidation proceeds, and preferred shares which have preference over common shares for dividends. It also covers how share capital is recorded when shares are issued at par value, as well as the conditions for paying dividends to shareholders from retained earnings.
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Reporting and Analyzing
Shareholders’ Equity Chapter 11 Corporation • Only business form that is recognized as a separate legal entity
• Has most of the rights and privileges of a person
• The creation of a corporation is regulated by law
▫ Canada Business Corporations Act, or ▫ Various provincial Corporations Acts
• May be classified by purpose and ownership
▫ Purpose: profit or nonprofit ▫ Ownership: public or private Shareholders
Board of Directors (elected by shareholders)
President/CEO (appointed by BOD)
VP, Operations VP, Finance VP, Marketing
Share capital • EVERY corporation issues at least one share • When a corporation is set up, the founding shareholder will establish the classes of share and amount of shares that are “authorized” • These are not recorded in the accounting records. ie. No journal entry is required. • Shares that are sold, or “issued” are recorded at the amount received for the share(s) Example • You owned 100 Class A shares in YouCo. • You decide to bring in a friend to partner with ▫ Your friend could subscribe to 100 new shares from YouCo. ▫ Pay $1/share ▫ Your friend would give the company $100 and it would record: Dr. Cash 100 Cr Share capital 100 Share capital
• Share capital in the company accounts is the
amount received by the corporation the first time a share was sold or issued • Once shares of a company are established on a market, transactions between shareholders are not recorded in the company’s records • If you buy a car from Ford, and later sell it, Ford doesn’t record the sale you made Shares • There are 2 main types of shares ▫ Common ▫ Preferred
• All companies are required to have at least one class of
common shares
• Most will have multiple classes authorized
▫ Unlimited or limited Why different types of shares? • Company may want to attract a different type of investor therefore easier to raise capital • Different classes could have different rights/characteristics: ▫ Ability to vote ▫ Payment of dividends ▫ Amount of the dividend ▫ Priority on liquidation ▫ Terms of redemption, if any Common shares
• At least one class must have all three of the
following rights: ▫ The right to vote at shareholder meetings ▫ The right to receive dividends, if declared ▫ The right to a share of the company’s net assets upon liquidation of the company Preferred shares
• Have preference over common shares
• Most common preference is related to dividends
▫ If dividends are declared, preferred shareholders receive them before common shareholders do
• Entitled to receive a return of their share capital
when a company is liquidated (after creditors) Preferred shares • Give up: ▫ Normally non-voting ▫ Normally have a fixed dividend rate A fixed amount per share, or A fixed percentage of the share’s issue price 5%, $1,000 preferred share = $50 dividend $2, $1,000 preferred share = $2/share dividend Reasons to issue preferred shares • Raise capital without diluting the common shareholder ownership interests • Dividends can be postponed (vs. interest on bonds or other forms of debt) • Provide new capital, which improves debt-to- equity ratios • Do not dilute future earnings as only entitled to fixed amount of dividends A=L+E 10,000 = 6,000 + 4,000
Debt to equity = 6,000 / 4,000 = 1.5 1 – means the company uses more liabilities than SE The higher the number gets, the riskier it is that the company will not be able to repay its liabilities when they come due. solvency Dividends
• In order to pay a dividend a company must meet
both of the following “solvency” conditions: ▫ It must have sufficient cash or other resources to meet obligations coming due ▫ It must have retained earnings equal to or greater than the dividend declared Recording cash dividends
• On declaration date: Dr. Dividends (Retained earnings) xxx Cr. Dividends payable xxx
In between is the ex-dividend date and date of
record (no entries required)
• On payment date: Dr. Dividend payable xxx Cr. Cash xxx Financing with Equity Advantages: • Equity financing does not have to be repaid (debt does) • Dividends are optional (interest is not)
Disadvantages: • Ownership interests may be diluted • Dividends are not deductible to reduce income for taxes
