微观经济学dividends, retained earnings and income reporting.ppt

1、1,Chapter 15 Companies:dividends, retained earnings and income reporting,PowerPoint presentation by Dr Anne Abraham University of Western Sydney 2009 John Wiley & Sons Australia, Ltd,DIVIDENDS,A dividend is a distribution by a company to its shareholders on a pro rata (proportional) basis Dividends

2、can take 4 forms: cash, property, scrip (promissory note to pay cash) or shares Dividends can be expressed as either: a percentage of the stated value of the share or a dollar amount per share,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,2,LO1,Cash dividends,A cash divide

3、nd is a pro rata distribution of cash to shareholders For a corporation to pay a cash dividend it must have: retained earnings adequate cash a declaration of dividends,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,3,Cash dividends continued,Entries for cash dividends Four

4、dates are important in connection with dividends 1. Declaration date Board of Directors formally declares a cash dividend and a liability is recorded,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,4,Dec 1 Retained Earnings 50 000 Dividends Payable 50 000 (To record declarat

5、ion of cash dividend of 50c per share on 100 000 shares),Cash dividends continued,2. Record date Date on which company closes its share register and determines the shareholders entitled to receive the dividend 3. Ex-dividend date Usually 4th business day before companys record date Dividend only pai

6、d to shareholders who purchase shares before record date,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,5,Cash dividends continued,4. Payment date Date dividend cheques are mailed or transferred electronically to shareholders Date on which payment of dividend is recorded,Po

7、werPoint presentation by Dr Anne Abraham, University of Western Sydney,6,Jan 20 Dividends Payable 50 000 Cash 50 000 (To record payment of cash dividend),Cash dividends continued,Allocating cash dividends between preference and ordinary shares Cash dividends must be paid first to preference sharehol

8、ders before any ordinary shareholders are paid For cumulative preference shares, any dividends in arrears and current year dividend must be paid before allocating any dividends to ordinary shareholders,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,7,Cash dividends continue

9、d,For non-cumulate preference shares, only current years dividend must be paid before paying any dividends to ordinary shareholders,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,8,Cash dividends continued,Example As at 30 June 2010 1000 8% $100 cumulative preference shares

10、 50 000 ordinary shares issued at $10 Directors declares $6000 cash dividend,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,9,Jun 30 Retained Earnings 6 000 Dividends Payable 6 000 (To record $6 per share cash dividend to preference shareholders),Cash dividends continued,Pr

11、eference dividend should have been 8% x $100 = $8 Therefore, $2 per share are in arrears As at 30 June 2011 Directors declare $50 000 cash dividend Allocation between classes of shares:,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,10,Total dividend $50 000 Allocated to pr

12、eference shares Dividends in arrears, 2010 (1000 x $2) $ 2 000 2011 dividend (1000 x $8) 8 000 10 000 Remainder allocated to ordinary shares $40 000,Cash dividends continued,Entry to record declaration of dividend: Note, if preference shares were not cumulative, in 2011 Preference shareholders recei

13、ve $8 000 Ordinary shareholders receive $42 000,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,11,Jun 30 Retained Earnings 50 000 Dividends Payable 50 000 (To record declaration of cash dividends of $10 000 to preference shareholders and $40 000 to ordinary shares),Share di

14、vidends,A share dividend is pro rata distribution to shareholders of the companys own shares Results in a decrease in retained earnings and an increase in share capital Does not decrease total assets or total shareholders equity,PowerPoint presentation by Dr Anne Abraham, University of Western Sydne

15、y,12,Share dividends continued,Reasons for issuing share dividends To satisfy shareholders dividend expectations without spending cash To increase the marketability of companys shares by increasing the number of shares and therefore reducing market price per share To emphasise that a portion of shar

16、eholders equity has been permanently reinvested in the business and unavailable for cash dividends,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,13,Share dividends continued,Entries for share dividends Entry when dividend is declared Entry when dividend is paid,PowerPoint

17、presentation by Dr Anne Abraham, University of Western Sydney,14,Jan 20 Share Dividends Payable 75 000 Ordinary Share Capital 75 000 (To record the issue of 5000 shares valued at $75 000 as a share dividend),Dec 1 Retained Earnings (or Share Dividends Declared) 75 000 Share Dividends Payable 75 000

18、(To record declaration of 10% share dividend),Share dividends continued,Effects of share dividends The composition of shareholders equity changes: Retained earnings decreases and Share capital increases But total shareholders equity remains unchanged,PowerPoint presentation by Dr Anne Abraham, Unive

19、rsity of Western Sydney,15,Share splits,A share split involves the issue of additional shares according to the percentage ownership of shareholders This results in a reduction in the stated value per share e.g., a 2-for-1 split means that one share with a value of $10 will be exchanged for 2 shares

20、each with a value of $5,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,16,Share splits continued,A share split does not effect the total equity of the company The purpose of a share split is to increase the marketability of the shares by lowering the market price per share

21、A share split does not affect the balance in shareholders equity accounts and therefore a journal entry is not required,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,17,Share splits continued,Differences between effects of share splits and share dividends,PowerPoint presen

22、tation by Dr Anne Abraham, University of Western Sydney,18,Dividend reinvestment plans,Many companies offer dividend reinvestment plans (DRP) to their shareholders Shareholders can reinvest all or part of their cash dividend by purchasing additional shares usually at a discount price A DRP has the s

23、ame effect as a share dividend,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,19,RETAINED EARNINGS,Retained earnings is profit that is retained in the company The balance in retained earnings is part of the shareholders claim on the total assets of the company It does not r

24、epresent a claim against any specific asset,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,20,LO2,RETAINED EARNINGS continued,A loss for a period is recorded in Retained Earnings by a closing entry in which Retained Earnings is debited and Profit and Loss Summary is credite

25、d Shareholders equity with deficit:,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,21,Retained earnings restrictions,Retained earnings restrictions make a portion of the balance currently unavailable for dividends Restrictions have two causes: 1. Contractual Long term debt

26、contracts may restrict retained earnings as condition for loan 2. Voluntary Board of Directors may voluntarily restrict retained earnings for specific purposes such as future plant expansion,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,22,Retained earnings restrictions co

27、ntinued,Disclosure Retained earnings restrictions are disclosed in the notes to the financial statements The balance in retained earnings is generally available for dividend declarations some companies state this fact,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,23,Prior-

28、period adjustments,Correction of a material error in reporting net income in a previously issued financial statement is made retrospectively in the first financial statement after discover The correction is made directly to Retained Earnings reported in the current years retained earnings statement

29、as an adjustment of the beginning balance of Retained Earnings,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,24,Prior-period adjustments continued,Example of entry to record correction Statement presentation of prior-period errors,PowerPoint presentation by Dr Anne Abraham

30、, University of Western Sydney,25,Retained Earnings 300 000Accumulated Depreciation 300 000 (To adjust for understatement of depreciation in a prior period),Reconciliation of beginning and ending retained earnings,The retained earnings statement shows changes in retained earnings during the year Deb

31、its and credits to retained earnings:,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,26,Statement presentation and analysis,Equity section of a companys statement of financial position includes: Share capital: contributed equity (paid and any outstanding amounts) Retained p

32、rofits: prior profits kept within company and not distributed as dividends Reserves: changes in equity not created through transactions with owners,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,27,LO3,Statement presentation and analysis continued,Presentation,PowerPoint pr

33、esentation by Dr Anne Abraham, University of Western Sydney,28,Statement presentation and analysis continued,Analysis Profitability is measured by return on ordinary shareholders equity It shows how many dollars of profit were earned for each dollar invested by ordinary shareholders Formula:,PowerPo

34、int presentation by Dr Anne Abraham, University of Western Sydney,29,COMPANY INCOME STATEMENTS,Include the same sections as in a proprietorship or a partnership except for the reporting of income taxes For tax purposes, companies are considered to be a separate legal entity As a result, income tax e

35、xpense is reported in a separate section of the company income statement before profit,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,30,LO4,COMPANY INCOME STATEMENTS continued,Condensed income statement shows typical presentation,PowerPoint presentation by Dr Anne Abraham,

36、 University of Western Sydney,31,COMPANY INCOME STATEMENTS continued,Income tax expense and related tax liability for income taxes payable are recorded as part of the adjusting process Adjusting entry as at 30 June 2010,PowerPoint presentation by Dr Anne Abraham, University of Western Sydney,32,Income Tax Expense 46 800 Income Taxes Payable 46 800 (To record income taxes for 2010),EARNINGS PER SHARE,Earnings data are frequently reported in the finan