Learning Objectives

• Understand the Business– LO1 Explain the role of shares (also called stocks) in financing a

corporation.• Study the accounting methods

– LO2 Explain and analyze common share transactions.– LO3 Explain and analyze cash dividends, stock dividends, and

stock split transactions.– LO4 Describe the characteristics of preferred shares and

analyze transactions affecting preferred shares.• Evaluate the results

– LO5 Analyze the earnings per share (EPS), return on equity (ROE), and price/earnings (P/E) ratios.

• Review the chapter

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Dividends on Common Shares

• Investors in common shares expect a return on their investment:

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Dividends And/orIncrease in Share Price

A growth investmentAn income investment

• A corporation does not have to pay dividends. • Dividend payments must be approved by the

board of directors.• A corporation must have sufficient retained

earnings and sufficient cash to pay dividends.LO3

Declaration DateThe Declaration Date is the date the board of directors officially

approves a dividend, thereby creating a liability.

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Dividends are not expenses; they are distributions of accumulated earnings.

Sun-Rype declares a $0.05 dividend per share on its 10.8 million outstanding common shares.

1 Analyze

2 Record

Date of RecordOn the Date of Record, the corporation prepares a list of current shareholders. The dividend is payable only to those listed on the

record date.

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Date of PaymentOn the Payment date, a cash dividend is paid to the shareholders of

record.

1 Analyze

2 Record

Dividend Dates

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Increase current liabilitiesand

Decrease retained earnings

No effectDecrease current assets

andDecrease current liabilities

Balance Sheet Effects

LO3

Stock DividendsStock dividends are the distribution of additional shares in the

form of a dividend.Stock dividends usually reduce the market price per share.

LO3© McGraw-Hill Ryerson. All rights reserved. 6

Stock Dividends do not change total shareholders’ equity.

Sun-Rype issues a 2% stock dividend when the share price is $4 per share, with 10.8 million common shares outstanding.

1 Analyze

2 Record

Stock SplitsStock splits increase the total number of authorized shares

by a specified ratio.

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A stock split does not affect retained earnings.

In a 2-for-1 stock split, each issued share is called in and two new shares are issued in its place.

A stock split does not require any journal entries.

LO3© McGraw-Hill Ryerson. All rights reserved. 8

Comparison of Stock Splits, Stock Dividends and Cash Dividends

A 2-for-1 Stock Split doubles the number of outstanding shares, and

halves the book value per share.

There is no change in total shareholders’ equity

A 100% Stock Dividend doubles the number of outstanding shares, but

does not change the book value per share.

The value of Common Shares increases and Retained Earnings

decreases.There is no change in total

shareholders’ equity.

A Cash Dividend does not change the number of outstanding shares

or the book value.

Retained Earnings decreases.Total shareholders’ equity

decreases.