chapter 12. chapter 12mugan-akman 20072 forms of business organizations sole proprietorship-natural...
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Chapter 12 Mugan-Akman 2007 2
Forms of Business Organizations
• Sole Proprietorship-natural person merchant
• General Partnership
• Limited Partnership and Limited Partnership Divided into Shares
• Limited Liability Corporation
• Corporation
Chapter 12 Mugan-Akman 2007 3
Corporations
limited liability of shareholders ownership transferred easily-CAPITAL IS
DIVIDED INTO SHARES• private and publicly traded• to be traded publicly they should get permission
from Capital Markets Board transition from a privately held corporation to a
publicly traded one is called going public, and this first sale of stock to the public is called an initial public offering, or IPO
Chapter 12 Mugan-Akman 2007 4
Shareholders/ General Assembly
Board of Directors
Chairman of the Board
CEO / president
Vice President -Sales
Vice President -Manufacturing
Vice President –Accounting and
Finance
Vice President -Personnel
Secretary
Controller (accounting) Treasurer (finance)
Represents the corporation
Authority Structure
Chapter 12 Mugan-Akman 2007 5
Terms Related with Capital of Corporations
• Share Capital (Registered Capital)• Unpaid Capital (Capital Commitments)• Paid-in Capital• Authorized Capital• Issued Capital • Treasury Stock • Outstanding Capital• Additional Paid-In Capital (share premium)
Chapter 12 Mugan-Akman 2007 7
Capital Transactions• Share Capital Increases
– In cash– In-kind– Issuing free shares
• Conversion of bonds
• Stock dividends
• Stock Split
• Treasury Stocks
Chapter 12 Mugan-Akman 2007 8
Convertible Bonds
• debt securities that may be converted under preset conditions to common stock of the issuer at the option of the bearer (investor)
• conversion methods:– Market price of the stock at the time of
conversion (market value approach)– Book value of the bond being converted
(book value approach)
Chapter 12 Mugan-Akman 2007 9
Stock Dividends
• Distribution of stocks proportionately from retained earnings to the shareholders
• Purposes• Satisfy the shareholders without cash outflows• Increase the demand for the stocks in the market
• Valuation– less than 20-25% of the capital are valued at the
market value of the stock and are met from the retained earnings
– large stock dividends are declared, for example more than 20-25%, the par value is used to record the transaction
Chapter 12 Mugan-Akman 2007 10
BeforeShareholders' Equity TLPaid-in Capital 200.000 Share Capital 200.000 Unpaid Capital - Capital Reserves 350.088 Additional Paid-in Capital 350.088 Profit Reserves 34.289 Legal Reserves 3.340 Other Reserves 30.949 Retained Earnings 60.000 Shareholders' Equity 644.377
Balance Sheet Effects-Stock DividendsAssume management of ZAM Corporation decided to distribute 5% stock dividends from 200.000 shares of TL1 par value each on 11 April 2007. The market value of ZAM Corporation shares was TL1,50 on 11 April.
Chapter 12 Mugan-Akman 2007 11
Before After Shareholders' Equity TL TLPaid-in Capital 200.000 210.000 Share Capital 200.000 210.000 Unpaid Capital - - Capital Reserves 350.088 355.088 Additional Paid-in Capital 350.088 355.088 Profit Reserves 34.289 34.289 Legal Reserves 3.340 3.340 Other Reserves 30.949 30.949 Retained Earnings 60.000 45.000 Shareholders' Equity 644.377 644.377
Balance Sheet Effects-Stock DividendsAssume management of ZAM Corporation decided to distribute 5% stock dividends from 200.000 shares of TL1 par value each on 11 April 2007. The market value of ZAM Corporation shares was TL1,50 on 11 April.
increase by the difference between par and price- TL 5.000
increase by par
decrease by 15,000
Chapter 12 Mugan-Akman 2007 12
Stock Split• Issuance of additional stocks by decreasing the par value of the
stock proportionately• Stock splits increase the demand for the stocks in the market by
decreasing the market price of the stock
e.g. effect of the 2 for 1 stock split made by Better-Off
Share Capital TL 250.000
Additional Paid-in Capital 175.000
Reserves 3.000
Retained Earnings 72.000
Shareholders' Equity TL 500.000
Outstanding shares- number of shares
25.000Book Value per Share -TL per 20
Before Stock Split
Chapter 12 Mugan-Akman 2007 13
Stock Split• Issuance of additional stocks by decreasing the par value of the
stock proportionately• Stock splits increase the demand for the stocks in the market by
decreasing the market price of the stock
e.g. effect of the 2 for 1 stock split made by Better-Off
After Stock Split
Share Capital TL 250.000 TL 250.000
Additional Paid-in Capital 175.000 175.000
Reserves 3.000 3.000
Retained Earnings 72.000 72.000
Shareholders' Equity TL 500.000 TL 500.000
Outstanding shares- number of shares
25.000 50.000Book Value per Share -TL per 20 10
Before Stock Split
Chapter 12 Mugan-Akman 2007 14
Treasury Stocks• Why?
• to improve the market price of the stock
• to have available stock to be used in the stock option plans
• to have available stocks of planned mergers and acquisitions
• to prevent a takeover
• to improve Earnings per Share
• do not have voting, or dividend rights
• do not have a right in the liquidation of the company
• Initially recorded at cost (contra equity account)
• Recorded at market value at re-issuance
• Any gains and losses are reported at the shareholders’ equity
Chapter 12 Mugan-Akman 2007 15
Profit Appropriation• 1. 1st Legal Reserves: 5% of net income before
taxes (until it reaches 20% of paid-in capital)• 2. 1st dividend to shareholders: 5% of paid-in
capital• 3. Other dividends: Dividends to shareholders
other than 1st dividends; dividends to board of directors and employees
• 4. 2nd Legal Reserves: 10% of dividends declared, excluding 5% 1st dividends
• 5. Special Reserves: Appropriation of net income as a special reserve as defined in the Articles of Association
• 6. Retained Earnings : Any amount remaining after the above appropriations
Chapter 12 Mugan-Akman 2007 16
Retained Earnings-Profit Appropriation
• Net Income After Taxes– Less: Legal Reserves (first)– Less: Dividends
• 1st dividends to shareholders• 2nd dividends to shareholders• Dividends to board of directors and employees
– Less: Legal Reserves (second)– Retained Earnings
Chapter 12 Mugan-Akman 2007 17
Statements of Changes in Equity
• Primary financial statement
• Summarize movements in shareholders’ equity from one accounting period to another
Chapter 12 Mugan-Akman 2007 18
Illustration of the Statement of Changes in Equity• During 2008, available for sale instruments of the company had a fair value increase of TL
5.096, and realized TL 1.100 from sale of such instruments. In April 2008, ZAM Corporation decided to increase the share capital from TL 200.000. The new 20.000 shares with a par value of TL10 were sold at TL 18,75 each. Legal reserves from 2007 income was 9.393 whereas dividends declared were 2.807. Net income for 2008 is TL 54.600.
ZAM CorporationPartial Balance Sheet
31 December2008 2007
Shareholders’ EquityPaid-in Capital TL 400.000 TL 200.000
Share Capital 400.000 200.000 Unpaid Capital - -Additional Paid-in Capital 525.088 350.088Legal Reserves 12.733 3.340Other Reserves 34.945 30.949Retained Earnings 102.400 60.000Shareholders’ Equity TL 1.075.166 TL 644.377
Chapter 12 Mugan-Akman 2007 19
ZAM Corporation Statement of Changes in Equity - For The Year 2008 -TL
Paid-in
Capital
Addl Paid in
Capital
Legal
Reserves
Other
Reserves
Retained
Earnings
Total SH
Equity
Balance 31 December 2007 200.000 350.088 3.340 30.949 60.000 644.377
Inc in Paid in Capital 200.000 200.000
Inc.in Addl Paid in Capital 175.000 175.000
Available For Sale Securities:Valuation Gains taken to Equity 5.096 5.096
Transferred to Profit/loss on sale -1.100 -1.100
Appropriation of income to Legal Reserves 9.393 -9.393 0
Period Income 54.600 54.600
Dividends -2.807 -2.807
Balance 31 December 2008 400.000 525.088 12.733 34.945 102.400 1.075.166
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