CHAPTER 12

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 6

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

Chapter 12 Mugan-Akman 2007 20