Int. Acc. FA LECT 4: CH 15 part 4: Equity (Analysis (Three important…
Int. Acc. FA LECT 4: CH 15 part 4: Equity
Explain the accounting for share dividends and share splits.
: distributing shares proportionally to stake that shareholders already have.
Retaining earnings instead of dividends -> share price increases.
Shares are less accessible to investors due to high share price.
Share split: more shares at lower price. E.g., 4-for-1 split of 100,000 shares at €100 -> 400,000 shares at €25.
Journal entry for share split? NO! Note to record increased number of shares and changed par value per share.
Share Split and Share Dividend differentiated
increases the number of shares outstanding and decreases the par or stated value per share.
increases the number of shares outstanding.
does not decrease the par value.
increases the total par value of outstanding shares.
Indicate how to present and analyze equity.
Cash flow statement
... companies should also report a “statement of changes in equity”:
For each component of equity, make a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from:
Each item of “other comprehensive income”
Transactions with shareholders
Profit or loss
Other comprehensive income (OCI):
Net income not affected --> Retained earnings not affected
Example: unrealized gains and losses on certain financial assets
Income items that do not pass through the income statement but are
directly recognized in equity
Comprehensive income (CI) = Net income + OCI
less important for valuation
Finance theory (Miller & Modigliani): dividends are irrelevant for value
Many profitable firms do not pay dividends at all
Equity per share (BPS) is often smaller than a company’s stock price. Why?
and 3. give important information for equity valuation and security analysis
Accounting rules tend to be
Not all expected growth potential is reflected in book (accounting) value
But, the stock market does value this forward-looking information
Three important ratios can be derived from accounting’s equity value:
Book value per share(BPS):equity/outstanding shares
Return on equity (ROE):income/equity
(price-to-book) ratio (12/05/2017)
Stock price = $150.03
Book value per share = $21.45 [=$62,188,/2,898m]
Market-to-book ratio = 7.01