Page 502 - Accounting Principles (A Business Perspective)

12. Stockholders' equity: Classes of capital stock

over the preceding 52 weeks plus the current week. The next two columns show the company name
(Kellogg) and the NYSE's symbol (K) for that company. The Div column is the annual dividend

based on the last quarterly, semiannual, or annual declaration. Yield per cent is calculated as
dividends paid divided by the current market price. The PE ratio is the closing market price divided
by the total earnings per share for the most recent four quarters. The Vol 100s column shows the
unofficial daily total of shares traded, quoted in hundreds. Thus, 995,700 shares of Kellogg's were
traded that day. The next to last column shows the closing price for that day. The final column
shows the change in the closing price as compared to the closing price of the preceding day.

Analyzing and using the financial results—Return on average common stockholders'
equity

Stockholders' equity is particularly important to managers, creditors, and investors in determining the return on
equity, which is the return on average common stockholders' equity.
The return on average common stockholders' equity measures what a given company earned for its
common stockholders from all sources as a percentage of the common stockholders' investment. From the common
stockholders' point of view, it is an important measure of the income-producing ability of the company. The ratio's

formula is:
Netincomeavailable for commonstockholders
Return onaveragecommonstockholders 'equity=
Averagecommon stockholders 'equity
If preferred stock is outstanding, the numerator is net income minus the annual dividend on preferred stock,
and the denominator is the average total book value of common stock. If no preferred stock is outstanding, the

numerator is net income, and the denominator is average stockholders' equity.
The Procter & Gamble Company reported the following information in its 2001 financial statements (USD
millions):
2001
Net earnings $ 2,922
Stockholders' equity, beginning 12,287
Stockholders' equity, ending 12,010
The return on average common stockholders' equity for Procter & Gamble is 24.1 per cent, or USD 2,922/[(USD
12,287 + USD 12,010)/2]. Investors view any increase from year to year as favorable and any decrease as
unfavorable.
Since the stock market is frequently referred to as an economic indicator, the knowledge you now have on
corporate stock issuances should help you relate to stocks traded in the market. Chapter 13 continues the discussion
of paid-in capital and also discusses treasury stock, retained earnings, and dividends.

An ethical perspective:
Belex corporation

Joe Morrison is the controller for Belex Corporation. He is involved in a discussion with other
members of management concerning how to get rid of some potentially harmful toxic waste
materials that are a by-product of the company's manufacturing process.

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