Financial Accounting: An Integrated Statements Approach, 2nd Edition

SUMMARY OF LEARNING GOALS

512 Chapter 11 Stockholders’ Equity: Capital Stock and Dividends

Industry (large companies only) Dividend Payout Ratio (%)

Airlines 0*

Automotive 19

Consumer electronics 5

Consumer products 34

Electric and gas utilities 21

Electronic manufacturing 9

Financial services 11

Food and beverage 8

Petrochemical 4

Retail 9

Software 2

Telecommunications 186

* Due to losses, the industry pays no dividends

Exhibit 8

Dividend Payout Ratios

for Selected Industries

Changes in the stockholders’ equity accounts can have a sig-

nificant impact on cash flows. Issuing common stock will in-

crease cash flows, while purchasing treasury stock will reduce

cash flows. In addition, cash dividends reduce cash flows.

Changes in stockholders’ equity and dividends are disclosed in

the Financing Activities section of the statement of cash flows,

as illustrated for Mattel, Inc., below.

As can be seen from the figures in color, Mattel has paid over

$187 million in dividends and another $255 million to pur-

chase treasury stock. The $22 million received from exercising

stock options and issuing treasury stock are proceeds from

common stock issuances paid by employees exercising stock

options.

Capital Stock and Dividends

FOCUS ON CASH FLOW

Mattel, Inc.

Partial Statement of Cash Flows—Financing Activities

For the Year Ended December 31, 2004 (in millions)

Describe the nature of the corporate form of

organization.Corporations have a separate legal exis-

tence, transferable units of stock, and limited stockholders’

liability. Corporations are subject to federal income

tax.

The documents included in forming a corporation in-

clude an application of incorporation, articles of incorpora-

tion, and bylaws. Costs often incurred in organizing a

corporation include legal fees, taxes, state incorporation fees,

and promotional costs. Such costs are treated as an expense.

1

Cash Flows from Financing Activities:

Payments of short-term borrowings, net $ 6.3

Payments of long-term debt (52.3)

Purchase of treasury stock (255.0)

Payment of dividends on common stock (187.0)

Proceeds from exercise of stock options and sale of treasury stock 22.0

Net cash flows used for financing activities $(466.0)