CHAPTER 9 SOURCES OF CAPITAL: OWNERS’ EQUITY
Changes from Eleventh Edition Updated from Eleventh Edition Approach By comparison with Chapter 8, this chapter’s equity topics are relatively straightforward. I try to downplay the differences between equity accounting for unincorporated and incorporated businesses. As a consultant to the former, I urge them to impute market salaries for their employee-owners, so that their income can be compared with the pretax earnings of incorporated firms. Cases Xytech, Inc. provides practice in accounting for various owners’ equity transactions. Innovative Engineering Company involves comparison of alternative financing arrangements for a new company. UPC, Inc., examines the calculation of earnings per share for annual periods. Maxim Integrated Products, Inc., provides a platform to discuss accounting for stock options under PAS 123R. This is a new case with this edition.

Problems
Problem 9–1 a. (1)

Debt/Equity Debt/Capitalization Ratio Ratio Including current liabilities.................................................................................................................... Rarely calculated $97,920 = 66.7% this way. $146,880

(2)

Excluding current liabilities except $79,560 $79,560 = 35.1% = 54.2% current portion of long-term debt........................................................................................................... $226,440 $146,880

(3)

Excluding all current liabilities.............................................................................................................. $73,440 $73,440 = 50.0% = 33.3% $146,880 $220,320

b. These two ratios measure the proportion of funds the company has raised from creditors as opposed to owners. They indicate how much “leverage” the firm has in its capital structure. The basic trade-off a company makes in determining the “right” ratio