|
Unit 4 - Instructor
Discussion Guide
PowerPoint Slides for Unit 4 Discussion Guide
Corresponding slides are in parenthesis with associated discussion
points, denoted "S" for slide and by number.
I. Who finances the business – owners (S 4.1)
Members as owners—members of a cooperative must capitalize its
business. Members meet this obligation by the purchase of:
a) Common Stock (S 4.2)
1) Common stock is the voting
stock—usually one member one vote. However some cooperatives vote on
a
proportional basis.
b) Preferred Stock (S 4.3)
1) Preferred stock may be
sold by the cooperative to provide additional capitalization.
(a) Has preference over common stock during liquidation.
(b) May be purchased by either members or nonmembers.
(c) May pay a limited dividend.
(d) Has no voting privileges.
c) Transferable Delivery Rights (S 4.4)
1) Purchase of long-term
delivery rights.
(a) The right to deliver a specified quantity of production for value-added
processing.
(b) The obligation to deliver a specified quantity of production for
value-added processing.
2) The delivery right is
usually tied to the purchase of shares of preferred stock (e.g., 1 share of
stock provides the right and obligation to deliver 1,000 bushels of corn).
3) Sale of long-term deliver rights.
(a) Producer may sell the stock and its delivery rights to other qualified
producers with board approval at whatever price they agree to accept, which
can be more or less than the original price of the stock.
II. Who Finances the Business (Users) (S 4.5)
Members as users of the cooperative’s services—it is the
responsibility of members to capitalize the business. In addition to the
purchase of stock or delivery rights, members supply additional equity by
retained patronage and per-unit retains.
Members as financers also have their equity redeemed.
a) Retained Patronage (S 4.6)
1) Proceeds from net
income generated by the business distributed as patronage.
(a) Usually 20 percent is paid in cash.
(b) 80 percent as allocated retained patronage—percentage of
allocation is a board of director decision.
b) Per-Units Retains (S 4.6)
1) Based on
the physical units handled by the cooperative for the members or dollar
volume (examples):
(a) 10 cents per box,
(b) $1 per cwt/ $1 per $100 of sales.
c) Equity Redemption (S 4.6)
1) Oldest
retained patronage or per-unit retains are redeemed first—assures
that current users of the cooperative
are largely the ones financing it.
2) Equity
account balances must be adequate to finance the cooperative.
(a) Timeliness of redemption is determined by the board.
III. Who Finances The Business (Creditors) (S 4.7)
Cooperatives may borrow debt capital from traditional and nontraditional
sources. Debt capital has a fixed rate of
interest (money cost) and a fixed repayment date. The less a cooperative
has to pay as interest on its debt capital, the greater the amount of
patronage refunds it can allocate to its patrons.
a) Sources of long-term credit:
CoBank, Denver, CO
National
Cooperative Bank, Washington, DC
Insurance
Companies
Commercial
Banking System
State
governments
Sale of
commercial paper
Leasing
b) Sources of short-term credit:
Commercial Banking
System
Credit Unions
Suppliers
CoBank,
Denver, CO
National Cooperative
Bank, Washington, DC
IV. How Cooperatives are Taxed (S 4.8 & S 4.9)
How qualified retained equity affects the cooperative and the member.
The cooperative deducts patronage paid to
members from its taxable income during the year the profits are earned.
Members include the patronage (both cash paid to them and the amount
retained by the cooperative) received from the cooperative in their taxable
income. The member pays the tax on the net earning of the cooperative that
he/she receives.
V. How Cooperatives are Taxed (S 4.10 & S 4.11)
Single tax treatment is accomplished by permitting a cooperative to
deduct patronage refunds distributed.
a) Distributed to Members/users.
1) Based on volume
of business ($ or Units) done with the cooperative.
2) From the cooperative’s
earnings done with or for all members/users.
b) Income earned from business with nonmembers.
1) Is subject to
federal tax at the cooperative level when earned.
2) If paid out to
member/users, they are responsible for a second tax liability.
VI. Flow of Funds to Finance a Cooperative Business (S 4.12 & S 4.13)
Cash comes into cooperative businesses from:
Equity
investments by members.
Purchase of
common stock.
Purchase of preferred
stock or delivery shares.
Membership
fees.
Sales of fixed
assets.
Sales of
inventory.
Collection of
accounts receivables.
Depreciation
is a noncash expense.
Creditors
(e.g., 30 days terms of purchases).
Advances on
products marketed.
Cash flows out of the business:
Purchases of
fixed assets.
Purchases of
inventory.
Advances on
products purchased.
Paying accounts
payable.
Customer
credit (e.g., granting 30 days credit to customers).
Have students complete Quiz 4 and then discuss answers.
|