15.01 Equity Flashcards
What does equity represent?
The equity accounts represent the residual interest in the net assets of an entity that remain after deducting its liabilities.
What are the two main categories of equity?
Earned capital: retained earnings and AOCI
Contributed capital: investments made by the firm by investors, in return for shares of capital stock.
What are the major equity account types for a corporation?
Common stock; Preferred stock; Additional paid-in-capital; Retained earnings; Accumulated other comprehensive income; Treasury stock
What is common stock?
Common stock equity account represents the total par value of issued common stock. A corporation begins operations by issuing stock to raise funds. Common stock typically has a par value or stated value assigned to it. The issue price of the stock, however, is almost always greater than the par value. This excess is recorded in additional paid-in capital (APIC) and is identified specifically as being from common stock. If common stock has no par or stated value, there is no allocation between common stock and APIC; the entire amount is simply recorded in the common stock account.
What is preferred stock?
Preferred stock equity account represents the total par value of issued preferred stock. Preferred stock has two advantages over common stock: dividends (must be paid before the company is allowed to pay the common shareholders) and liquidation (if the corp. liquidates, preferred shareholders must be paid before the common shareholders).
What are dividends in arrears?
If preferred stock is cumulative and dividends for a year are not paid, then the dividends are considered to be in arrears. Dividends in arrears are not required to be paid but accumulate if unpaid. However, the liability for dividends in arrears is only recognized after a dividend is declared.
The cumulative feature of preferred stock simply means that, in the event of a dividend declaration, preferred shareholders are entitled to be paid the dividends in arrears before any distribution related to the current period occurs. Undeclared dividends in arrears are disclosed in the footnotes
What is additional paid-in-capital (APIC)?
APIC equity account represents the amount received for stock issuances in excess of par value.
What is retained earnings?
Retained earnings equity account represents the firm’s net earnings to date less dividends to date, plus or minus other items including prior-period adjustments and certain accounting changes.
Retained earnings represent the accumulated earnings since inception of a company that have not been paid out to shareholders in the form of a dividend. At the end of each accounting year, net income is closed into retained earnings.
What is a stock dividend?
A stock dividend is a distribution by a firm of its stock to its shareholders in proportion to their existing holdings. Stock dividends are not actual distributions of assets from a company but represent transfers of capital from retained earnings to contributed capital accounts. Therefore, in relation to stock dividends, no liability is recorded.
What is the effect of a stock dividend?
The effect of a stock dividend is to increase the number of shares issued and outstanding. EPS are decreased by a stock dividend. Stock dividends are distributed to reduce the market price of the firm’s stock (often because the stock price has become too high for potential investors) and also to reduce demand by shareholders for cash dividends.
What are the two types of stock dividends?
Small stock dividend - less than 20%-25%, record at FV at declaration date (the difference between FV and par value is recorded to APIC)
Large stock dividend - greater than 20%-25%, record at par value
What is a stock split?
A stock split is not a dividend. Rather, it is an adjustment to the par value and number of shares issued. Firms often split their shares to reduce the market price and make the shares available to a larger number of shareholders. A 2-for-1 stock split halves the par value and doubles the number of shares. Since total par value is unchanged, no accounting entry is made. A firm may choose to record a memo entry. A reverse stock split does the opposite by reducing the number of shares outstanding and proportionally increasing the par value.
What is treasury stock?
Treasury stock is stock that is repurchased by a firm but not retired. These treasury shares are not paid dividends and are nonvoting. They are considered authorized and issued but not outstanding. Treasury stock is a contra-equity account. No gain or loss is recorded in the income statement from the purchase, reissue, or retirement of treasury stock.
What are the two options for recording treasury stock?
Par value method and cost method.
How do pass-through entities account for equity differently than corporations do?
The equity section identifies the capital balances of each partner and does not distinguish between contributed capital and retained earnings. Additionally, a partnership isn’t a taxable entity, so no provisions are recorded for current or deferred income taxes in the financial statements.
