58 VOCABULARY Flashcards
Common Stock
Common stock is ownership interest that is subordinate to all other classes of stock (and to all creditors) of the issuing corporation in participation rights and in dividend and liquidation preferences (i.e., holders of common stock are paid after debt and preferred stock obligations have been met). Common stock is also known as residual ownership interest and usually carries voting rights (at stockholders’ meetings), although some classes of common stock may be nonvoting. Common stock is often called common shares.
Additional Paid-in Capital
Additional paid-in capital (APIC) is an increase in equity (net assets) in excess of par or stated value arising from transactions involving the enterprise’s own stock. Usually, it is reported for each class of stock or each type of transaction (e.g., APIC from common, from preferred, from treasury stock (both par and cost methods), from conversion of convertible shares, from retirement of callable or redeemable shares from payment of a liquidating dividend, and from quasi-reorganization).
Additional paid-in capital is sometimes called “paid-in capital in excess of par” or “contributed capital in excess of par.”
Bankruptcy Reform Act
The Bankruptcy Reform Act is a set of uniform laws that regulate the critical aspects of bankruptcy. It was originally passed in 1878 and amended in 1984, 1994, 2000, and 2005. The act intended to provide relief to an insolvent debtor from his debts (to provide a “fresh start”) and to give all creditors an equal chance to share in the assets of the debtor in a specified priority and according to their claims. It also incorporates secured financing per the Uniform Commercial Code (UCC) and other debtor-creditor relationships. (Contrast to liquidation and reorganization.)
The operative sections of the Act are as follows:
Chapter 7—Liquidation
Chapter 9—Adjustment of the Debt of a Municipality
Chapter 11—Business Reorganization
Chapter 12—Adjustment of Debts of Family Farming and Family Fishermen
Chapter 13—Adjustment of Debts of an Individual with Regular Income
(The CPA Examination is concerned primarily with liquidation.)
May be voluntary or involuntary.
Contributed Capital
Dividends
Dividends are the distributions of cash, other corporate assets or property, or the corporation’s own stock to stockholders in proportion to the number of outstanding shares held. Accounting for dividends represents a debit to retained earnings and the establishment of a liability at the date of declaration. Dividends must meet the preferences of preferred stock first and then may be extended to common stock.
There are two types of dividends:
- Common, such as cash, stock (treasury or newly issued shares), and property
- Special, such as scrip and liquidating
Four dates are relevant to dividends: date of declaration, record, ex-dividend, and distribution (payment).
Date of declaration is the date whereby the dividend amount is decided by the board of directors for those shareholders owning stock on the date of record (usually 1 month later) and to be paid on the date of distribution. Ex-dividend date is a date prior to the date of record (see ex-dividend date).
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date.
Financial Statements
A financial statement is a structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources and obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework.
Financial statements ordinarily refer to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework.
Holding Gain or Loss
A holding gain or loss is the net change in fair value of a security. The holding gain or loss does not include dividend or interest income recognized but not yet received, write-offs, or the allowance for credit losses.
FASB ASC Glossary
Long-Term Contracts
A long-term contract is a contract for the construction of a specific project over an extended period of time (more than one accounting period), such as ships, airplanes, bridges, roads, and buildings. Accounting issues include revenue/profit recognition and valuation of construction-in-process. There are two alternative GAAP methods available: completed-contract and percentage-of-completion.
FASB ASC 605-35-05-5
Net Income
Net income is operating income plus non-operating revenues minus non-operating expenses minus taxes.
Restructuring
Restructuring is changing the debt or equity structure of an entity (e.g., debt restructuring and capital restructuring).
In a debt restructuring, creditors grant concessions to the debtor with the hope that they will receive some repayment of the amounts lent rather than forego all of the amounts lent. The concessions by creditors may be voluntary or they may be forced by law or the courts.
In a capital restructuring, the characteristics of the stock may be changed (i.e., par value) or one class of stock may be substituted for another class of stock.
Retained Earnings
Retained earnings are an increase in net assets from results of operations, retained by the corporation for use in the enterprise. They are internally generated financing or the corporation’s undistributed earnings. They are accumulated earnings, less accumulated losses and dividends paid, from inception. Retained earnings are a major source of owners’ equity and can be viewed as additional investments by the owners as foregone dividends.
Negative balance is called a deficit.
Retained earnings may also be decreased by purchase of treasury stock at a price higher than the amount originally received for the stock.
Retained earnings may be appropriated (i.e., restricted as to use) by:
contractual specification (e.g., bond covenants),
legal requirement (e.g., by state law), or
management discretion (e.g., for future expansion).
Retained earnings are increased by net income, prior-period adjustments, and quasi-reorganization. Retained earnings are decreased by net loss, prior-period adjustments, cash, property, scrip, stock dividends, and treasury stock and stock retirement transactions.
Stock Dividend
Stock dividends are distributions of the corporation’s own stock (treasury or newly issued shares) to stockholders in proportion to the number of outstanding shares held. They do not change the par value per share or the shareholder’s proportional interest in the corporation, but they do increase the number of shares issued and outstanding. A stock dividend does not change assets, liabilities, or total stockholders’ equity. It merely transfers amounts between equity accounts. Accounting for dividends represents a disbursement (credit) to the capital stock account(s) and a reduction (debit) to Retained Earnings. Stock dividends are revocable up until the date of issuance (distribution) and may involve some special accounting issues.
FASB ASC 505-20-20
Stock dividends are used in calculating the weighted-average number of shares outstanding for EPS (earnings per share) computations and are given retroactive treatment “as if” the shares had been outstanding for the entire period.
Stock dividends represent return on investment to shareholders.
Stockholders’ Equity
