ACCOUNTING FOR STOCKHOLDER's EQUITY

Question 1

What are SE ACCTS?

Answer 1

CS

APIC-CS ( market price - par)

PS - Recorded at par value ( close to MV)

Question 2

Define Contributed capital

Answer 2

the amounts paid in by common and preferred shareholders.

Question 3

What are the CS shares rights?

Answer 3

share proportional profits and losses

share the right to vote during board meetings

Question 4

Define Preferred stock

Answer 4

create by contract

stockholders’s sacrifice certain rights for dividend preferences.

Question 5

RE

Answer 5

cumulative earning or losses

Question 6

What are the advantages of equity financing?

Answer 6

1) CO receives cash on sale of stock
2) CO does not have to pay dividends or buy bakc its stock.
3) creditors must pay 1st then PS shareholders are paid their investment, then CS shareholders are paid last
4) DIVs are not an expense , but return of profit

Question 7

What are 4 CS rights?

Answer 7

1) Share proportionately in profits and losses.
2) Share proportionately in management (the right to vote for Directors on the Board).
3) Share proportionately in assets on liquidation.
4) Share proportionately in new issues of stock of the same class—called the preemptive right.

Question 8

What are 5 status of CS?

Answer 8

1) Authorized shares: legally issued shares
2) Issued shares: number of shares sold or distributed to shareholders .
3) Unissued shares: shares authorized and not issued
4) Treasury shares: Corporation’s own shares and repurchased and held by the corporation.
5) Outstanding shares: number of shares that are owned by shareholders ( issued share - TS)

Question 9

What are direct cost incurred to sell stocks?

Answer 9

1) underwriting costs
2) accounting and legal fees
3) printing cost
4) Taxes

all are reduction to APIC

Question 10

What are stock splits?

Answer 10

1) proportionate increase in the number of equity shares and proportionate decrease in the share’s par value.

Question 11

What are the features of TS?

Answer 11

1) Provide tax beneficial distribution of cash to SH
2) improve ratios especially EPS and return on equity
3) Provide shares for stock options or merger needs
4) Prevent hostile takeovers
5) Stabilize or increase stock price, by increasing demand

Question 12

What are two methods of TS?

Answer 12

Cost method ( mostly used)

Par value

( TS has none of the 4 rights of CS until re-issued)

Question 13

Define Cost Method

Answer 13

1) TS account based on TS cost

Question 14

Accounting for share retirements?

Answer 14

1) sum of par value and the average additional paid in capital represents the original issue proceeds

Question 15

What are preferred shares benefits?

Answer 15

1) Priority over receiving dividends
2) Priority claim to assets in liquidation
3) Usually nonvoting
4) Dividends are usually stated on face of security, as a % of par value, or a dollar amount per share.

Question 16

Is Preferred Stock is not recorded at par value and, like common stock, it’s generally closer to its market price?

Answer 16

false

PS is recorded at par

it is unlike CS and is generally closer to MP.

Question 17

What are PS features

Answer 17

Cumulative: PS Shareholder gets current and any past undeclared dividends before common. Accumulated dividends must be paid before.

Convertible: PS Shareholder option to convert to CS

Callable PS: Co. option to buy back PS shares

Participating PS: Shareholder can get > their % Div when CS exceeds the percentage stated in the PS

Redeemable PS: Co. must buy back, so record as Liab, not SE

Question 18

Define Dividends

Answer 18

Dividends represent a return to shareholders on their investment in the corporation.
Dividend distributions generally are based on accumulated profits (retained earnings).
Dividends are voluntary (in contrast to interest payments which are not)

Question 19

What are the four types of dividends?

Answer 19

Cash dividends—Distributions to shareholders in cash.

Stock dividends—Distributions of the firm’s own shares.

Property dividends—Distributions in any asset other than cash (commonly investments in shares of other entities).

Liquidating dividends—Distribution that the firm pays from contributed capital instead of retained earnings (when RE is zero or negative, called deficit RE).

Question 20

Does stock dividend lead to legal liability?

Answer 20

no

Question 21

Do stock dividends change SE on BS?

Answer 21

no

However:

Retained earnings are decreased.

Contributed capital is increased.

The amount depends on the size of the dividend.

Question 22

Define small ( ordinary) stock dividend?

Answer 22

A stock dividend’s share do not exceed 20% to 25% at MV.

Question 23

What are the corrections for prior period of adjustments?

Answer 23

All material errors must be corrected.

Record corrections of NI errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period.

Such corrections are called prior period adjustments.

For comparative financial statements, a company should restate the prior year columns affected, to correct for the errors.

Question 24

What are the primary elements of other comprehensive income?

Answer 24

Unrealized gains and losses from the available-for-sale portfolio of investment securities and derivatives classified as cash flow hedges.

Foreign currency translation adjustments.

Unrecognized pension costs and benefits.

Question 25

What are two options for reporting OCL?

Answer 25

Include components of OCI after net income on one continuous statement summing to comprehensive income.

Present a separate statement of other comprehensive income that begins with net income on the first line and details the components of OCI.

Question 26

What is accumulated OCI?

Answer 26

Accumulated other comprehensive income, the aggregation of OCI over the years, is the third component of stockholders’ equity.

Firms report accumulated other comprehensive income on the balance sheet in the stockholders’ equity section, along with contributed capital and retained earnings.

Question 27

How is SE presented on the BS?

Answer 27

Notice the order & descriptions on the BS SE Section:

Capital Stock–Preferred, Common, Common Distributable with Par & # of shares parenthetically described.

Additional-paid-in-capital –Preferred & Common

Retained Earnings

(Treasury Stock)

Accumulated Other Comprehensive Gain (Loss)

Question 28

How does SE Stmt differ from BS SE?

Answer 28

SE Statement is columnar, easy to recognize from any other FS representing changes in each SE Account

1st Row is Beginning Balance of each SE Account

Each SE Account’s changes during year are described

Last Row is Ending Balance of each SE Account, which must match the amounts shown in the BS SE Section

CS & TS # of shares (Beg., Changes, End) is also shown

Question 29

How does SE Stmt differ from BS SE part 2?

Answer 29

All Amounts in millions (except par values & EPS)

FS are comparative: 2 years BS, 3 years all others (GAAP rule allowing readers to do trend analysis)

SE Stmt columns not side-by side (3 years vertically)
“Consolidated” – Kellogg’s controls subsidiaries

BS shows part of Consolidated Equity that’s not Kellogg’s

RE column represents “RE Stmt” from intro courses

Comprehensive Income (last SE Stmt column or 5th FS)

Question 30

What is FS Ratio analysis?

Answer 30

Ratio analysis compares info from FS to provide greater insight about a Co.
Done for a number of years (to see trends) & in comparison to other Co. or industry average ratios

Hundreds of ratios in various categories: Profitability,

Liquidity, Asset Efficiency, Market Value, Leverage
Ratios with nominators such as NI (earned during year)with BS denominator, it must then be average, not end

Question 31

How is payout raito calculated?

Answer 31

Cash div/ NI - Preferred dividends

Question 32

How is book value per share calculated?

Answer 32

CS equity/ outstanding shares

Amount each share would receive if Co. were liquidated on the basis of amounts reported on BS.

Question 33

What is the only required to be shown on FS?

Answer 33

Represents dividend paid per CS share if all NI paid

Generally shown below NI on IS
Basic EPS if Diluted EPS also shown (lower than basic)