ACCOUNTING FOR STOCKHOLDER's EQUITY Flashcards
What are SE ACCTS?
CS
APIC-CS ( market price - par)
PS - Recorded at par value ( close to MV)
Define Contributed capital
the amounts paid in by common and preferred shareholders.
What are the CS shares rights?
share proportional profits and losses
share the right to vote during board meetings
Define Preferred stock
create by contract
stockholders’s sacrifice certain rights for dividend preferences.
RE
cumulative earning or losses
What are the advantages of equity financing?
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
What are 4 CS rights?
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.
What are 5 status of CS?
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)
What are direct cost incurred to sell stocks?
1) underwriting costs
2) accounting and legal fees
3) printing cost
4) Taxes
all are reduction to APIC
What are stock splits?
1) proportionate increase in the number of equity shares and proportionate decrease in the share’s par value.
What are the features of TS?
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
What are two methods of TS?
Cost method ( mostly used)
Par value
( TS has none of the 4 rights of CS until re-issued)
Define Cost Method
1) TS account based on TS cost
Accounting for share retirements?
1) sum of par value and the average additional paid in capital represents the original issue proceeds
What are preferred shares benefits?
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.
Is Preferred Stock is not recorded at par value and, like common stock, it’s generally closer to its market price?
false
PS is recorded at par
it is unlike CS and is generally closer to MP.
What are PS features
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
Define Dividends
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)
What are the four types of dividends?
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).
Does stock dividend lead to legal liability?
no
Do stock dividends change SE on BS?
no
However:
Retained earnings are decreased.
Contributed capital is increased.
The amount depends on the size of the dividend.
Define small ( ordinary) stock dividend?
A stock dividend’s share do not exceed 20% to 25% at MV.
What are the corrections for prior period of adjustments?
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.
What are the primary elements of other comprehensive income?
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.
