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ACCT 217 > Ch 11- Analyzing SE > Flashcards

Ch 11- Analyzing SE Flashcards

1
Q

THREE types of corporate forms of organization

A

1) proporietorship
2) corporation
3) partnership

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2
Q

What is a corporate form of organizaiton

A

-separate legal entity
(distinct from owners & shareholders)

-has the rights and priveleges of a person

-may be public or private

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3
Q

public corporation

A

many shareholders, shares are publically traded and held

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4
Q

private corporation

A

few shareholders, shares are closely held and not traded

shares exchange hands through negotiations

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5
Q

characteristics of corporations

A

-separate legal entity
-limited liability of shareholders (sharehodlers only responded up to the value of the shares they hold)
-transferable ownership rights
-ability to acquire capital
-continuous life
-corporation management
-govt regulations
-income tax

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6
Q

pros of a corporation

A

-separate legal entity
-limitied liability
-ease of transferring ownership rights
-easy to acquire capital by issuing shares
-continuous life
-separating management and owners
-potentially reduced income tax compared to other busness orgs

shareholders can own shares and not have to manage the corporations- management will do this

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7
Q

cons of corporations

A

-increased cost and complexity to follow govt regulations
-increased reproting and disclosure requirements

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8
Q

public corproations havea a higher — as compared to priate corps

A

more cost of compliance with regulations

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9
Q

what are the classes of shares

A

1) common/ordinary shares:

2) preferred shares

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10
Q

where are ownership rights of shareholders writted

A

in articles of incorporation or in by-laws

(rights in voting, dividends, and liquidation)

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11
Q

SE= share capital + retained earnings

Share capital= common shares + preferred shares

Retained Earnings= All profits of the company from day 0

A
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12
Q

authorized shares

A

the max amount of shares a company is allowed to sell

-> may be limited or unlimited
-> not recorded, disclosed only in the notes to the financial statemnets

->this info is found in articles of incorporation

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13
Q

issued shares

A

number of shares sold

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14
Q

legal capital

A

share capital cannot be distributed to shareholders, unlike retained earnnigs, which can be distributed as dividends

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15
Q

issued shares ?? authorized shares

A

<=

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16
Q

what can be distributed as dividends to SH?

retaned earnings or share capital?

A

only retained earnings!!

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17
Q

what is IPO

A

first issue of shares is normally through Initial public offering (IPO)
->share price is set by the company

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18
Q

after the shares have been issued by a company, can the price change?

A

yes! the inital price is the IPO but then the market forces of STOCK EXCHANGE will change the price of the shares

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19
Q

Do price fluctuations have a direct impact on fincancil statments?

A

no! it is not recorded on the FS

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20
Q

what is the JE for shares issued for cash
common shares

A

Dr Cash
Cr Common Shares

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21
Q

what is the JE for shares issued for cash
preferred shares

A

Dr Cash
Cr Preffered Shares

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22
Q

Shares can be issues in exchange for services or non caash assets!

A
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23
Q

under ifrs how are shares reocrded if not issued for cash

A

record at cash equivalent price (ideally the fair value of consideration received)

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24
Q

under aspe how are shares recorded if not issued for cash

A

fair value of shares given up or fair value of consideration receiveed (Whichever is more reliable)

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25
Q

under IFRS if company issues common shares for an air craft, what is the JE

A

Dr Aircraft
Cr Common shares

the dollar amount is the fair market value of the aircraft

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26
Q

WHY would a company repurchase its shares

A
  • to distrubute cash to shareholders
    -increase trading on securities market
    (to heat up the trading in the market, if company is concerned that the trading in its shares is not very active)
    -reduce number of shares issues (incrase earnings per share and return on common se)
    -buyout of hostile shareholders
    -have shares avaialble for compensation or other uses
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27
Q

what happens in the books when shares are repurchased

A

they are normally retired and cancelled (removed from the shar capital account)

can also be held as treasury shares, for future resale, in ONLY SOME CASES
(only in some provinces and froegin countries)

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28
Q

how to record the repurchase of common shares JE

A

1) remove cost of shares from share capital account
2) record cash paid
3) record gain/loss on purchase

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29
Q

je for repurchased common shares when there is a contributed surpulus

A

Dr Common Share (how much they were isssued for)
Cr Cash (amount that they were bought back for)
Cr Contributed surplus (difference between the two amounts)

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30
Q

repuruchase above averageg cost JE

slide 19

A

Dr common shares
dr contributed surplus
dr retained earnings
cr cash

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31
Q

what are preferred shares

A

-shares that have contractual provisions that given them priority over common shares

-usually dont have voting rights (they cant vote in a shareholders meeting, whereas common shareholders can vote)

32
Q

JE for issuing preffered shares

A

Dr Cash
Cr Preferred shares

33
Q

what are some preferential features of preferred sahres

A

-specified dividend rate
-dividend preference (tehy are paid divdends before dividends paid to common shareholders, and dividends are cumulative (if not paid this year, than preferred shareholders paid for this eyar and next year))
-liquidation prefernce
-other preference (conversion privelede, redeemable/callable, retractable)

34
Q

dividends meaning

A
  • a pro rate distriution of a poriton of a corporations RE to shareholders
    -cash dividends are most common
    -stock divdends may also be issued
35
Q

cash dividends 2 requirements

A
  • meet a two part solvecy test (cbca)
    -effect a formal declaraition of divdidends by board of directors
36
Q

debt vs equity
-itnerest payments: optioanl or compulsory

A

debt
-interest compulsory

equity
-interest optional (divdiends dont have to be declared)

37
Q

3 important dates in connections with divdends

A

1) declaration date
2) record date
3) payment date

38
Q

what is the declarationd date

A

when board of directors decide to formally authorize cash divdends
-> commits the corporation to a legal oblifation

JE: on dec 1 declared

Dec 1 Dr Divdends declared
Cr Dividends payabledi

39
Q

divdends declares affect which account on books

A

RE!!!!

40
Q

Divdends payable account type

A

liabilty

41
Q

what is the record date (div decl)

A

if you are holding shares on the record date, you will get divdends, if you dont you wont ge dividiends

NO JE REQUREID

42
Q

payment date JE

A

Dr. Div payable
Cr. Cash

43
Q

what are stock dividends

A

distributing dividends in shares

-> fair value (on date of declaration) is assigned to stock divdind shares
-> same three dates as chash dividends

44
Q

why would a company wanna pay stock divdends as opposed to cash dividends

A

company doesnt have to pay cash

45
Q

pros of stock dividends

A

1) satisfy shareholder dividend, without spending cash
2) increase marketability od the shares (incrase number of shares, decrease market price per share, smaller investors can invest)
-? reinvest and restrict a portion of the shareholders equity (unavailable for future cash divdends

46
Q

slide 30 ex

A

!

47
Q

je for stock dividends -declaration date

A

Dr Dividends declared
Cr stock dividends distributable (liability)

48
Q

je for stock dividends -distribution date

A

Dr Stock dividends distributable
Cr cash

49
Q

what kind of account is stock dividends distributable

A

LIABILITY ACCOUNT

50
Q

WHAT IS THe impact of stock dividends declaration on total shareholders equity

A

0

51
Q

is stock dividdend refelcted on the cash flow statmenet

A

no!

52
Q

is cash dividendd reflected on the cash flow statemetn

A

yes!

53
Q

what is a stock split?

A

involves the issue of additional shares to shareholders according to their % ownership

(like a strock dividend but muhch larger)

54
Q

main purpose of stock split

A

increase marketability of shares by lowering share price

55
Q

what is effect of stock split on—-

A

slide 34

56
Q

is there a je for stock split

A

no!

57
Q

if you were an individual would u want a cash dividend, stock divdend, or stock split

A

cash dividend

stock dividend if org has a lot of growth potential

stock split=no effect on the investors, instead of one share you will have 2

58
Q

What is shareholder equity made up of

A

Share Capital (common +preferred shares)

and

Contibuted surplus (amounts contributed form repuchasing and retiring shares)

and Retained Earnings

and Accumulated other comprehensive income (under IFRS)

59
Q

What is retained earnings compose of

A

Cumulative net incomes/losses + annual net income - net losses and dividends

**a poortion may be restricted and therefore unavailable for paying out ddividends

60
Q

when is accumulated other comprehenesive income reported?

(also called aOCI)

A

only under IFRS

61
Q

What is OCI

A

INCLUDES CERTAIN GAINS AND LOSSES THAT BY PASS NET INCOME

Ex: revaluation gains and losses of ppe using the revaluation model

62
Q

what is accumulated oci?

A

cumulative change in shareholders equity

-> start w open balance, and is increased/decreased by other comprehensive income/loss period

63
Q

what is net income closed to?

what is OCI closed to?

A

retained earnings

aoci

64
Q

what is included in aoci

A
65
Q

what are the two ways to record PPE under IFRS

-> which is most popular

A

1) cost- acc depr
2) Fair market value

usually #1

66
Q

why does revaluation gains and losses NOT go into net income?

A

1) because this makes net income too volatile! increase decrease a lot cuz market changes

2) the fair market value of products are not in control of management, so ofc not under net income

67
Q

slide 40-44

A
68
Q

How do we measure a company’s corporate eprformance?

A

1) dividend record
2) earnings performance

69
Q

Dividend record- 2 ratios

A

payout ratio

dividend yield

70
Q

earnings performance- 2 raitos

A

basic earnings per share

return on common shareholder’s equity

71
Q

Dont memorize formulas, but make sure you understand the meanings of the ratios

A

will be given the formulas on final

72
Q

what does the payout ratio tell you

A

measures the % of profits distributed as cash dividends to common shareholders

-HIGHER IS BETTER IF INVESTORS WANT INCOME
-LOWERS IS BETTER IS INVESTORYS WANT SHARE PREICE APPRECIATION (if company is paying out less dividends then the cash is being used by the company to re-invest into the business)

73
Q

payout ratio formula

A

cash dividends declared/net income

74
Q

dividend yield
-what does it tell us

A

measures the profit generaetd by each share

HIGHER IS BETTER IF INVESTOR WANTS INCOME
LOWER IS BETTER IF INVESTOR WANTS PRICE APPRECIAITON

75
Q

What is the basic earnings per share ratio

A

measures the income earned by each common share

-increased eps over prior years indicates improved performance
-not comparable b/w companies

76
Q

how to calculate weighted average number of common shares

A

use the table on slide 50

77
Q
A

ACCT 217 (62 decks)

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