Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FAIS 3 > Ch 16 > Flashcards

Ch 16 Flashcards

0
Q

How are preferred stock and options classified?

A

As liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
1
Q

Why should companies classify non redeemable shares as equity?

A

Because issuer has no obligation to pay dividends or repurchase
The stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Dilutive securities

A

Upon exercise may dilute EPS

ex. Convertible securities, options, warrants

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Convertible bonds

A

Can be changed into other corporate securities during some

specified period after issuance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Why do corporations issue convertibles? 2 reasons

A

1 raise equity capital

2 obtain debt financing at cheaper rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

The accounting for convertible debt involves reporting issues at 3 times

A

Time of:
1 issuance
2 conversion
3 retirement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

IFRS requires that the issuer of convertible debt record the…

A

Liability and equity components separately

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Method of recording convertible bonds at time of issuance

A

Follows method used to record straight debt issues, none
Of the proceeds are recorded as equity

Companies amortize to maturity date any discount or premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Converting bonds into other securities, what method is used to record conversion?

A

Book value method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Book value method

A

Records the securities exchanged for the bond at the carrying
Amount (book value) of the bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Induce conversion

A

Additional consideration such as cash or common stock, called
A “sweetener”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

When do induced conversions occur?

A

When issuer wishes to encourage prompt conversion of its
Convertible debt to equity securities

To reduce interest costs or improve debt to equity ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Accounting treatment of induced conversions

A

Expensed in the current period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Retiring convertible debt, what must companies recognize?

A

Companies need to recognize gain or loss on retiring convertible
Debt

in same way they recognize gain or loss in retiring non convertible
Debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Retirement of debt: reporting differences between cash acquisition price of debt and it’s carrying amount

A

Reported in current income as gain or loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Convertible preferred stock

A

Includes option for holder to convert preferred shares into fixed
Number of common shares

When convertible preferred stock exercised, company does
Not recognize a gain or loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Difference between classification of convertible preferred (where no mandatory redemption exists) and convertible bonds

A

Convertible preferred considered part of stockholders equity

Convertible bonds considered liability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What accounting method is used when convertible preferred stock is exercised?

A

Book value method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Warrants

A

Certificates entitling the holder to acquire shares of stock at
Certain price within stated period

Warrants when exercised have dilutive effect on EPS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Difference between convertible securities and stock warrants

A

Upon exercise of warrants holder has to pay certain amount

Of money to obtain shares

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

3 situations for issuance if warrants or options to buy additional shares

A

1 make security more attractive in deal

2 preemptive right to purchase common stock first

3 executive and employee compensation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Detachable stock warrant

A

Can be separated form stock and traded as separate security

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Warrants issued with other securities

A

Long term options to buy common stock at fixed price

Generally life of warrants is 5 years or 10 years

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

A company should allocate the proceeds from the sale of debt with detachable stock warrants between…

A

The 2 securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

2 methods of allocation between warrants issued with other securities

A

1 proportional method

2 incremental method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Proportional method

A

Allocates proceeds using proportion of 2 amounts based on fair
Values

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Incremental method

A

Used when fair value can’t be determined

Allocates known fair value to security and then allocates purchase
Price when fair value is unknown

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Inseparable feature (convertible security)

A

Choices are mutually exclusive

Holder either converts the bond or redeems cash, but can’t
Do both

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Detachable warrants

A

Involves 2 securities, 1 debt security remains outstanding until
Maturity

And the other a warrant to purchase common stock
This justifies separate accounting treatment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Nondetachable warrants

A

Don’t require allocation of proceeds btw/bonds and warrants

Similar to convertible bonds, companies record entire proceeds
From Nondetachable warrants as debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Preemptive privilege AKA stock right

A

To purchase newly issued shares in proportion to their holdings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What does preemptive privilege/stock right do for existing shareholders?

A

Saves existing shareholders from suffering a dilution of voting
rights without their consent

May allow for purchase of stock below its fair value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Companies make only a memorandum entry when they…

A

Issue rights to existing stockholders

33
Q

Stock option

A

Warrant which gives key employees the option to purchase

common stock at given price over extended period of time

34
Q

Stock based compensation plans

A

Provide employee opportunity to receive stock if performance

Of company by whatever measure is satisfactory

35
Q

Option expense is much smaller element of compensation relative to restricted stock. 2 major reasons

A

1 manipulation of accounting numbers by executives to achieve
Higher share price to get compensated with options

2 GAAP results in companies recording higher expense when
Stock options are granted

36
Q

Grant date

A

Date you receive options

37
Q

IFRS follows the same model as GAAP for recognizing…

A

Share based compensation

38
Q

Intrinsic value method (granted stock options)

A

Measures compensation cost by excess of market price of stock
Over its exercise price at grant date

Intrinsic value method measures what holder would receive today
If option was immediately exercised

39
Q

Intrinsic value

A

Difference between market price of stock and exercise price

Of options at grant date

40
Q

Fair value method (granted stock options)

A

Companies use acceptable option-pricing models to value the

Options at date of grant

41
Q

GAAP requires companies recognize compensation cost using…

A

Fair value method

42
Q

4 major factors of option pricing

A

1 volatility of underlying stock
2 expected life of options
3 risk-free rate during option life
4 expected dividends during option life

43
Q

2 main accounting issues for stock option plans

A

1 how to determine compensation expense

2 over what periods to allocate compensation expense

44
Q

Stock options fair value method

A

Companies compute total compensation expense based on
FMV of options expected to vest on date they grant options to
Employees

45
Q

Service period AKA Vesting period

A

Time between grant date and vesting date

Periods in which employees perform the service

46
Q

To vest

A

To earn the rights to

Employees award becomes vested at date that the employee’s
right to receive or retain shares or cash under award no longer
Depends on remaining service to employer

47
Q

Restricted stock plans

A

Transfer shares of stock to employees,

subject to agreement that shares can’t be sold, transferred or
Pledged until vesting occurs

48
Q

3 major advantages of restricted stock plans

A

1 restricted stock never becomes worthless
2 restricted stock results in less dilution to existing shareholders
3 restricted stock better aligns employee incentives with
Companies incentives

49
Q

Restricted stock results in less dilution to existing shareholders

A

Restricted stock awards usually 1/2 to 1/3 the size of stock options

50
Q

Unearned compensation

A

Cost of services yet to be performed

Not an asset

51
Q

Employee stock-purchase plans (ESPPs)

A

Generally permit all employees to purchase stock at discounted
Price for short period of time

52
Q

What 3 conditions must be satisfied for employee stock purchase plans (ESPPs) to not be considered compensatory?

A

1 substantially all full time employees may participate on equitable
Basis
2 discount from market is 5% or less
3 plan offers no substantive option feature

53
Q

IFRS requires than any discount from market price on stock purchase plans be recorded as…

A

Compensation expense

54
Q

4 requirements for disclosure of compensation plans

A

1 nature and terms of plans and how they affect Shareholders
2 effect on income statement of compensation cost
3 method of estimating FMV of goods or services received
Or FMV of equity instruments granted
4 cash flow effects from share based payment plans

55
Q

How did companies overstate earnings in the S&P 500 by 10 percent?

How did companies resist overstating earnings?

A

Through use of the intrinsic value method (overstate)

Accurately stated through use of fair value method

56
Q

Earnings per share

A

Indicates income earned by each share of common stock

57
Q

When is a corporations capital structure simple?

A

When it consists only of common stock

or includes no Potential common stock that upon conversion
Or exercise could dilute earnings per common share

58
Q

When is a capital structure complex

A

When it includes securities that could have dilutive effect on EPS

59
Q

Earnings per share for common stock holders (when preferred shares exist) equation

A

EPS =

net income - preferred dividends)/(weighted avg. # SH. Outstanding

60
Q

If a company declares dividends on preferred stock and a net loss occurs, how does the company compute the loss?

A

The company adds the preferred dividend to the loss to

Compute the loss per share

61
Q

If the preferred stock is cumulative and the company has net income but declares no dividend in the current year, it…

A

Subtracts an amount equal to the dividend that should have

Been declared in current year only

62
Q

If preferred stock is cumulative and company reports a net loss, but declares no dividend in current year, it…

A

Adds an amount equal to the dividend to the net loss

63
Q

Where should dividend in arrears be included in computations?

A

Dividend in arrears included in previous year’s computations

64
Q

Weighted average number of shares outstanding

A

Period shares are outstanding constitutes basis of per share
Amounts reported

Companies must weight shares by fraction of period they are
Outstanding

65
Q

In determining the restatement of weighted avg. of shares outstanding what is restated?

A

Stock dividends and stock splits when they occur

66
Q

Issuance or purchase of stock changes the amount of…

2) Are the weighted average of shares restated?

A

Net assets

2) weighted avg. of shares aren’t restated

67
Q

Antidilutive securities

A

Securities that upon conversion or exercise increase EPS

or reduce loss per share

68
Q

Diluted EPS equation

A

Diluted EPS equation =
(Net income - preferred dividends)/(weighted avg. # SH. Outstanding)
- impact of convertibles
- impact of options, warrants and other dilutive securities

69
Q

If-converted method, how is it used?

A

How companies measure dilutive effects of potential conversion
On EPS

70
Q

If-converted method, for convertible bonds assumes 2 things

A

1 conversion of convertible securities at beginning of period
Or time of issuance

2 elimination of related interest net of tax

71
Q

The additional shares assumed issued…

A

Increase the denominator (the weighted avg. # of SH.)

72
Q

The amount of interest expense, net if tax associated with potential common shares…

A

Increases the numerator (net income)

73
Q

Treasury stock method

A

Used by companies to include options and warrants and their

Equivalents in EPS computations

74
Q

What does the treasury stock method assume .

A

Options or warrants are exercised at beginning of year/issuance
Date

And company uses proceeds to purchase common stock for
The treasury

75
Q

If the exercise price of the option or warrant is lower than market price of stock…

A

Dilution occurs

76
Q

If exercise price of an option or warrant is higher than the market price of the stock it…

A

Reduces number of common shares

Its anti dilutive because leads to increase in EPS

77
Q

Contingent shares

A

In business combinations the acquirer may promise to issue

Additional shares under certain conditions

78
Q

2 conditions for contingent shares

A

1 passage of time condition
Or
2 attainment of certain earnings or market price level

79
Q

When computing diluted EPS, what should a company exclude?

A

Including any securities that are anti dilutive in the calculation

80
Q

5 additional disclosures in note form that capital structures and dual presentation of EPS require

A

1 description of pertinent rights and privileges of securities outstanding
2 reconciliation of numerators and denominators of basic and
Complex EPS
3 effect from preferred dividends on EPS
4 securities not included in current year that could dilute EPS in
Future
5 effect of conversions subsequent to year end but before issuance

FAIS 3 (17 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions