Chapter 10: Shareholders’ Equity Flashcards
Explain the edge corporations have over other businesses
They can raise large amounts of capital as investors large and small can participate in ownership
Explain the factors related to the edge corporations have on other businesses
- Shares can be purchased in small amounts.
- Ownership interest can easily be transferred through the sale of shares on markets, such as the TSX
- Stock ownership provides investors with limited liability.
What are the two primary sources of equity capital?
- Contributed capital
- Retained earnings
What is Contributed capital and its two distinct componants
Contributed capital = the amount invested by shareholders
- Amounts initially received from the sale of shares
- Contributed surplus that reflects contributions made by shareholders in excess of the amounts credited to share capital accounts.
What is retained earnings?
Generations made by the profit-making
activities of the company.
Retained Earnings is the accumulated net earnings since the corporation’s inception, less the accumulated dividends from the corporation since its incorporation
What are some benefits of Share ownership
- A voice in management
- Dividends
- Residual claims
What is the share benefit of residual claims?
Share holders may receive a proportionate share of the company upon liquidation
What are authorized shares?
The maximum number of shares that can be issued, as specified in the charter of the corporation
What are issued shares?
The total # of shares the corporation has issue to date
What are un-issued shares
of authorized shares that have never been issued to date
What are treasury shares
Shares that have been issued to investors then reacquired by the issuing corporation
What are outstanding # of shares
of shares currently owned by shareholders
or
# of shares authorized, less un-issued shares, less # of treasury shares
What is the Earnings per share ratio?
Answers how profitable a company is
Earnings per share (EPS) = Net earnings available to common shareholders / Average # of common shares outstanding
What are the two types of shares companies issue?
Common Shares
Preferred Shares
What are Common shares
Basic voting shares issued by a corporation
What is Par value?
The nominal value per share established in the charter of a corporation
What are no par value shares?
Share that do not have an amount per share specified in the corporation charter
What is an Initial public offering (IPO)
Initial sale of a company’s shares to the public
What are stock options?
Stock options allow employees to purchase shares from the corporation at a predetermined, fixed price.
Generally lower than price in secondary market
What happens when purchase price of shares is less than average issuance price of shares?
the difference is credited to contributed surplus
Common shares (SE) 2,700,000
Cash (A) 2,500,000
Contributed surplus (SE) 200,000
What are the key dates of declaration and payment of dividends
The declaration date
The date of record
The payment Date
What is the declaration date?
The date when the board of directors approves the divided. When declared it creates dividend liability
What is the date of record?
The date in which the corporation prepares a list of current shareholders. Dividend is paid to names on the record date.
What is the payment date?
date on which cash is dispersed to pay dividends
What is the journal entry on declaration date
Dividends declared (-SE)
Dividends payable (+L)
What is the journal entry on date of payment
Dividends payable (-L)
Cash (-A)
What are the two fundamental requirements for the payment of a cash dividend
Sufficient retained earnings
Sufficient Cash
When does legal obligation to pay dividend happen?
When board of directors declares a dividend.
What is the dividend yield ratio?
a measure of percentage return that shareholders earn from dividends
Dividend Yield Ratio = Dividends per share/Market price per share
What is a stock dividend?
a distribution of additional shares of a corporations own share capital to its shareholders.
How is value of stock dividend calculated?
outstanding shares x percent stock dividend x price per share
What are stock splits?
Similar to dividends, the total number of authorized, issued, and outstanding shares are increased by a specified number
EX. 2-for-1 stock split
- Doubles outstanding shares
- Halves issue price per share
What are the journal entries for stock dividends?
Dividends declared-Common (SE)
Stock dividend distributable (SE)
Stock dividend distributable (SE)
Common shares (SE)
How are Preferred shares different from common shares?
Preferred shares:
- typically do not grant voting rights
- typically have a fixed dividend rate
- are less risky than common shares
What are convertible preferred shares?
Shares that may be exchanged for a different series of preferred or common shares of the corporation
What are redeemable or callable perferred shares?
Shares that may be repurchased by the corporation at a predetermined price.
What are retractable preferred shares?
Shares that may be redeemed at the option of the shareholder for the redemption price
What are the two preferred shares dividend preference?
Current Dividend preference
Cumulative Dividend preference
What is Cumulative dividend preference?
Any unpaid dividends from previous years must be paid before common dividends are paid
What is current dividend preference?
The current preferred dividends must be paid before paying any dividends to common shares
When can an adjustment to the beginning balance of retained earnings be made?
When there was a correction of a material accounting error that occurred in a prior period
OR
A change in accounting policy occurred
What is Accumulated Other Comprehensive Income (AOCI) (Loss)
An equity item that reflects the financial effect of events that cause changes in SE, other than investments or distributions by shareholders
What are the two equity accounts needed in a sole proprietorship?
a capital account
a drawings account
What is the purpose of a capital account in a sole proprietorship?
-to record investments by owner
-to accumulate period net earnings or losses
What is the purpose of a drawings account in a sole proprietorship?
- to record withdrawals of cash or assets from the business
What is a capital account (sole proprietorship)
cumulative total of all investments + earnings - withdrawals of resources
What is the difference in accounting between sole proprietorship & partnership?
- Separate capital and drawings accounts must be created for each partner
- After closing process, each partners capital account = cumulative total of investments + partners share of earnings - partners withdrawls
