Chapter 11 Flashcards
if you deposit 100 on January 1, 2022 in your bank and how much money do you get with the interest on December 31, 2024. Assume that interest rate is 7%
You start with 100. 1 year later you get 100(1+0.07) so you get 107 1 yeat later. In the second year you get 100(1.07)*1.07) = 114.49. So this is the future value two years later
Common shares rights?
Voting right
Dividend right
right to share in the distribution of assets upon liquidation
Premtive rights to purchase new stocks issued by the corporation (to avoid diluting your interest)
Why do company’s go bakrupt?
If they have debt. If they only have equity fund then they do not go bankrupt
When there is an increase in share price in the stock market, does it increase equity section of B/S?
No, because it comes down to if something is an accounting event or not. If there is an increase in equity there is increase in asset or decrease in liability. When stock prices increases nothing changes to assets of liabilities so no change in real economic resources (no cash coming in)`
What are the two clases of facebook stock?
Class A: 1 vote per share
Class B: 10 votes per share (held by a small group of insiders)
Why do firms issue dual or multiple classes of common shares?
Stock ownership dilution. Company insiders do not want to give up control of company (dilute their ownership interes) so that they can keep controlling the firm
Is there any stock without voting power?
Yes, the prefer stock. If you buy prefer stocks you do not get voting power at all but if you buy common stock you generally have voting rights
Is there any common stock without voting power?
Yes, for example Google class C common stock
Shareholder Equity other names?
Stockholders equity, Owner’s equity, Residual interest, Ownership interest, Net asset, Assrts minus liabilites
What are auhorized shares?
The total number of shares that can be issued by a company and are specified in the articles of incorporation. Unlimited allows more freedom to issue chares at management’s dicussion
What are the two types of authorized shares?
Issued shares: outstanding shares traded in the market plus treasure shares from stock repurchases
Unissued shares
Which of the following dollar amount is shown under the common share section of equity?
Outstanding shares
What is the valid reason for a decrease in common shares?
Common shares were repurchased and cancelled. Stock repurchases result in treasury shares, a contra equity account.
What is EPS?
Net Income in the absence of prefer stock/Weighted average number of outstanding shares
(if there is prefer stock we need to subtract prefer dividend)
In general, repurchased shares are immediately cancelled in Canada. What is the impact on Balance sheet equation?
Asset goes down and shareholders equity goes down
To record stock repurchase and retirement of 5,000 common shares on Sept 1 (stock price is 1.5 at this point)
(Dr) Common shares (5000*2.5) = 12,500 (Cr) Cash 5000*1.5 = 7500 Contributed suprlus (5000*1) = 5000
To record stock repurchase and retirement of 4000 common shares on Oct 1 (stock price is 4 at this point)
(Dr) Common shares (4,000 * 2.5) = 10,000
(Cr) Cash (4000 * 4) = 16,000
(Dr) Contriuted surplus (5,000)
(Dr) Retained earnings 1,000
Can the corporation recognize a gain from stock repurchases?
No, corporations cannot recognize a gain or a loss from share transactions with their own shareholders
Difference between common and preferred stock?
If you buy common stock you will have voting power (most likely) but there is not fixed dividend rights. If you bought preferred stock you do not have voting power but at time of purchase you know exact amount of dividend you could potentially get at the time of dividend declaration.
When are preferred shareholders paid before common shareholders?
If dividends are paid in a year.
What happens if dividends are not declared in a year on cumulative dividends preferred shares?
The divdends owed to preferred shareholders with accumulate and be paid in the future.
Dividends in arrears?
Dividiends that are owed to the preferred shareholders, but have not been declared or paid.
Redeemable preferred shares?
The company can cancel your share at any time at a specified price.
What is the impact of cancellation on B/S equation?
(1) Stock buyback has to happen
(2) Those shares are then called treasury stock which are put into inissued categories
Assets goes down and shareholder’s equity does down
What is the impact of cancellation on B/S equation?
(1) Stock buyback has to happen
(2) Those shares are then called treasury stock which are put into inissued categories
Assets goes down and shareholder’s equity does down
Retractable preferred stock?
Shareholder can cancel his share by selling it back to the company
Convertible preferred shares?
Shareholders’ option to exchange your chares for a common share.
When does a company issue shares?
(1) At inception
(2) When going public
(3) To raise additional funds
Journal entry to record share issuance
(Dr) Cash (Cr) common stock
What are dividends?
A corporation’s distribution of cash or stock to its shareholders on a proportional basis (stock stock property etc.)
What are the important dates for cash dividends?
(1) Dividend delcaration
(2) Date of record
(3) Date of Payment
Which of the important dates for cash dividends is a non accounting event?
Date of record
Journal entry for dividend declaration?
(Dr) Retained earnings (Cr) Dividend payable
journal entry for date of payment
(Dr) Dividend payable
(Cr) Cash
Suppose that a stock price is 1 per share and there are 1,000 shares outstanding in the market. You own 100 shares of this company, leading to 10% ownership. When a company issues a 10% stock dividend, what happens to your ownership percentagr?
No impact. What changes is the number of outstanding shares in the stock market.
What is a 2 for 1 stock split?
Divide stock price by 2, so stock price per share decreases by half but the number of shares doubles in the market.
What is the reason for stock split?
Although there is no accounting entry for stock split, the number of outstanding shares increases and stock price per chare decreases which might attract more investors since it is more accessible.
