Chapter 11 (Reporting and Analyzing Stockholders' Equity) Flashcards
Contributed capital
Reports the proceeds received by the issuing company from original stock issuances.
Examples of contributed capital
Common stock, preferred stock, and additional paid-in capital.
Earned capital
Retained earnings and accumulated other comprehensive income
Examples of accumulated other comprehensive income
Foreign currency translation adjustments, changes in market values of derivatives, unrecognized gains and losses on available-for-sale securities, and pension adjustments
Noncontrolling interests
Results from the practice of consolidating subsidiaries that are controlled but not wholly owned and it represents neither capital contributed by the part or capital earned by the shareholders.
Classes of stock
Preferred and common
Common stock
Represent the primary ownership unit in a corporation. Common stockholders have voting rights which allow them to participate in the governance of the corporation.
Number of shares authorized
The upper limit on the number of shares that the corporation can issue. Established in the articles of incorporation and can only be increased by an affirmative shareholder vote.
Shares issued
The number of shares issued is the actual number of shares that have been sold to stockholders by the corporation.
Shares outstanding
The number of issued shares less the number of shares repurchased as treasury stock
Preferred stock
Preferred stock generally has some preference, or priority, with respect to common stock but does not have voting rights.
Common types of preferred stock preference
Dividend preference and liquidation preference
Dividend preference
Preferred shareholders receive dividends on their shares before common shareholders do. Preferred shareholders get their dividends before common shareholders. A cumulative provision may exist as well that allows dividends to accumulate until paid out.
Liquidation Preference
Makes preferred shares less risk than common shares. Preferred shareholders receive payment in full before any proceeds are paid to common shareholders.
Liquidating value
Any liquidation payment to preferred shares is normally at its par value, although it is sometimes specified in excess of par, called a liquidating value.
Call feature
The call feature provides the issuer with the right, but not the obligation, to repurchase the preferred shares at a specified price.
How do call features impact the value of shares?
They lower the price because they make the investment less attractive to potential investors.
Conversion feature
Allows preferred stockholders to convert their shares into common shares at their option at a predetermined conversion ratio.
Why would anyone want a conversion right?
The fixed yield and liquidation value for the preferred stock limit the upside potential return of preferred shareholders.
Participation feature
Preferred shares sometimes carry a participation feature that allows preferred shareholders to share ratably with common stockholders in dividends.
Why would you want a participation feature?
The dividend preference over common shares can be a benefit when dividend payments are meager, but a fixed dividend yield limits upside potential if the company performs exceptionally well. This limitation can be overcome with a participation feature.
Why do companies repurchase shares?
1) It feels that the market undervalues the shares. 2) To offset the dilutive effects of an employee stock option program. 3) To concentrate ownership to avoid an unwelcome takeover action.
Do repurchased shares participate in dividends or in shareholder votes?
No
Treasury stock.
A contra-equity account for repurchasing shares.
Earned capital
Represents the cumulative profit that has been retained by the company
How is earned capital decreased?
By dividends paid to shareholders
Does earned capital only represent retained earnings?
No, it also contains AOCI.
Stock dividends
Dividends in the form of additional stock. Retained earnings are reduced and contributed capital is increased.
Small stock dividends calculation
Retained earnings is reduced by the market value of the shares distributed (dividend shares x market price per share) and contributed capital is increased by the same amount
Stock splits
A proportionate distribution of shares and, as such, is similar in substance to a stock dividend.
What part of the SOCF is impacted by the issuance of common stock, acquisition of treasury stock, and cash (but not stock) dividends?
Cash Flow from Financing Activities
Comprehensive income
A more inclusive notion of company performance than net income. It includes all recognized changes in equity that occur during a period except those resulting from contributions and distributions to owners
Accumulated other comprehensive income
Where comprehensive income is closed at the end of each accounting period (instead of retained earnings).
Purpose of the Summary of Stockholders’ Equity
Reports a reconciliation of the beginning and ending balances of important stockholders’ equity accounts.
Net income available for common shareholders
Net income - net income attributable to noncontrolling interests - preferred dividends
Return on common equity (ROCE)
Net income available for common shareholders / Average common shareholders’ equity
Basic EPC (BEPS)
Net income available for common shareholders / Weighted average number of common shares outstanding
Complex capital structure
When a company has certain dilutive securities outstanding
Dilutive securities
Securities that can be converted into shares of common stock and would therefore reduce (or dilute) the earnings per share upon conversion
Three primary types of dilutive shares
Stock options, convertible debt, and convertible preferred stock
Simple capital structure
A company without any dilutive securities
Diluted EPS (DEPS)
Reflects the added shares that would have been issued if all “in the money” stock options and other convertible securities had been exercised at the beginning of the year.
(Net income available to common shareholders + Add-backs) / Weighted average number of common shares + Shares of convertible securities and stock options assumed to be converted)
Convertible securities
Debt and equity securities that provide the holder with an option to convert those securities into other securities
Stock rights
Give the holder an option to acquire a specified number of shares of capital stock under prescribed conditions and within a stated period.
Stock warrant
A certificate that gives someone stock rights
Stock options
Used to compensate offices and employee of the corporation
Vesting period
A period of time during which the employee is not allowed to exercise the stock option.
