Chapter 11 (Reporting and Analyzing Stockholders' Equity)

Question 1

Contributed capital

Answer 1

Reports the proceeds received by the issuing company from original stock issuances.

Question 2

Examples of contributed capital

Answer 2

Common stock, preferred stock, and additional paid-in capital.

Question 3

Earned capital

Answer 3

Retained earnings and accumulated other comprehensive income

Question 4

Examples of accumulated other comprehensive income

Answer 4

Foreign currency translation adjustments, changes in market values of derivatives, unrecognized gains and losses on available-for-sale securities, and pension adjustments

Question 5

Noncontrolling interests

Answer 5

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.

Question 6

Classes of stock

Answer 6

Preferred and common

Question 7

Common stock

Answer 7

Represent the primary ownership unit in a corporation. Common stockholders have voting rights which allow them to participate in the governance of the corporation.

Question 8

Number of shares authorized

Answer 8

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.

Question 9

Shares issued

Answer 9

The number of shares issued is the actual number of shares that have been sold to stockholders by the corporation.

Question 10

Shares outstanding

Answer 10

The number of issued shares less the number of shares repurchased as treasury stock

Question 11

Preferred stock

Answer 11

Preferred stock generally has some preference, or priority, with respect to common stock but does not have voting rights.

Question 12

Common types of preferred stock preference

Answer 12

Dividend preference and liquidation preference

Question 13

Dividend preference

Answer 13

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.

Question 14

Liquidation Preference

Answer 14

Makes preferred shares less risk than common shares. Preferred shareholders receive payment in full before any proceeds are paid to common shareholders.

Question 15

Liquidating value

Answer 15

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.

Question 16

Call feature

Answer 16

The call feature provides the issuer with the right, but not the obligation, to repurchase the preferred shares at a specified price.

Question 17

How do call features impact the value of shares?

Answer 17

They lower the price because they make the investment less attractive to potential investors.

Question 18

Conversion feature

Answer 18

Allows preferred stockholders to convert their shares into common shares at their option at a predetermined conversion ratio.

Question 19

Why would anyone want a conversion right?

Answer 19

The fixed yield and liquidation value for the preferred stock limit the upside potential return of preferred shareholders.

Question 20

Participation feature

Answer 20

Preferred shares sometimes carry a participation feature that allows preferred shareholders to share ratably with common stockholders in dividends.

Question 21

Why would you want a participation feature?

Answer 21

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.

Question 22

Why do companies repurchase shares?

Answer 22

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.

Question 23

Do repurchased shares participate in dividends or in shareholder votes?

Answer 23

No

Question 24

Treasury stock.

Answer 24

A contra-equity account for repurchasing shares.

Question 25

Earned capital

Answer 25

Represents the cumulative profit that has been retained by the company

Question 26

How is earned capital decreased?

Answer 26

By dividends paid to shareholders

Question 27

Does earned capital only represent retained earnings?

Answer 27

No, it also contains AOCI.

Question 28

Stock dividends

Answer 28

Dividends in the form of additional stock. Retained earnings are reduced and contributed capital is increased.

Question 29

Small stock dividends calculation

Answer 29

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

Question 30

Stock splits

Answer 30

A proportionate distribution of shares and, as such, is similar in substance to a stock dividend.

Question 31

What part of the SOCF is impacted by the issuance of common stock, acquisition of treasury stock, and cash (but not stock) dividends?

Answer 31

Cash Flow from Financing Activities

Question 32

Comprehensive income

Answer 32

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

Question 33

Accumulated other comprehensive income

Answer 33

Where comprehensive income is closed at the end of each accounting period (instead of retained earnings).

Question 34

Purpose of the Summary of Stockholders’ Equity

Answer 34

Reports a reconciliation of the beginning and ending balances of important stockholders’ equity accounts.

Question 35

Net income available for common shareholders

Answer 35

Net income - net income attributable to noncontrolling interests - preferred dividends

Question 36

Return on common equity (ROCE)

Answer 36

Net income available for common shareholders / Average common shareholders’ equity

Question 37

Basic EPC (BEPS)

Answer 37

Net income available for common shareholders / Weighted average number of common shares outstanding

Question 38

Complex capital structure

Answer 38

When a company has certain dilutive securities outstanding

Question 39

Dilutive securities

Answer 39

Securities that can be converted into shares of common stock and would therefore reduce (or dilute) the earnings per share upon conversion

Question 40

Three primary types of dilutive shares

Answer 40

Stock options, convertible debt, and convertible preferred stock

Question 41

Simple capital structure

Answer 41

A company without any dilutive securities

Question 42

Diluted EPS (DEPS)

Answer 42

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)

Question 43

Convertible securities

Answer 43

Debt and equity securities that provide the holder with an option to convert those securities into other securities

Question 44

Stock rights

Answer 44

Give the holder an option to acquire a specified number of shares of capital stock under prescribed conditions and within a stated period.

Question 45

Stock warrant

Answer 45

A certificate that gives someone stock rights

Question 46

Stock options

Answer 46

Used to compensate offices and employee of the corporation

Question 47

Vesting period

Answer 47

A period of time during which the employee is not allowed to exercise the stock option.