chapter 11: reporting and interpreting shareholder's equity Flashcards
contributed capital
amount invested by shareholders and has two compnents
- amount initially received from sale of shares
- contributed surplus that reflect contributions made by shareholders apart from sale of shares
retained earnings
generated by profit making activities
net earnings - dividends
what is the only business form that law recognizes as a separate entity from the owners?
a corporation
what are the benefits that owners of common shares can benefit?
a voice in management
dividends
residual claim
residual claim
shareholders may receive proportionate share of the distribution of remaining assets upon liquidation of the company
authorized number of shares
maximum number of shares that a corporation can issue to the public
has to be specified in the charter
issued shares
number of shares that have been issued
outstanding shares
total number of shares that are owned by shareholders on any particular date
what must a company do if they want to sell more shares than their authorized number of shares?
they must ask permission to shareholders to be able to change the charter specifying what is the maximum amount of shares that can be issued
un-issued number of shares
the number of authorized shares that have never been issued to date
treasury shares
shares that have been issued to investors and then reacquired by the issuing corporation
earnings per share ratio
formula and meaning
how profitable is the company?
measure of the return on investments that is based on the number of shares outstanding
earnings per share =
net earnings available to common shareholders
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average number of common shares outstanding
what are the two types of shares that are issued by a company?
common shares
preferred shares
which type of shares is issued by ALL corporations?
common shares
which type of shares is issued by only SOME corporations
preferred shares
common shares
basic voting shares issued by a corporation
often called residual equity
why are common shares called residual equity?
because they rank after the preferred shares for dividends and asset distribution upon liquidation of a company
how is the dividends rate of a common share determined?
determined by board of directors based on company profitability
if the company not profitable, it can eliminate the dividends
how is the dividends rate of a preferred share determined?
determined by contract
if the company not profitable, it can’t eliminate the dividends
par value of shares
nominal value per shares specified in the charter
serves as basis for legal capital
issued mostly in US but rarely Canada
no par value shares
do not have an amount per share specified in the charter
legal capital
permanent amount of capital defined by the law that must remain invested in the business
serves as cushion for creditors
initial public offering of shares
when a corporation first sells shares to the public
secondary new shares (seasoned new offerings)
additional new shares to the public
do the transaction between investors directly affect the company’s financial statementS?
nah boy
what is the secondary market
such as NYSE or TSE
where different shareholders trade shares between themselves
stock options
new form of compensation
employees buy stocks at a fixed price, no matter what market price is
must companies report the difference between what they could have made from selling their shares in the market and what they made due to stock options?
ye boy
why would a company repurchase shares
increase price of shares by reducing t¡number of outstanding shares
does a company generate a profit if it acquires its own shares at a lower price than the market
nah bruh
they are capital transactions, not operating transactions
what they do create is contributed surplus credited in shareholders’ equity
what happens when a company if a company repurchases shares at a higher price than the market price?
whatever there was of contributed surplus gets eliminated ((debited) (a part of it if not all of it))
if all surplus Is eliminated, then you debit (reduce) retained earnings
how can dividends be paid other than with cash?
with assets or by using additional shares
what are the types of dates on the dividend declaration?
declaration date
date of record
payment date
declaration date
date on which the board of directors officially approved the dividend
as soon as they make declaration, liability is created
date of record
date on which the corporation prepares the list of current shareholders as shown on its records
dividends can only be paid to shareholders who own shares at that date
payment date
date at which cash dividends is paid to shareholders of record
what are the two requirements necessary for the payment of dividends
sufficient retained retained
sufficient cash
if a company does not have sufficient retained earnings to pay dividends to remain profitable but still does so, what is an additional criteria?
they must still be able to pay their obligations
dividend yield ratio
formula and meaning
how much do investors earn on their investments based on dividends
dividends per share / market price per share
stock dividend
distribution of additional shares of a corporation’s own equity
on pro rata basis
this means that if the company declares stock dividends of 10%, each shareholder will receive 10% of additional share of what they already own
if a company declares stock dividends, will the individuals owning the shares become wealthier as if it were cash dividend payments?
nah boy
once the stock dividend is declared, the share price falls dramatically
do stock dividends change the total shareholder’s equity?
nah boy
stock splits
increase in total number of authorized shares by a specified ratio (number
does not increase retained earnings
does not require journal entry but must be disclosed in the notes of financial statements
how do you record a small stock dividend? (under 50%)
you record it at he market price of the shares
how do you record a large stock dividend? (over 50%)
you record at the average issues price of the share
preferred shares
grants additional rights to shareholders who own preferred shares
what are the most significant differences of preferred shares?
preferred shares do not grant voting rights
preferred shares are less risky than common shares
preferred shares typically have a fixed dividend rate
preferred shares do not grant voting rights
does not appeal to investors who want control of the company
preferred shares are less risky than common shares
have priority over common shareholders regarding dividends and distribution of assets due to liquidation
preferred shares typically have a fixed dividend rate
preferred shares don’t have a par value
they carry a stated values (nominal value)
fixed dividend rates (amount per share)
attractive to investors who want stable income
convertible preferred shares
preferred shares that are convertible to common shares at the option of the holder
can preferred shares be redeemable or callable?
yeee
how are the preferred shares with a fixed redemption date classified as?
as liabilities
how are dividends of the preferred shares with a fixed redemption date classified as?
expenses
how are retractable preferred shares classified as?
classified as liabilities because its in the control of the holder
what are the two most common dividend preferences available to owners of preferred shareholders?
current dividend preference
cumulative dividend preference
current dividend preference
always carried by preferred shares
requires that current preferred dividends be paid before any dividends are paid on the common shares
where are declared dividends declared at?
between the preferred and commons shares
cumulative dividend preference
states that if all or part of the current dividend is not paid in full, the unpaid amount (dividends in arrears), must be paid before any common dividends can be paid
dividend in arrears
dividends on cumulative preferred shares that have not been declared in prior years
they are like a certain restriction on paying dividends cause you still owe some form past periods
not reported in statement of financial position, but in the notes
sole proprietorship
unincorporated business owned by one individual
not necessary to file any legal papers
does not pay income taxes
partnership
unincorporated business owned by two or more people
which are the equity accounts need for a sole proprietorship?
a capital account
drawing (withdrawal) account
capital account of a sole proprietorship
records investments by the owner
accumulate periodic net earnings or loss
reflect cumulative total investments by owner * all earnings - withdrawals of ressources
drawing (withdrawal) account of a sole proprietorship
used to record owner’s withdrawal of cash or assets from the company
what are the primary advantages of a partnership
ease of information
complete control by partners
lack of income taxes on business itself
what is the primary disadvantage of a partnership
unlimited liability
how is reflected the equity account of a partnership
same as sole proprietorship
separated capital accounts
drawing (withdrawal) accounts
what would investors have to consider when choosing between common shares and preferred shares?
which one should they ultimately choose?
an investor has to consider the dividends paid, but the the return on sale of shares as well
preferred shares usually guarantee more dividends cash payments, but its prices do not fluctuate sufficiently to make a difference
furthermore, often times, preferred shares can be collectable or redeemable at a price slightly above the issuance price
not the other hand, common shares do not pay as much dividends, but the investor should only worry about the net earnings and profitability
the investor could have a much higher return if the prices go¡f the shares he acquired go up higher than what he bought them for
what is the effect of a stock dividend on assets, liabilities’ and shareholders’ equity
assets and liabilities are not affected
Total shareholders’ equity should remain the same
contributed capital increases and retained earnings decrease by the same amount
when paying dividends, are future cash flows necessary to consider?
yeeee boooy
if a company has a net loss in a quarterly period, but still pays dividends, what statement does it make to investors?
that although they had losses this quarter, future cash flows and results will be positive
they show confidence
had they not paid dividends, investors would have been like “mon Che wtf”
why would a company repurchase its own shares?
Reduction of the number of common shares outstanding in order to increase earnings per share
Increase the price per share by reducing the number of common shares outstanding,
A smaller number of outstanding common shares allows the company’s management to maintain control of the company’s operations as well as investment and financing activities,
Lack of investment opportunities for the use of cash generated from operations.
Planned issuance of additional shares to management personnel as a result of stock options with the desire to maintain the same number of shares outstanding
