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Comm 217 > chapter 11: reporting and interpreting shareholder's equity > Flashcards

chapter 11: reporting and interpreting shareholder's equity Flashcards

1
Q

contributed capital

A

amount invested by shareholders and has two compnents

  1. amount initially received from sale of shares
  2. contributed surplus that reflect contributions made by shareholders apart from sale of shares
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2
Q

retained earnings

A

generated by profit making activities

net earnings - dividends

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3
Q

what is the only business form that law recognizes as a separate entity from the owners?

A

a corporation

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4
Q

what are the benefits that owners of common shares can benefit?

A

a voice in management

dividends

residual claim

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5
Q

residual claim

A

shareholders may receive proportionate share of the distribution of remaining assets upon liquidation of the company

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6
Q

authorized number of shares

A

maximum number of shares that a corporation can issue to the public

has to be specified in the charter

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7
Q

issued shares

A

number of shares that have been issued

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8
Q

outstanding shares

A

total number of shares that are owned by shareholders on any particular date

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9
Q

what must a company do if they want to sell more shares than their authorized number of shares?

A

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

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10
Q

un-issued number of shares

A

the number of authorized shares that have never been issued to date

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11
Q

treasury shares

A

shares that have been issued to investors and then reacquired by the issuing corporation

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12
Q

earnings per share ratio

formula and meaning

A

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
______________________________________
average number of common shares outstanding

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13
Q

what are the two types of shares that are issued by a company?

A

common shares

preferred shares

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14
Q

which type of shares is issued by ALL corporations?

A

common shares

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15
Q

which type of shares is issued by only SOME corporations

A

preferred shares

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16
Q

common shares

A

basic voting shares issued by a corporation

often called residual equity

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17
Q

why are common shares called residual equity?

A

because they rank after the preferred shares for dividends and asset distribution upon liquidation of a company

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18
Q

how is the dividends rate of a common share determined?

A

determined by board of directors based on company profitability

if the company not profitable, it can eliminate the dividends

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19
Q

how is the dividends rate of a preferred share determined?

A

determined by contract

if the company not profitable, it can’t eliminate the dividends

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20
Q

par value of shares

A

nominal value per shares specified in the charter

serves as basis for legal capital

issued mostly in US but rarely Canada

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21
Q

no par value shares

A

do not have an amount per share specified in the charter

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22
Q

legal capital

A

permanent amount of capital defined by the law that must remain invested in the business

serves as cushion for creditors

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23
Q

initial public offering of shares

A

when a corporation first sells shares to the public

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24
Q

secondary new shares (seasoned new offerings)

A

additional new shares to the public

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25
Q

do the transaction between investors directly affect the company’s financial statementS?

A

nah boy

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26
Q

what is the secondary market

A

such as NYSE or TSE

where different shareholders trade shares between themselves

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27
Q

stock options

A

new form of compensation

employees buy stocks at a fixed price, no matter what market price is

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28
Q

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?

A

ye boy

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29
Q

why would a company repurchase shares

A

increase price of shares by reducing t¡number of outstanding shares

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30
Q

does a company generate a profit if it acquires its own shares at a lower price than the market

A

nah bruh

they are capital transactions, not operating transactions

what they do create is contributed surplus credited in shareholders’ equity

31
Q

what happens when a company if a company repurchases shares at a higher price than the market price?

A

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

32
Q

how can dividends be paid other than with cash?

A

with assets or by using additional shares

33
Q

what are the types of dates on the dividend declaration?

A

declaration date

date of record

payment date

34
Q

declaration date

A

date on which the board of directors officially approved the dividend

as soon as they make declaration, liability is created

35
Q

date of record

A

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

36
Q

payment date

A

date at which cash dividends is paid to shareholders of record

37
Q

what are the two requirements necessary for the payment of dividends

A

sufficient retained retained

sufficient cash

38
Q

if a company does not have sufficient retained earnings to pay dividends to remain profitable but still does so, what is an additional criteria?

A

they must still be able to pay their obligations

39
Q

dividend yield ratio

formula and meaning

A

how much do investors earn on their investments based on dividends

dividends per share / market price per share

40
Q

stock dividend

A

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

41
Q

if a company declares stock dividends, will the individuals owning the shares become wealthier as if it were cash dividend payments?

A

nah boy

once the stock dividend is declared, the share price falls dramatically

42
Q

do stock dividends change the total shareholder’s equity?

A

nah boy

43
Q

stock splits

A

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

44
Q

how do you record a small stock dividend? (under 50%)

A

you record it at he market price of the shares

45
Q

how do you record a large stock dividend? (over 50%)

A

you record at the average issues price of the share

46
Q

preferred shares

A

grants additional rights to shareholders who own preferred shares

47
Q

what are the most significant differences of preferred shares?

A

preferred shares do not grant voting rights

preferred shares are less risky than common shares

preferred shares typically have a fixed dividend rate

48
Q

preferred shares do not grant voting rights

A

does not appeal to investors who want control of the company

49
Q

preferred shares are less risky than common shares

A

have priority over common shareholders regarding dividends and distribution of assets due to liquidation

50
Q

preferred shares typically have a fixed dividend rate

A

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

51
Q

convertible preferred shares

A

preferred shares that are convertible to common shares at the option of the holder

52
Q

can preferred shares be redeemable or callable?

A

yeee

53
Q

how are the preferred shares with a fixed redemption date classified as?

A

as liabilities

54
Q

how are dividends of the preferred shares with a fixed redemption date classified as?

A

expenses

55
Q

how are retractable preferred shares classified as?

A

classified as liabilities because its in the control of the holder

56
Q

what are the two most common dividend preferences available to owners of preferred shareholders?

A

current dividend preference

cumulative dividend preference

57
Q

current dividend preference

A

always carried by preferred shares

requires that current preferred dividends be paid before any dividends are paid on the common shares

58
Q

where are declared dividends declared at?

A

between the preferred and commons shares

59
Q

cumulative dividend preference

A

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

60
Q

dividend in arrears

A

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

61
Q

sole proprietorship

A

unincorporated business owned by one individual

not necessary to file any legal papers

does not pay income taxes

62
Q

partnership

A

unincorporated business owned by two or more people

63
Q

which are the equity accounts need for a sole proprietorship?

A

a capital account

drawing (withdrawal) account

64
Q

capital account of a sole proprietorship

A

records investments by the owner

accumulate periodic net earnings or loss

reflect cumulative total investments by owner * all earnings - withdrawals of ressources

65
Q

drawing (withdrawal) account of a sole proprietorship

A

used to record owner’s withdrawal of cash or assets from the company

66
Q

what are the primary advantages of a partnership

A

ease of information

complete control by partners

lack of income taxes on business itself

67
Q

what is the primary disadvantage of a partnership

A

unlimited liability

68
Q

how is reflected the equity account of a partnership

A

same as sole proprietorship

separated capital accounts

drawing (withdrawal) accounts

69
Q

what would investors have to consider when choosing between common shares and preferred shares?

which one should they ultimately choose?

A

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

70
Q

what is the effect of a stock dividend on assets, liabilities’ and shareholders’ equity

A

assets and liabilities are not affected

Total shareholders’ equity should remain the same

contributed capital increases and retained earnings decrease by the same amount

71
Q

when paying dividends, are future cash flows necessary to consider?

A

yeeee boooy

72
Q

if a company has a net loss in a quarterly period, but still pays dividends, what statement does it make to investors?

A

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”

73
Q

why would a company repurchase its own shares?

A

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

Comm 217 (18 decks)

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