Chapter 14: Corporations, Additiontal Topics and IFRS Flashcards
What are stock dividends?
A distribution of the corporation’s own shares to its shareholders
- Does not change assets or shareholder’s equity
- Decreases retained earnings and increases share capital by same amount
- Total amount is unchanged
What are the purposes and benefits of stock dividends?
1) Satisfies shareholder’s dividend expectations without spending cash
2) Increases marketability of corporation’s shares (by increasing number of shares , market price will decrease)
3) Emphasizes that a portion of shareholder’s equity has been permanently reinvested in the business
What are stock splits?
Stock splits involve the issue of additional shares to shareholders according to their percentage ownership
- Increases the marketability by lowering market price per share
- Does not affect shareholder’s equity
What is the difference between stock splits, cash and stock dividends and their result on financial statements?
Cash dividends reduce assets and shareholder’s equity (retained earnings)
Stock dividends increase share capital and decrease retaine earnings
Stock splits have no effect ( but increase the number of shares issued )
Why would a company reacquire their shares from shareholders?
To:
- Increase trading on securities markets (to hopefully increase share value)
- Increase earnings per share
- Buy out hostile shareholders
- Have shares available for compensation or other uses
Reacquire shares are retired and cancelled (in most situations)
What are discontinued operations?
A component of the enterprise that has been disposed of or is reclassified as “ held for sale “
( e.g. a separate major business line or geographic area )
What is the statement of changes in shareholder’s equity?
Shows the changes in shareholder’s equity during the year, required under IFRS
What is earnings per share and how is it calculated?
Earnings per share indicates the profit earned by each common share, required under IFRS.
(Profit-Preferred Dividends) / Weighted Average of Common Shares Issued
What is price-earnings ratio an how is it calculated?
The price earnings ratio helps investors compare earnings of different companies
Market price per share / Earnings Per Share = Price-Earnings Ratio
A high PE ratio indicates that investors believe the company has good earning potential
What is payout ratio and how is it calculated?
Payout ratio indicates what percentage of a profit a company is distributing its shareholders
Cash dividends / profit = Payout ratio
Mature companies may have a higher payout ratio due to limited growth potential. A low payout ratio may indicate the company is retaining cash for possible future growth
