Chapter 18: Bottom Line Flashcards
Shareholders equity is
Shareholders’ equity is the owners’ residual interest in a corporation’s assets.
It arises from
(1) amounts invested by shareholders and
(2) amounts earned by the corporation on behalf of its shareholders.
These are reported as
(1) paid in capital and
(2) retained earnings in a balance sheet.
A statement of shareholders’ equity reports the sources of the changes in individual shareholders’ equity accounts.
Comprehensive income encompasses all changes in equity except
Comprehensive income encompasses all changes in equity except those caused by transactions with owners (like dividends and the sale or purchase of shares). It includes traditional net income as well as “other comprehensive income.”
A corporation is a separate legal entity
A corporation is a separate legal entity - separate and distinct from its owners. A corporation is well suited to raising capital and has limited liability. However, it gives rise to “double taxation.” Common shareholders usually have voting rights; preferred shareholders usually have a preference to a specified amount of dividends and to assets in the event of liquidation.
Shares sold for consideration other than cash (maybe services or a noncash asset) should be recorded at the
Shares sold for consideration other than cash (maybe services or a noncash asset) should be recorded at the fair value of the shares or the noncash consideration, whichever seems more clearly evident.
When a corporation retires previously issued shares, those shares assume the same status as
When a corporation retires previously issued shares, those shares assume the same status as if they had never been issued. Payments made to retire shares are viewed as a distribution of corporate assets to shareholders. When reacquired shares are viewed as treasury stock, the cost of acquiring the shares is temporarily debited to the treasury stock account. Recording the effects on specific shareholder’s equity accounts is delayed until later when the shares are reissued.
Retained earnings represents
Retained earnings represents, in general, a corporation’s accumulated, undistributed, or reinvested net income (or net loss). Distributions of assets are dividends.
Most corporate dividends are paid in
Most corporate dividends are paid in cash. When a noncash asset is distributed, it is referred to as a property dividend. The fair value of the assets to be distributed is the amount recorded for a property dividend.
A stock dividend is the distribution of additional shares of stock to
A stock dividend is the distribution of additional shares of stock to current shareholders. For a small stock dividend (25% or less), the fair value of the additional shares distributed is transferred from retained earnings to paid-in capital.
For a stock distribution of 25% or higher, the par value of the additional shares is reclassified within shareholders’ equity if referred to as a stock split effected in the form of a stock dividend, but if referred to merely as a stock split, no journal entry is recorded.
U.S. GAAP and IFRS are generally compatible with respect to
U.S. GAAP and IFRS are generally compatible with respect to accounting for shareholders’ equity. Some differences exist in presentation format and terminology.
