Chapter 7 - Stockholder's Equity, Cash Flows, and Ratio Analysis Flashcards
Common Stockholder’s Equity Formula
Total Stockholder’s Equity - Preferred Stock Outstanding (greater of call price or par value) - Cumulative Preferred Dividends
What are common stockholders not guaranteed?
Not guaranteed dividends or assets upon dissolution
Book Value per Common Share Formula
Common Shareholder’s Equity / Common Shares Outstanding
What is the difference between cumulative and non-cumulative preferred stock?
Cumulative = All or part of preferred dividend not paid in any year accumulates and must be paid in the future before dividends can be paid to common shareholders Non-cumulative = Dividends not paid in any year do not accumulate; lose right to receive dividends not declared
What is the difference between participating and non-participating preferred stock?
Participating = Preferred shareholders share with common shareholders in dividends in excess of a specific amount Non-participating = Preferred shareholders are limited to the dividends provided by their preference; don't share excess dividends
Retained Earnings Formula
Net Income/Loss - Dividends +/- Prior Period Adjustments +/- Accounting changes reported retrospectively + Adjustment from Quasi-reorganization
J/E for classification of RE from unappropriated to appropriated
DR. RE (unappropriated)
CR. RE (appropriated)
What is the purpose of a quasi-reorganization?
To eliminate RE deficit
What are the procedures to record a quasi-reorganization?
- Revalue assets to current FV and liabilities to their PV
- Bring RE to “0”
- Plug in value for APIC
What is a treasury stock?
Corporation’s own stock that has been issued to shareholders and subsequently required (but not retired)
At what cost is the treasury stock recorded and when is the gain/loss determined under:
Cost Method
Par Value Method
Cost Method - Reacquisition Cost; when treasury stock is reissued or retired
Par Value Method - Par Value; when treasury stock is repurchased
How do donated stock affect total stockholder’s equity?
It doesn’t affect total stockholder’s equity. It only decreased the number of shares outstanding, resulting in higher book value per common share.
J/E to record donated stock
DR. Donated Treasury Stock (@FMV)
CR. APIC (@FMV)
J/E to record sale of donated stock
DR. Cash (@ sales price)
DR. APIC (SPOriginal FMV)
CR. Donated Treasury Stock (@BV/Original FMV)
JE to record Sale of Subscriptions
DR. Subscriptions Receivable
CR. Common Stock Subscribed (@par)
CR. APIC
JE to record collections of subscriptions
DR. Cash
CR. Subscriptions Receivable
What requirement is necessary to issue stocks for subscriptions?
Payments must be made in full to issue stocks
J/E to record Issuance of Stock Previously Subscribed
DR. Common Stock Subscribed (@par)
CR. Common Stock (issued)
*Subscriptions must be fully paid to issue stock
What are stock rights? How are they recorded?
Stock rights provides an existing shareholder with the opportunity to buy additional shares.
DR. Cash
CR. Common Stock (@par)
CR. APIC
When should a liability be created for distributions to shareholders?
On date of declaration
DR. RE
CR. Dividends Payable
At what value should property dividends be recorded?
At FMV
J/E for property dividends
DR. RE
DR. Accumulated Depreciation
CR. Asset at cost
DR./CR. Loss/Gain
What are scrip dividends? J/E to record scrip dividends
Scrip dividends are used when there’s a cash shortage.
DR. RE
CR. Notes Payable
What is a liquidating dividend?
Dividends > RE
Excess Dividends charged to APIC then Common Stock or Preferred Stock
Treatment of stock dividends:
- Small stock dividends (20-25%)
Stock Dividends/Outstanding Shares
Small stock dividends - Reduce RE by FMV stock
Large stock dividends - Reduce RE by Par stock
What are the exceptions of stock dividends and stock splits on treasury stock?
Generally does not occur except when:
- Company is maintaining ratio of treasury shares to outstanding shares in order to meet stock option or other contractual commitments
- State law requires that treasury stock be protected from dilution
How do stock splits affect stockholder’s equity?
No change in stockholder’s equity but par decreases
What requirements must be met for non-compensatory stock option/purchase plans issued to employees?
- All full-time employees meeting limited employee qualifications may participate, except those that own specific amount of outstanding stock in corporation
- Stock is offered to eligible employees equally
- Time permitted to exercise the rights is limited to reasonable period
- Any discount from market price is no greater than would be a reasonable offer of stock to shareholders or others
Does IFRS have non-compensatory stock purchase plans and stock options?
No, all employee stock purchase plans and stock options are considered to be compensatory
When is compensation expense calculated and recorded for compensatory stock option/purchase plans? J/E?
Compensation expense is calculated on grant date (date option is issued) and recognized over the period of employment attributable to option.
DR. Compensation Expense
CR. APIC - Stock Options
J/E for expiration of compensatory stock options
DR. APIC - Stock Options
CR. APIC - Expired Stock Options
Difference between US GAAP and IFRS on presentation of comprehensive income.
US GAAP allows comprehensive income to be presented as a separate category in the statement of equity, while IFRS prohibits this.
What kind of dividends are not considered to be income?
Stock dividends
If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be:
Credit to APIC
Quoit, Inc. issued preferred stock with detachable common stock warrants. The issue price exceeded the sum of the warrants’ fair value and the preferred stock’s par value. The preferred stock’s fair value was not determinable. What amount should be assigned to the warrants outstanding?
The FV of the warrants
In a compensatory stock option plan for which the grant and exercise dates are different, the stock options outstanding account should be reduced at the:
At the exercise date
How do gains and losses from treasury stocks affect the net income and retained earnings?
Net income or retained earnings will never be increased through treasury stock transactions. However, losses can decrease net income and retained earnings.
On which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?
Date of grant
Formula to measure intrinsic value of call option
Number of share options × Market price of the stock on the date of the grant less exercise price of the share option
What type of stocks is Basic EPS for?
Common Stock –> Simple capital structure
Basic EPS Formula
Income Available to Common Shareholders/Weighted Avg. # of Common Shares Outstanding
Formula for Income Available to Common Shareholders
Net Income - Dividends Declared Non-cumulative P/S - Dividends Accumulated Cumulative P/S
Weighted Avg # of Common Shares Outstanding Effects:
- Shares sold during period
- Shares reacquired during the period
- Stock dividends and stock splits
- Reverse stock splits
- Shares sold during period –> Increase
- Shares reacquired during the period –> Decrease
- Stock dividends and stock splits –> Increase
- Reverse stock splits - Decrease
Diluted EPS Formula
Income Available to Common Shareholders + Interest on Dilutive Securities/Weighted Avg. # of Common Shares, assuming all dilutive securities are converted to common stock
When to report dilutions from options, warrants, and their equivalents?
Avg Mkt Price > Exercise price
Otherwise options or warrants would be “out of money” –> don’t need to report
Formula to calculate additional shares outstanding for dilutions from options, warrants, and their equivalents
Number of Shares - [(Number of Shares * Exercise Price)/Avg. Mkt Price]
* Add to Weighted Avg # of Common Shares Outstanding
How do convertible bonds affect the Basic EPS formula?
Numerator - Add Interest Expense * (1 - Tax Rate)
Denominator - Add number of shares associated with assumed conversion
How do convertible preferred stock affect the Basic EPS formula?
Numerator - No affect. Add in Preferred Dividends for Basic EPS then subtract them back out
Denominator - # of shares assumed with assumed conversion
When do you not have to report dilution from convertible securities?
Diluted EPS > Basic EPS
Difference in inclusion of dilution from contingent shares for:
US GAAP
IFRS
US GAAP - Basic EPS
IFRS - Diluted EPS
Which item, if dilutive and if other conditions are met, would enter into the determination of the weighted average shares outstanding to be used in the basic earnings per share (basic EPS) calculation?
Contingent shares
In computing the weighted-average number of shares outstanding during the year, which of the following midyear events must be treated as if it had occurred at the beginning of the year?
Declaration and distribution of stock dividends and stock splits
Earnings per share disclosure is required for:
Companies who have made a filing with the SEC in preparation for a sale of public securities.
Under U.S. GAAP, earnings per share data should be reported on the income statement for:
- Extraordinary items
- Income before extraordinary items
Both
What type of Cash receipts and disbursements are reported in:
Operating
Investing
Financing
Operating - Current Assets and Liabilities that are not interest bearing
Investing - Non-current Assets
Financing - Debt that is interest bearing and equity
What is the maturity of Cash and Cash equivalents ?
Within 3 months
Different treatment of bank overdrafts for:
US GAAP
IFRS
US GAAP - Not considered to be Cash and Cash equivalents; reported in financing activities
IFRS - Considered to be Cash and Cash and Cash equivalents
Different treatment of disclosure for Cash flow amounts per share:
US GAAP
IFRS
US GAAP - Prohibited
IFRS - Not prohibited
Summarized format of statement if Cash flows
Operating Activities + Investing Activities + Financing Activities = Change in Cash
Change in Cash + Beg. Cash = End Cash
Effect of Cash:
- Increase asset
- Decrease asset
- Increase liabilities
- Decrease liabilities
- Increase asset - Decrease (buy)
- Decrease asset - Increase (sell)
- Increase liabilities - Increase (borrow)
- Decrease liabilities - Decrease (repay)
Difference between direct and indirect method
Direct method requires reconciliation which is essentially the indirect method
What section of the Cash flow statements are the following reported under US GAAP?
- Dividends received
- Dividends paid
- Cash received from trading securities
- Cash received from marketable securities
- Cash received from held to maturity securities
- Pay interest
- Repay principal
- Dividends received - Operating
- Dividends paid - Financing
- Cash received from trading securities - Operating
- Cash received from marketable securities - Investing
- Cash received from held to maturity securities - Investing
- Pay interest - Operating
- Repay principal - Financing
Income taxes are included in operating activities under US GAAP if:
Current, deferred, or both?
Both
Indirect operating Cash flow method formula
“CLAD”
Net Income per I/S + Depreciation + Amortization (Discount) + Losses - Gains - Amortization (Premium) - Equity Earnings affiliated +/- Change in Operating Assets +/- Change in Operating Liabilities = Cash Flow Operations
Format of Direct Method Operating Cash Flows
Cash received from customers
Interest received
Dividends received
Other operating Cash receipts such as insurance proceeds and lawsuit settlements
Cash received from sale of securities classified as trading security, if classified as current asset
Cash paid to suppliers and employees
Interest paid
Income taxes paid
Cash paid to acquire securities classified as trading securities, if classified as current asset
Other operating Cash payments
Treatment of non-cash investing and financing activities
Should be provided separately in a supplemental disclosure
US GAAP and IFRS treatment if the following items:
- Interest Received
- Interest Paid
- Dividends Received
- Dividends Paid
- Taxes Paid
US GAAP:
- Interest Received - CFO
- Interest Paid - CFO
- Dividends Received - CFO
- Dividends Paid - CFF
- Taxes Paid - CFO
IFRS:
- Interest Received - CFO OR CFI
- Interest Paid - CFO or CFF
- Dividends Received - CFO or CFI
- Dividends Paid - CFO or CFF
- Taxes Paid - CFO, CFI, CFF
Cash received from customers formula for Direct Method
Revenue - Increase in Receivables + Decrease in Receivables + Increase in Unearned Revenue - Decrease in Unearned Revenue
Cash paid to suppliers formula for Direct Method
Cost of Goods Sold + Increase in Inventory - Decrease in Inventory - Increase in A/P + Decrease in A/P
Cash paid to employees formula for Direct Method
Salaries and Wages Expense - Increase in Wages Payable + Decreases in Wages Payable
How should the purchase of a 3 month treasury bill be reported on the statement of Cash flows?
Not reported because treasury bill is considered to be a Cash equivalent so purchasing the treasury bill only changes the form of Cash held, not the Cash position of the entity
Purpose of liquidity ratios
To measure an entity’s short term ability to pay off its obligations
Working Capital Formula
Current Assets - Current Liabilities
Current Ratio/Working Capital Ratio
Current Assets/Current Liabilities
Acid-test Ratio
Cash Equivalents + Marketable Securities + Net Receivables /Current Liabilities
Cash Ratio
Cash Equivalents + Marketable Securities / Current Liabilities
Purpose of activity ratios
To measure how effectively a company is using its assets
Accounts Receivable Turnover
Net Credit Sales / Average Net Receivables
Accounts Receivable Turnover in days
365 days/Accounts Receivable Turnover
Inventory Turnover
COGS/Average Inventory
Inventory Turnover in days
365 days/Inventory Turnover
Operating Cycle
AR turnover in days + Inventory turnover in days
Working Capital Turnover
Net Sales/Average working capital
Total Asset Turnover
Net Sales/Average Total Assets
Purpose of profitability ratios
To measure the success and failure of a company
Net Profit Margin
Net Income/Net Sales
Return on Total Assets
Net Income/Average Total Assets
DuPoint Return on Assets
Net Profit Margin * Total Asset Turnover
Return on Investments
Net Income + Interest Expense * (1-Tax Rate)/Average (Long-term Liabilities + Equity)
Return on Common Equity
Net Income - Preferred Dividends/Average Common Equity
Purpose of Long-term Debt-paying Ability Ratios (Coverage Ratios)
Measures security for long term debtors and creditors
Debt/Equity
Total liabilities / Common Shareholder’s Equity
Debt Ratio
Total Liabilities/Total Assets
Times interest earned
Recurring Income before taxes and interest / Interest
