Chapter 7: Stockholders Equity & Cash Flows Flashcards
What is legal capital (capital stock)?
Amount of capital that must be kept by company for protection of creditors.
Common stockholders equity formula:
+ Total stockholders equity
- preferred stock outstanding (greater of call or par)
- cumulative preferred dividends in arrears
Book value per common share formula:
Common shareholders equity
/ common shares outstanding
What is the difference between cumulative & non-cumulative preferred stock?
Cumulative - dividends not declared in a year accumulative over time
Non-cumulative - dividends not paid in a year are not accumulated.
What is participating preferred stock?
Stock receives additional dividends over current dividend amount
Change in Retained Earnings formula:
Net income/loss - dividends declared \+/- prior period adjustments \+/- accounting for changes retrospectively \+/- adjustment from quasi-reorg
What is the purpose of appropriated RE?
What is the JE for recording this?
Disclose to shareholders that RE is not available for dividends.
DB: RE
CR: RE (appropriated)
What is the purpose of a quasi-reorganization?
Eliminate deficit in RE by restating overvalued assets to lower FVs
JE for issue of common stock?
DB: Cash
CR: C/S
CR: APIC
When do you calculate gain/loss under the cost method of treasury stock?
When do you calculate gain/loss under the par value method of treasury stock?
G/L calculation at reissue date (after repurchase)
G/L calculation at repurchase date
What is donated stock?
How should the company record this?
When company receives own stock as donation from a shareholder.
Company should record donated stock at FMV.
What is the JE for recording donated stock?
What is the JE for donated stock sold?
DB: Dontaed treasury stock
CR: APIC
DB: Cash
CR: APIC or DB: APIC
CR: Donated T/S
What is the date of declaration?
What JE is recorded on this date?
Date the board of directors approves a dividend.
DB: Retained Earnings
CR: Dividends Payable
What is a property in-kind dividend?
What occurs on the date of declaration?
Dividend of non-cash assets.
Property distributed should be restated to FV and G/L calculated on I/S.
What is a scrip dividend & when are they used?
What is the JE for scrip dividends on date of declaration?
Note payable of dividend at a later date. Used when there are cash shortages.
DB: Retained Earnings
CR: Notes Payable
What do IFRS & SEC require for public entities in regards to disclosures for dividends?
Must disclose dividends per share and in total for each class of shares in notes.
What is considered a small & large stock dividend?
Small: < 20% - 25%
Large: > 20% - 25%
When a company declares a cash dividend, Retained earnings is decreased on the day of ?
Declaration
What is a liquidating dividend?
Amount of dividends in excess of RE.
How are compensatory stock options valued?
FV of the options issued
What is compensation expense & how is it treated when accounting for stock options?
FV calculated under a valuation model
Expense allocated over the period between the grant date and vesting date
What is the number of shares issued formula?
of shares = # of shares outstanding + # of treasury
How do you record a small stock dividend JE?
DB: RE (using market)
CR: Common Stock (using par)
CR: Contributed Capital (APIC)
How do you record a large stock dividend JE?
DB: RE (using par)
CR: Common Stock (using par)
During a stock dividend, is there a change in overall Owners Equity or liability?
NO
How do you record a stock split JE?
Memo entry only on date of declaration
What are the steps for allocation between preferred and common stocks when P/S have participation?
P/S: dividends in arrears P/S: current period dividend C/S: matching amount using P/S % P/S: additional % C/S: remainder
Allocation difference between fully participating & partially participating?
Fully: Dividends allocated based on total par value outstanding
Partially: Dividends allocated to P/S based on %, the rest goes to C/S
What is the JE during the issuance of rights of a stock right?
What is the JE during the exercise of rights of a stock right?
What is the JE during the expiration of rights of a stock right?
No JE
DB: Cash
CR: C/S
No JE
What is the JE during the issuance of rights of a stock right to outside parties for services?
What is the JE during the issuance of rights of a stock right to outside parties for services?
DB: Expense (market - exercise $) * shares
CR: Rights outstanding (market - exercise $) * shares
Remove Rights outstanding & record on exercise price
When the rights are issued, which of the following accounts will be increased?
NONE - No journal entry is needed, because no transaction has yet taken place.
What EPS method is used for stock options & warrants?
Treasury Stock method
What EPS method is used for convertible bonds & preferred stock?
If- converted method
What are the steps in the treasury stock method?
1) Assume exercise of all shares
2) purchase back stock from proceeds of exercise
3) the difference of shares between 1 & 2 is added to denominator
What are the steps in the if-converted method?
1) multiply out to find the interest expense (net of tax effect for bonds) and add to numerator
2) Convert shares and add to denominator
If there is more than one potential common stock, which item enters into the EPS formula first?
One with the lowest numerator/denominator ratio
How are bank overdrafts categorized under US GAAP & IFRS?
US GAAP - Financing activity
IFRS - Operating activity
What are the three types of activity within the cash flow?
Operating
Investing
Financing
What are the two types of cash flow presentations?
Which one is preferred by GAAP & IFRS?
Which one is often used by company’s?
Direct & Indirect methods
Direct is preferred
indirect is used
What is required when using the direct method under US GAAP? IFRS?
Where is this requirement reported?
reconciliation of net income to net cash from operating activities
not required for IFRS
supplemental schedule
What is the reconciliation formula to get back to operating cash from net income?
= Net Income \+ non-cash expenses/losses - non-cash income/gains \+ increase op. Liability - increase op. Asset
What is included in the direct method operating activities?
\+ cash received from customers \+ interest received \+ dividends received \+ cash from sale of trading security \+ other operating cash receipts - cash paid to customers - interest paid - income taxes paid - cash paid to get trading securities - other operating cash payments
What makes up the cash received from customers?
= revenues - increase in A/R \+ decrease in A/R \+ increase in UR - decrease from UR
What makes up the cash paid to suppliers?
= COGS \+ increase in inventory - decrease in inventory - increase in A/P \+ decrease in A/P
What additional disclosure do you need when using the indirect method?
cash paid for interest and income taxes
How do the following affect on cash in the cash flow balance for the following:
1) Increase an asset
2) Decrease an asset
3) Increase a liability
4) Decrease a liability
1) Decrease cash
2) Increase cash
3) Increase cash
4) Decrease cash
What type of adjustments do you need to make under the indirect method work?
"CLAD" CA/CL Gains & Losses Amortization & depreciation deferred items
What makes up the investment activities?
loans to related parties
C/S purchase
proceeds from sale of investment
proceeds from AFS & HTM securities
What makes up the financing activities?
pay dividends issuance of stocks & bonds purchase of T/S borrowing funds paying principal of bonds & loans
What activity do these items belong too:
1) Selling products/collecting A/R
2) Treasury Stock
3) Purchasing inventory/ paying suppliers
4) Paying dividends
5) Paying taxes
1) CFO
2) CFF
3) CFO
4) CFF
5) CFO
What activity do these items belong too:
1) Issuing C/S or P/S
2) buy/sell trading securities
3) paying principal on debt
4) buying long term assets
5) paying interest on debt
1) CFF
2) CFO
3) CFF
4) CFI
5) CFO
What activity do these items belong too:
1) recording dep., amort., depletion
2) borrowing funds
3) Collect interest on investment
4) selling assets/investments
5) collecting dividends
6) recording equity method information
1) Nothing
2) CFF
3) CFO
4) CFI
5) CFO
6) Nothing
What are the general steps in the indirect method cash flow operating activities?
1) Net income
2) adjust non cash items (dep., amort.)
3) adjust gains/losses on assets
4) adjust for changes in CA & CL
What should not be disclosed in an enterprise’s statement of cash flows indirect method or supplemental info?
Cash flow per share
Under IFRS, how are these categorized:
1) Interest Received
2) Interest Paid
3) Dividend Received
4) Dividend Paid
5) Taxes Paid
1) CFO or CFI
2) CFO of CFF
3) CFO or CFI
4) CFO or CFF
5) CFO, CFI, CFF
