Exam 3 Flashcards
preferred stock holders have preference over common stock holders when it comes to
Receipt of dividends and receiving assets upon liquidation
the following is NOT a legitimate transaction
Declaring a treasury dividend
Which statement is most true regarding the terms “treasury stock” and “par.”
They are archaic terms with little practical relevance today, but still used.
Major Mining owns 400,000 shares of Heathclift stock that it bought as an investment. Major decides to distribute 200,000 of the Heathclift shares to its own shareholders as a form of dividend. What type of dividend would this be?
Property dividend
The Board of Barney Enterprises votes to distribute a cash dividend. Most of the following individuals will receive a dividend. Whom among the following individuals will NOT receive the dividend?
Joyce, who bought 600 shares through a broker after the ex-dividend date
Which of the following most immediately and directly controls the formation of Corporations?
The laws of individual states
There are 4 major components of stockholders equity
Accumulated other comprehensive income, Retained earnings, Paid-in capital,
There are 4 major components of stockholders equity
Accumulated other comprehensive income, Retained earnings, Paid-in capital,
Share issue costs refer to the costs of legal, promotional, and accounting services related to the sale of shares. These costs reduce the net cash proceeds from selling the shares and are
not recorded separately (Accounting for share issue costs of Equity shares differs from accounting for share issue costs of debt. In accounting for debt. the issue costs are recorded separately.)
Share issue costs refer to the costs of legal, promotional, and accounting services related to the sale of shares. These costs reduce the net cash proceeds from selling the shares and are
not recorded separately (Accounting for share issue costs of Equity shares differs from accounting for share issue costs of debt. In accounting for debt. the issue costs are recorded separately.)
What is the BEST and most comprehensive definition of Paid-in capital?
It refers to all assets received by the company in exchange for stock
What causes a company to establish a valuation allowance for a deferred tax asset?
When it is more likely than not that its future income will be insufficient to take advantage of the deferred tax asset
During 2015, Stern Company had pretax accounting income of $45 million. The only temporary difference between accounting income and tax income was $15 million of rent received in advance (received in 2015 but applies to 2016). Stern’s taxable income for the 2015 would be:
$60 million (The $15 was unearned revenue, received in advance so it was not included in accounting income. However, it was included in taxable income for 2015. 45M + 15M = 60M.)
During 2015, Stern Company had pretax accounting income of $45 million. The only temporary difference between accounting income and tax income was $15 million of rent received in advance (received in 2015 but applies to 2016). Stern’s taxable income for the 2015 would be:
$60 million (The $15 was unearned revenue, received in advance so it was not included in accounting income. However, it was included in taxable income for 2015. 45M + 15M = 60M.)
Which of the following differences between financial accounting and tax accounting creates a deferred tax asset?
Revenue collected in advance.
Woody Corp. had taxable income of $8,000 in the current year. The amount of MACRS depreciation was $3,000 while the amount of depreciation reported in the income statement was $1,000. Assuming no other differences between tax and accounting income, Woody’s pretax accounting income was:
$10,000 (To solve, start with tax income. Add back the amount of depreciation that was deducted for tax accounting, then subtract the amount that should be recorded for depreciation under financial accounting rules. The result is financial accounting net income.)
What is the BEST and most comprehensive definition of Paid-in capital?
It refers to all assets received by the company in exchange for stock
One form of share-based compensation is restricted stock awards. What is used to determine the value of the compensation offered by a restricted stock award?
Market value of the stock on the date of grant
Sharon Wills is the senior accountant for Hypertek. As a form of share-based compensation, the company offered her restricted shares that she must earn by working for the company from 2012 through 2016. Which account will Hypertek credit each year as the shares vest?
Paid in capital - restricted shares
Most share-based compensation plans require employees to remain with a company for a certain number of years to derive the benefit. This period of time is often refererd to as the required “service period.” Another term for this required service period is the
vesting period.
f a stock dividend (not cash dividend) occurs in the middle of the fiscal year, when calculating the current year’s EPS, the shares are treated as if they were issued:
At the beginning of the year.
Derek Peters is the comptroller at Delcom Automotive Parts, Inc. The company granted him stock options as part of his employment package. Derek started work in July, 2014 and his options vest as follows: 20% in 2015, 20% in 2016; 25% in 2017; and 35% in 2018. What is the name for this vesting profile?
Graded vesting
Which of the following is the most likely ethical risk with share-based compensation plans?
It can motivate managers to artificially inflate earnings
Which of the following is the most likely ethical risk with share-based compensation plans?
It can motivate managers to artificially inflate earnings
Two types of share-based compensation are restricted stock awards and stock options. These types of compensation have both similarities and differences. In what ways are these awards similar?
They both require a debit to compensation expense during the required service period
Mark’s Market has an employee stock purchase plan. Under the plan, employees may purchase shares of Mark’s stock at $6.20 per share when the market price of the stock is $7.40 per share. For each share of stock purchased by employees, what is the compensation expense recognized by Mark’s?
$1.20
Glenda Enterprises reported Net income of $235,000 in 2015. Also in 2015, the Board declared common stock dividends of $45,000 and preferred stock dividends of $27,000. In computing basic earnings per share (EPS) for 2015, what will be the amount in the numerator for the calculation?
$208,000 ($235,000 - $27,000 = $208,000)
Glenda Enterprises reported Net income of $235,000 in 2015. Also in 2015, the Board declared common stock dividends of $45,000 and preferred stock dividends of $27,000. In computing basic earnings per share (EPS) for 2015, what will be the amount in the numerator for the calculation?
$208,000 ($235,000 - $27,000 = $208,000)
On March 4, 2012, Lustron resold 500,000 of the Treasury shares for $10 per share. What is the correct journal entry Lustron should record on the March 4, 2012? if treasury stock was purchased at $8 per share originally
Cash 5,000,000
Treasury stock - cost 4,000,000
Paid in capital - share repurchase 1,000,000
On March 4, 2012, Lustron resold 500,000 of the Treasury shares for $10 per share. What is the correct journal entry Lustron should record on the March 4, 2012? if treasury stock was purchased at $8 per share originally
Cash 5,000,000
Treasury stock - cost 4,000,000
Paid in capital - share repurchase 1,000,000
On March 4, 2012, Lustron resold 500,000 of the Treasury shares for $10 per share. What is the correct journal entry Lustron should record on the March 4, 2012? if treasury stock was purchased at $8 per share originally
Cash 5,000,000
Treasury stock - cost 4,000,000
Paid in capital - share repurchase 1,000,000
Cyrus Corp. had taxable income of $158,000 in the current year. The amount of MACRS depreciation was $23,000 while the amount of depreciation reported in the income statement was $18,000. There were no other differences between tax and accounting income, Cyrus’s pretax accounting income was:
$163,000 (Given taxable income, add back the MACRS (tax) depreciation, then subtract accounting depreciation, to derive accounting income. 158K + 23K - 18K = 163K.)
Cyrus Corp. had taxable income of $158,000 in the current year. The amount of MACRS depreciation was $23,000 while the amount of depreciation reported in the income statement was $18,000. There were no other differences between tax and accounting income, Cyrus’s pretax accounting income was:
$163,000 (Given taxable income, add back the MACRS (tax) depreciation, then subtract accounting depreciation, to derive accounting income. 158K + 23K - 18K = 163K.)
Under current U.S. GAAP, which of the following is a cash flow associated with OPERATING activities for Acme Inc.?
Payment of semiannual interest on Acme’s bonds payable
Under current U.S. GAAP, which of the following activities by Acme Inc. is a cash flow associated with INVESTING?
Acquisition of bonds of Hinkley Inc. (a separate company)
There are two prominent methods of preparing the statement of cash flows. Which method starts with Net income, then makes adjustments for transactions that did not involve cash?
Indirect method
Most of the following are investing activities for Acme Inc. Which is NOT an investing activity for Acme Inc. ?
Signing a short-term note payable with the local bank to obtain the cash needed to meet the June payroll for Acme employees
Under current U.S. GAAP, which of the following is a cash flow associated with OPERATING activities of Acme Inc.?
Payment of income taxes to the I.R.S.
Most of the following are investing activities for Acme Inc. Which is NOT an investing activity for Acme Inc. ?
Sale of Acme’s preferred stock to Acme shareholders
Which of the following is a non-cash FINANCING activity by Acme Inc?
Settling a loan from First Bank by issuing 4,000 shares of Acme stock to the bank
Under current U.S. GAAP, which of the following is a cash flow associated with FINANCING activities for Acme Inc.?
Retirement of Acme common stock by repurchasing it from Acme shareholders
On May 1, 2016, JayKay Inc. used idle cash to purchase notes issued by Hinkley, Inc. on the open market. The notes pay 3% interest and had an original duration of 12-months, though they mature on August 15, 2016. How should JayKay classify these notes?
As short-term investments
When calculating diluted earnings per share (EPS) for a firm with a complex capital structure, we assume that stock options were exercised and that the cash proceeds were used to:
Buy treasury stock.
If a stock dividend (not cash dividend) occurs in the middle of the fiscal year, when calculating the current year’s EPS, the shares are treated as if they were issued:
At the beginning of the year.
According to a 2011 study by the Economic Policy Institute, the top 1% of households receives what percentage of total US income and owns what percentage of total US wealth?
The top 1% of households receive 21.3% of total income and own 35.6% of total wealth.
According to a 2011 study by the Economic Policy Institute, the top 1% of households receives what percentage of total US income and owns what percentage of total US wealth?
The top 1% of households receive 21.3% of total income and own 35.6% of total wealth.
Bryan must compute diluted earnings per share for his company. He knows he must apply the “treasury stock method” for the dilutive effect of the stock options and believes that he should use the average market price of the stock in applying the method. But he is a bit confused and wonders if he should use the year-end price of the stock, not the average price for the year, in applying the treasury stock method. In which part of the FASB codification will Bryan find the guidance he needs?
Presentation
What part of the FASB codificaition tells us how to compute the “weighted-average number of shares” for EPS calculations, and tells us that “The most precise average would be the sum of the shares determined on a daily basis divided by the number of days in the period. Less-precise averaging methods may be used, however, as long as they produce reasonable results.”? You answer should appear in this fomat: “ASC XXX-XX-XX-X” where the X’s are numbers.
ASC 260-10-55-2
What part of the FASB codificaition tells us how to compute the “weighted-average number of shares” for EPS calculations, and tells us that “The most precise average would be the sum of the shares determined on a daily basis divided by the number of days in the period. Less-precise averaging methods may be used, however, as long as they produce reasonable results.”? You answer should appear in this fomat: “ASC XXX-XX-XX-X” where the X’s are numbers.
ASC 260-10-55-2
Increase in the fair value of securities available-for-sale (OCI or NI)
OCI
Gain on sale of land(OCI or NI)
NI
Loss on pension plan assets (actual return less than expected)(OCI or NI)
OCI
Gain from foreign currency translation(OCI or NI)
OCI
Increase in the fair value of trading securities (OCI or NI)
NI
Loss from revising an assumption related to a pension plan(OCI or NI)
OCI
Loss on sale of patent (OCI or NI)
NI
Prior service cost(OCI or NI)
OCI
Increase in the fair value of bonds outstanding; fair value option (OCI or NI)
NI
Gain on postretirement plan assets (actual return more than expected)(OCI or NI)
OCI
Gain on sale of land (OCI or NI)
NI
Loss on pension plan assets (actual return less than expected) (OCI or NI)
OCI
Gain from foreign currency translation (OCI or NI)
OCI
Loss from revising an assumption related to a pension plan (OCI or NI)
OCI
Prior service cost (OCI or NI)
OCI
Gain on postretirement plan assets (actual return more than expected) (OCI or NI)
OCI
Indicate by letter whether each of the terms or phrases listed below is more associated with financial statements prepared in accordance with U.S. GAAP (U)
Common stock, Liabilities often listed before equity in the balance sheet (statement of financial position), Accumulated other comprehensive income, Paid-in capital—excess of par, Net gains (losses) on investments—AOCI, Preferred stock
Indicate by letter whether each of the terms or phrases listed below is more associated with financial statements prepared in accordance with International Financial Reporting Standards (I).
Preference shares, Asset revaluation reserve, Share premium, ordinary shares, Equity often listed before liabilities in the balance sheet (statement of financial position), Share premium, preference shares, Ordinary shares, Investment revaluation reserve
Indicate by letter whether each of the terms or phrases listed below is more associated with financial statements prepared in accordance with International Financial Reporting Standards (I).
Preference shares, Asset revaluation reserve, Share premium, ordinary shares, Equity often listed before liabilities in the balance sheet (statement of financial position), Share premium, preference shares, Ordinary shares, Investment revaluation reserve
Indicate by letter whether each of the terms or phrases listed below is more associated with financial statements prepared in accordance with International Financial Reporting Standards (I).
Preference shares, Asset revaluation reserve, Share premium, ordinary shares, Equity often listed before liabilities in the balance sheet (statement of financial position), Share premium, preference shares, Ordinary shares, Investment revaluation reserve
Options exercised.
Time-weighted shares assumed issued plus time-weighted actual shares
Simple capital structure.
Single EPS presentation
Basic EPS.
No dilution assumed.
Convertible preferred stock.
Potential common shares.
Earnings available to common shareholders.
Subtract preferred dividends.
Antidilutive.
Exercise price exceeds market price.
Increased marketability.
Stock split.
Extraordinary items.
Shown between per share amounts for net income and for income from continuing operations.
Stock dividend.
Midyear event treated as if it occurred at the beginning of the reporting period, 25% of outstanding shares is considered large dividend and is same as a stock split (Lg SD - Par Value, Sm SD - Current Market Value)
Stock dividend.
Midyear event treated as if it occurred at the beginning of the reporting period
Add after-tax interest to numerator.
Convertible bonds.
Diluted EPS.
Maximum potential dilution.
Noncumulative, undeclared preferred dividends.
Preferred dividends do not reduce earnings.
Common shares retired at the beginning of August.
Time-weighted by 5/12.
Include in diluted EPS when conditions for issuance are met.
Contingently issuable shares.
Include in diluted EPS when conditions for issuance are met.
Contingently issuable shares.
cash effect of each transaction is reported on a statement of cash flows as operating activities
Merchandise sales, Purchase of merchandise, Employee salaries, Payment of semiannual interest on bonds payable, Income taxes
cash effect of each transaction is reported on a statement of cash flows as investing activities
Sale of land, Sale of equipment at a gain, Acquisition of bonds of another corporation, Purchase of a building, Collection of nontrade note receivable (principal amount), Loan to another firm, Sale of a copyright
cash effect of each transaction is reported on a statement of cash flows as investing activities
Sale of land, Sale of equipment at a gain, Acquisition of bonds of another corporation, Purchase of a building, Collection of nontrade note receivable (principal amount), Loan to another firm, Sale of a copyright
cash effect of each transaction is reported on a statement of cash flows as financing activities
Sale of common stock, Purchase of treasury stock, Issuance of a long-term note payable, Repayment of note payable, Issuance of bonds, Payment of a cash dividend, Retirement of common stock, Issuance of a short-term note payable
cash effect of each transaction is reported on a statement of cash flows as financing activities
Sale of common stock, Purchase of treasury stock, Issuance of a long-term note payable, Repayment of note payable, Issuance of bonds, Payment of a cash dividend, Retirement of common stock, Issuance of a short-term note payable
common stock
Can vote/sell and get dividends
preferred stock
cannot vote and are paid dividends 1st
Paid in Capital
Assets given to company for stock
par value
stocks cannot be legally sold below this amount (intentionally set low), AKA Stated Value, anything pd above is paid in capital
why double entry accounting?
can keep earnings separate from equity hence the income statement
Cumulative preferred stocks
do not have to pay dividend every year but will still owe that dividend in the future
Retained Earnings
accumulated net income and source for paid dividends (Reduction in RE through cash dividends, stock div., property div.)
Initial public offering of stock JE is
Dr Cash - Cr Common stock at par value and Excess to Paid in Capital
Share issue Cost reduces what?
paid in capital
Retired Stock
Paid in Capital share repurchase, reverse entry use the average share price, and its like it was never issued/reduces # outstanding shares
Treasury Stock
accounting not finished until sell again. sets in holding on the books
Treasury Stock
accounting not finished until sell again. sets in holding on the books
Paid in Capital Share Repurchase (Valuation Account)
Credit Balance for gain/loss on buyback - can only be debited if it has a balance
Stock Dividend impact on equity
does not reduce total equity
property dividend
issue stock of another company as dividend, JE bring stock to fair value before recording dividend. Dr Investment Stock (Gain) and Cr Gain on Appreciation in Investment. THEN Dr Retained Earning Full Amt and Cr Property Div Payable.
property dividend
issue stock of another company as dividend, JE bring stock to fair value before recording dividend. Dr Investment Stock (Gain) and Cr Gain on Appreciation in Investment. THEN Dr Retained Earning Full Amt and Cr Property Div Payable.
Return on Equity formula
net income (change in retained earnings) / Avg shareholder equity
Return on Equity formula
net income (change in retained earnings) / Avg shareholder equity
Cliff Vesting
wait amount of time then qualified for full amount
Cliff Vesting
wait amount of time then qualified for full amount
Earnings Per Share formula
(Net Inc. - Preferred dividends) / weighted avg common shares outstanding
Earnings Per Share formula
(Net Inc. - Preferred dividends) / weighted avg common shares outstanding
how do you calculate weighted average common shares outstanding
outstanding shares + sold common shares *(n/12) - Repurchase * (n/12)
