F1 - M3 - Stockholders' Equity: Part 1 Flashcards
For equity, is equity broken out between earned capital and not earned capital?
Yes, on statement of stockholders equity, it is broken out between capital that is earned (retained earnings) and capital that is contributed (sales of common and preferred stock).
Is accumulated other comprehensive income earned capital?
Yes, this is money that you earned, but goes strait to equity and not the income statement.
What is noncontrolling interest? Where is that reported on the balance sheet?
This is when you purchase another company and consolidate, but you do not have 100% ownership of them. The percent that you do not own, you have to report. So if you own 75%, you have to report the other 25% as non controlling interest since you do not own it.
This is reported in equity, under other comprehensive income.
What is capital stock or legal capital?
This is the amount that must be retained by the corporation for the protection of creditors. It is the par or stated value of both preferred and common stock.
Is preferred stock issued at par? What about common stock?
Normally preferred stock is issued at par, but common stock is sometimes issued at par.
No par common stock may be issued as true no-par stock, or no-par stock with a stated value.
Do some states allow corporations to pay dividends out of additional paid in capital?
Yes
For stock, what is authorized, issued, and outstanding?
Authorized - Per the corporations, articles of incorporation, this is the amount of shares that the corporation can issue to investors.
Issued - These are the number of shares, that have been sold to investors.
Outstanding - These are the number of shares that are currently held by shareholders. These normally match issued, but can change if the company decides to repurchase stock.
This must be disclosed.
What is common stock? What rights do they have?
Common shareholders bare the most risk, because they are paid after debt holders and preferred shareholders. For example, when a dividend is declared, first the preferred shareholders get paid, and then the common shareholders. Hence why the numerator in the EPS formula is Net Income - Preferred dividends. That shows what is left for the common shareholder.
Common shareholders have the right to vote, right to earnings in a corporation, right to share of assets in a corporation after creditors and preferred shareholders are paid.
What is a preemptive right?
This is when common shareholders want to keep their voting strength even if more shares are issued. For example, if you own half of the shares issued, and the corporation decides to sell more shares they have authorized, but you want to keep your 50% ownership, you can have a preemptive right to purchase a certain amount of those shares so you can keep your 50% ownership. That has to be stated in the articles of incorporation.
What is the book value per share formula?
This measures the amount common shareholders would receive for each share if all their assets were sold at their book values and all creditors were paid.
Book Value Per Share = Common shareholders’ equity (Assets - Liabilities - Preferred equity - Dividends in arrears)/ Common shares outstanding (Number of shares issued - Number of shares repurchased)
Dividends in arrears - This is when you have preferred shareholders and they are owed money from prior years were dividends were not issued. This is for cumulative preferred shareholders. This reduces the amount that goes to the common shareholder.
We know the difference between cumulative and noncumulative preferred shares, but what is the difference between participating and nonparticipating preferred shareholders?
For example, participating preferred shareholders get paid first over common shareholders, and then common shareholders get paid. Once the common shareholders are paid, if there is an excess dividends to be paid out, that is spilt among the participating and common shareholders on a pro rata basis.
If you are nonparticipating, you get paid first over common shareholders, and then common shareholders are paid. If there is an excess, non participating do not get those, only participating.
Do preferred shareholders have voting rights? What about common shareholders?
Preferred shareholders do not have voting rights, but common shareholders do.
What is dividends in arrears? Is this a legal liability?
This is when you have preferred shareholders and they are owed money from prior years were dividends were not issued. This is for cumulative preferred shareholders. This reduces the amount that goes to the common shareholder.
It is not a legal liability, but it is disclosed in total on a per share basis. The reason it is not a legal liability, is because the corporation does not have to legally pay it. Debt on the other hand, they have to pay that legally along with any interest. Dividends in arrears are not a legal liability. It is disclosed on the balance sheet, or in the footnotes.
What is the difference between a fully participating preferred shareholder vs a partially participating shareholder?
A fully participating shareholder means that after the common shareholders get paid, there is not a cap on how much of that excess income they are going to get.
A partially participating shareholder gets the excess dividends but they are limited to a certain percentage of that income.
What is convertible preferred stock?
This is when you pay a premium for your preferred shares, but you have the option to convert your preferred shares to common shares. This is good if you believe the common share price will go up in the future but you are not sure. You can buy convertible preferred shares, and when the price of the common shares goes up, you can convert.
What is a callable (Redeemable) preferred stock?
The corporation that issued the stock, can call that stock (repurchase) at a specified price. This makes the stock less valuable because the corporation could buy back the stock before it increases in value.
The per share amount where the preferred stock is callable, must be disclosed either on the balance sheet or in the footnotes.
What is mandatorily redeemable preferred stock?
This is when the preferred shares are bought back by the issuing company on a certain maturity date.
The difference is, that this is more debt, so this has to be treated as a liability on the financial statements.
What is additional paid in capital (APIC)? Is selling stock greater the only transaction that impacts APIC?
This is when you get more money for your sale of shares issued, than what the par value is. So the formula is = Number of shares issued * (Contributed capital - Par value).
No, there are other ways. Instructor said you don’t have to memorize the others, just know that selling of stock is not the only thing that impacts APIC.
What are some of the things that will reduce retained earnings?
Distributions to stockholders, and transfers to additional paid in capital for stock dividends.
What is the formula for retained earnings?
Net income/loss
- Dividends (cash, property, and stock) declared
+- Prior period adjustments
+- Accounting changes reported retrospectively
= Retained earnings
What is the journal entry for when a dividends?
Debit Retained Earnings and Credit Dividends Payable
What is classification of retained earnings?
This is where the company restricts a certain amount of retained earnings and tells the shareholders and investors why this is (disclosed).
What is the entry for appropriating retained earnings?
DR: Retained Earnings (unappropriated) and CR Retained earnings appropriated for [purpose]
What kind of transaction is treasury stock on the statement of cash flows?
A financing outflow
Do treasury shareholders have the right to vote and receive dividends?
No
What is the formula to get shares outstanding?
Shares issued - Shares repurchased = Shares outstanding
For treasury stock, what is the cost method?
This is when you repurchase your stock the gain or loss is calculated upon reissue. For example, I buy back the stock, but I do not recognize a gain or loss until I sell the stock until I resell the stock.
The value of the stock will be on your books at cost value
For treasury stock, what is the legal or par value method?
A gain or loss will be calculated immediately upon repurchase of the stock, and it will be recorded on par value.
Do treasury stock gain and losses hit the income statement?
NO they hit equity, but they do not ever hit the income statement.
For treasury stock gains and losses when it is resold, what account does that go to?
When you sell a stock, it will be credited for gains and debited for losses to the account called “additional paid in capital from treasury stock”. This will either increase equity (gain), decrease equity (loss).
If there is no balance to reduce in the paid in capital treasury stock account from a loss, then we will reduce the retained earnings account instead.
For the par value method, what is the formula for the gain or loss of sale?
You calculate the gain or loss when the repurchase price differs from the original selling price.
Reverse original entry for shares repurchased
Credit cash price paid
Remember that the gain or loss is calculated right away.
What is the formula for calculating gains or losses for the cost method?
Reissue price - Repurchase price (cost)
What happens when you retire treasury stock under the cost method and the par value method?
Cost method - You have to reverse the common stock from the original sale, reverse the paid in capital from the original sale, and reverse the treasury stock entry from the repurchase. The plug will go to retained earnings.
Par method - Debit the common stock at par and credit the treasury stock at par.
What is the entry for donated stock? What is that?
Donated stock is when a shareholder donates the stock back to the corporation. No cash exchanged hands so no cash entry will be made. Stock will be measured at FMV.
Debit: Donated Treasury Stock (at FMV)
Credit: Additional paid in capital (at FMV)
What happens if you sell the shares that were donated?
You take the selling price - FMV. Then you record a gain or loss. Gain would credit APIC and loss would reduce APIC.
When cash is restricted, is that an appropriation of retained earnings, or is that a restriction in the cash account?
When an entity restricts cash, that is a restriction of cash and not of RE. If they restrict their earnings for a specific purpose, then we want to restrict RE. Which is called appropriation of retained earnings.
