F7 Flashcards
Stockholders' Equity, Cash Flows, and Ratio Analysis
What are the 5 major components of Stockholder’s Equity?
- Capital Stock (also called legal capital)
- APIC
- Retained Earnings or Deficit
- AOCI
- Treasury Stock (accounted for differently, depending on the method of accounting used)
- **In a Consolidated Balance Sheet NCI must be shown as well
Common Shareholder bear the benefits of risk and loss, but what aren’t they guaranteed?
Dividends or any assets upon dissolution.
Additional Stock issued: what may common stock holder’s have rights to?
- Voting rights
- Dividend rights
- Rights to share in distribution of assets if corporation is liquidated, AFTER satisfaction of creditor and preferred stockholders’ claims.
Formula
How to determine book value per common share?
Common Shareholder’s Equity
Divided by: Common shares outstanding.
Equals: Book value per common share
Formula
How to determine Common Shareholders Equity?
Total Shareholders Equity
Less: Preferred Stock Outstanding (greater of Call price of Par Value)
Less: Cumulative preferred dividends in arrears
Equals: Common Share holder’s equity.
What is Participating Preferred stock?
Preferred shareholder’s participate with common shareholders with dividends over a specific amount.
Fully participated means that preferred shareholders participate in excess dividends without limit
What is non-participating preferred stock?
The do not share in excess dividends with common shareholders
What is manditorily redeemable stock?
Stock that must be bought back by the issuing company at the maturity date.
NDPAA (Ned PAH)
What is the formula for Retained Earnings?
Net Income/Loss
- Dividends (cash, property, stock) declared
± Prior period adjustments
± Accounting changes reported retrospectively
_+ Adjustments from quasi-reorganization _
= **Δ **in Retained Earnings
What is a Quasi-reorganization?
An accounting adjustment, and not a legal reorganization.
Revised the capital structure of the organization as if it had been legally reorganized.
- Assets restated at FV, Liabilities PV
- R/E brought to 0 balance by closing to APiC or other capital accounts
- Remember to continue to show the date of adj. to R/E for 3-10 yrs.
- No negative balance in any capital account
What is the purpose of a Quasi-reorganization?
Restate overvalued assets to their lower of fair values to reduce future depreciation and eliminate retained earnings deficits, and thus allow for a declaration of dividends.
Companies with a significant deficit in retained earnings to eliminate such a deficit and have a “fresh start”.
What are the 2 methods for Treasury Stock Accounting?
Cost - unallocated reduction in stockholders’ equity
Par (legal/stated value) method - deducted from capital stock
No gains/losses are recognized on I/S! Income and R/E may never increase by the transaction. APIC - Treasury Stock account used to record “gains” and absorb “losses”.
Treasury stock is NOT an ASSET. Cash & property dividends are not paid on treasury stock; dividends may be paid on treasury stock.
What is the major difference between the Cost and Legal methods?
Timing of the recognition of the gain or loss in treasury stock transactions.
4
What is the Cost method?
- Treasury Shares are recorded and carried at the acquisition cost.
- The gain/loss is recognized with the Treasury stocks are a sold or retired.
- “Gain” is credited to APIC-treasury stock
- “Loss” is debited and charged against previous “gains”.
- If not sufficient then the loss will decrease R/E.
What is the Par Method? How does it differ from Cost?
Recorded at par value with excess to APIC - Treasury Stock or deducted from R/E after charged to any APIC - Treasury Stock.
Reported as a deduction from capital stock.
Differs from cost method since it recognize the Gain/Loss at buy back.
What is a Dividend?
A Pro-Rata distribution by a corporation based on the shares of a particular class of stock and usually represents a distribution of earnings.
3
List the significant dates with respect to Cash Dividends.
Declaration - becomes a liability and reduces R/E
Date of Record - NO J/E, memorandum entry ONLY.
Date of Payment - dividend actually paid
Property in-kind Dividends
On the date of the declaration the property should be restated to Fair Value and a Gain or loss should be recognized.
Example (Cost 70, AD 20)
- Dr: Asset FMV 100
-
Dr: AD 20
- Cr: Asset (Cost) 70
- Cr: Gain 50
What is a liquidating dividend?
Occurs when a dividend exceeds the amount of retained earnings.
Rule: A “liquidating dividend” is a return of capital (which decreases additional paid-in capital) and not a distribution of earnings (which decreases retained earnings).
Both the SEC and IFRS require what in the statement of earnings in regards to Dividends?
Required to present dividends per share in total for each blass of shares in the statement of changes in equity or in the notes to the financial statements
Generally Treasury stock does not receive a stock dividend, but what are the 2 exceptions?
- The company is maintaining a ratio treasury shares to outstanding
- State law requires that treasury stock be protected from dilution.
Identify 2 types of Stock Options
Compensatory - compensation cost is determined on the grant date using an option pricing model. It’s expensed and allocated over the service period. (IFRS stock options are generally considered compensatory!)
Noncompensatory - GAAP substantially all full-time employees may participate, offered equally or as percentage of salary, reasonable exercise period, discount is no greater than that offered to stockholders.
What is a Strike Price (exercise price or option price)?
The price at which the underlying stock can be purchased pursuant to the option contract.
What is the exercise date?
Is the date by which the option holder must use the option to purchase the underlying (typically the date at which the stock options outstanding account is reduced).
What is the Grant Date?
The date the option issue.
Equity instruments issued for employee services are to be valued at the date of the grant (based on FMV of award).
No J/E
What is vesting period?
A period over which the employee has to perform services in order to earn the right to exercise the options.
Basic EPS: What amount of preferred Dividend is removed from Net Income?
It is the the amount of Preferred Dividend accumulated in the period!
What is the Formula for the Basic EPS?
Income available to common shareholders
Divided by: Weighted-average number of common shares outstanding
NI - PD
WASCO
What are the two elements that are deducted from Net Income for Basic EPS?
- Dividends declared in the period on non-cumulative preferred
- Dividends accumulated in the period on cumulative preferred stock
Formula
What is WASCO?
Shares outstanding at Beg.
+ Shares sold during the period (time-weighted basis)
- Shares reacquired during period (time-weighted basis)
+ Stock dividends + stock splits (retroactively adj.)
- Reverse stock splits (retroactively adj.)
= Weighted-Average-Number of Common Stock Outstanding
WASCO for Dividends and Stock Splits?
The must be treated like they occurred in the beginning of the period.
What is a complex Capital structure?
When it has securities that can be potential converted to common stock and would dilute EPS
What are the Potentially Dilutive Securities?
- Convertible securities
- Warrants and other options
- Contracts that may be settled in cash/stock
- Contingent Shares
Only one is needed!
Options and similar instruments are only dilutive when?
When the average market price of the underlying common stock exceeds the exercise price of the options or warrants.
What method is used to Dilute Convertible Securities?
The “If diluted” method. This assumed that the securities were converted to common stock at the beginning of the period (or at the time of issue, if later)
In the “If diluted” method what is added to the Numerator?
Interest expense, net of tax due to the assumed conversion of the bonds to common stock
In the “If Diluted” method, what is added to the denominator?
The number of shares associated with the assumed conversion.
What is the convertible preferred method?
- Adjust the numerator (as preferred stock dividends do not affect net income)
- Add to the denominator the number of shares associate with the assumed conversion
- Antidilution rules apply to the convertible preferred method .
How does one account for Dilution result for contracts that may be settled with stock?
If the facts suggest, it is presumed that contract will be settled in stock and the resulting shares are included if the effect is dilutive.
Under IFRS, how are contracts to be settled in cash or stock accounted for in the EPS?
It is always assumed to be dilutive.
Dilution from contingent shares?
They are included in the calculation of Basic EPS if the conditions for the issuance are met.
For earnings requirements: If the conditions have been met at the end of the period, it is included in the EPS of the beginning of the period that the conditions have been satisfied.
If the have not been met, they are include in the Diluted EPS
One disclosure to remember is?
Cash flow per share should not be reported.
True or False: Any subsequent after period issuance of Stock Splits or Dividends should be reported in the period financial statements.
True!
How do you calculate EPS using stock splits and Stock dividends?
Shares outstanding X months outstanding X Stock dividend percentage + 1 x stock split multiplier.
In a net loss stituation, what is added to increase the net loss of a Basic EPS?
The Preferred Dividends And the cumulative preferred dividends in arrears.
How to account for donated stock Transactions?
The are put into the donated treasury stock account at Fair Market Value.
Cash equivalents are defined as?
Quickly convertible into cash
So near maturity (90 days) that the risk of changes in value due to interest rate changes are insignificant.
Overdrafts: US GAAP vs IFRS?
In GAAP, overdrafts are excluded from cash and are classified as financing cash flows. Under IFRS, cash may include back overdrafts
Statement of Cash flows 3 elements
- Operating Cash flows
- Investing Cash flows
- Financing Cash flows
Operating cash flows include?
Current assets and liabilities.
Excluding current notes payable and the current portion of long-term debt
Investing Cash flows includes?
Noncurrent assets
Indirect Method
Net income
Plus: Depreciation / Amortization
Plus: Losses
Less: Gains
Less: Earnings of Affiliate
When the indirect method is use what is required as a disclosure?
Cash paid for taxes and interest
What are some examples that are considered contingent shares for purpose of computing EPS?
Shares issuable upon:
- Achieving a specific net income target
- Issuances of a patent
- Passage of a specific time period
Example NOT CONTINGENT
- Exercise of stock option
3
Required disclosures of a statement of cash flows under the direct method (GAAP)
- The major classes of gross cash receipts and gross cash payments.
- The amount of income taxes paid.
- A reconciliation of net income to net cash flow from operations.
CLAD
Adjustments made to Operating Activities section under Indirect method. (85% of them)
- Current Assets & Liabilities
- Losses and Gains
- Amortization and Depreciation
- Deferred Items
On what date should companies decrease retained earnings by the amount of the dividend?
Date of Declaration is the date the board of directors formally approves a divided. A liability is created (dividends payable), and retained earnings is reduced (debited).
Gain?
What happens if a corporation sells some of its treasury stock at a price that exceeds its cost?
The excess is credited to APIC.
Rule: Not permitted to record gain/loss on the purchase and/or sale of treasury stock in I/S!
Any “difference” goes to “paid-in capital,” or if there is not enough paid-in capital to absorb a loss, the loss would be debited (subtracted) from “retained earnings.”
What happens after aquisition and retirement of common stock?
Additional paid-in capital is decreased upon the acquisition and retirement of shares at a cost.
The difference between the cost of retirement ($2,000) and par retired ($1,000) is the decrease in additional paid-in capital.
When should stock options outstanding be reduced?
Stock options outstanding are reduced at the exercise date.
How does the declaration of a 15% stock dividend by a corporation affect R/E and Total Stockholder’s Equity?
Retained Earnings - Decrease
Total Stockholder’s Equity - No Effect
Rule: A stock dividend (less than 20-25% of stock outstanding) is treated by transferring the FMV of the stock dividend at declaration date from retained earnings to capital stock and paid-in capital. There is no effect on total shareholder’s equity because all transfers take place within shareholder’s equity.
In order to improve its operating cash flow to total debt ratio, a firm reporting under IFRS will classify:
Dividends paid as CFF.
Under IFRS, dividends paid can be classified as CFF or CFO. The operating cash flow to total debt ratio will be improved by classifying dividend payouts as CFF.
Operating Cash Flow (CFO) Transactions
- Selling products, collecting receivables (cash)
- Purchasing inventory, paying vendors
- Purchasing supplies/services
- Loss on Sale of Fixed Asset
- Paying Taxes
- Purchasing/selling trading securities (GR)
- Collecting interest on investment
- Collecting dividends on investment
- Paying interest on debt
Investing Cash Flow (CFI) Transactions
- Purchasing long-term assets or investments for cash
- Selling long-term assets or investments (noncash equivalents and non-trading securities)
Financing Cash Flow (CFF) Transactions
- Borrowing funds (bank loans, issuing debt)
- Paying principal on debt
- Issuing common/preferred stock
- Paying dividends on common/preferred stock
- Repurchasing stock (treasury shares)
NO NET Cash Flow Transactions
- Recording depreciation, amortization depletion
- Recording income of equity method affiliates
- Portion of outstanding debt issuances called in at price above par
GAAP and IFRS
Classifaction for Interest Received, Dividends Received
- GAAP: CFO
- IFRS: CFO or CFI
GAAP and IFRS
Classifaction for Interest Paid
- GAAP: CFO
- IFRS: CFO or CFF
GAAP and IFRS
Classifaction for Dividends Paid
- GAAP: CFF
- IFRS: CFF or CFO
GAAP and IFRS
Classification for Taxes Paid
- GAAP: CFO
- IFRS: CFO, CFI, CFF
CLiPSS
List the 5 types of Dividends
- Cash
- Liquidating - return of investment
- Property - FMV of asset given up with gain/loss recognized
- Scrip - Promise to pay a dividend in the future
-
Stock - results in capitalizing part of R/E, increasing legal capital.
(Remember: if < 20-25% small record @ MV, if > 20-25% large record @ par)
Describe the accounting for unexercised, expiring stock options.
Any balance in “APIC - stock options” is reclassified to “APIC - expired stock options”.
Previously recognized compensation expense is not adjusted.
