F7- Stkholder Equity Flashcards
1
Q
Types of Capital Stock
[Legal Capital]
A
- Each class of stock that it may legally issue: “Authorized” capital stock
- When part or all of the authorized Capital stock is “Issued”.
- B/C a Corp may own issued capital stock in the form of treasury stock, the amt of issued capital stock in the hands of shareholders: “Outstanding”
2
Q
Common Stock
A
- Shareholders bear the ultimate risk of loss & receive the ultimate benefits of success
- But, they are not guaranteed dividends or assets upon dissolution.
3
Q
Common shareholders Preemptive Rights
A
- To a proportionate share of any additional common stock issued if granted in the articles of incorporation.
4
Q
Book value per Common Share Calc.
A
= Common Shareholders’ equity/Common shares Outstanding
5
Q
Common Stockholders’ Equity Formula
A
Total Shareholder’s equity
- Pref. Stk outst.(at greater of call price or par value)
- Cumulative preferred dividends in arrears
= Common Shareholders’ Equity
6
Q
Preferred Stock & types?
A
- Is an equity security with preferences & features not associated with C/S
- May include a preference relating to dividends, which may be cumulative or non-cumulative & participating or non-participating.
7
Q
Cumulative Preferred Stock
A
- All or part of the preferred dividend not paid in any year accumulates & must be paid in the future before dividends can be paid to common shareholders
- Referred to as dividends in arrears & is not a Legal Liability.
8
Q
Participating Preferred Stock
A
- Preferred shareholders share with Common shareholders in dividends in excess of a specific amount
- Fully participating means that preferred shareholders participate in excess dividends without limit
9
Q
Preference Upon Liquidation
A
- Include a preference to assets upon liquidation of the entity
10
Q
Convertible Preferred Stock
A
- May be exchanged for common stock
- At the option of the stockholder
- At a specific conversion rate.
11
Q
Callable (Redeemable) Preferred Stock
A
- May be called (repurchased) at a specific price
- At the option of the issuing corp.
12
Q
Mandatorily Redeemable Preferred Stock
Liability
A
- Is issued with a maturity date
- Must be bought back by the company on the maturity date.
- Similar to Debt & Must be classified as debt.
13
Q
Additional-Paid-In-Capital & Examples
A
- Excess of par or stated value
Examples:
- Sale of treasury stock at a gain
- Quasi-reorganization
- Issuance of liquidating dividends
- Conversion of bonds
- Declaration of a small stock dividend
14
Q
Retained Earnings is?
A
- Is Accumulated earnings (or Losses) during the life of the corporation that have not been paid out as dividends.
15
Q
Retained Earnings Formula
A
Net Inc/Loss
- Dividends (cash, property, stock) declared
+/ - Prior Period adjustments
+/ - Acct changes reported retrospectively
+ Adj. from quasi-reorganization
= Changes in Retained Earnings
16
Q
Classification of Retained Earnings
[Appropriations]
A
- Classified as either appropriated or unappropriated
- Purpose is to disclose to the shareholders that some of the R/E are not available to pay dividends
- B/c they have been restricted legal or contractual reasons.
- May not be used to absorb costs or losses & may not be transferred to income.
17
Q
Quasi- Reorganization: Purpose
A
- Restate overvalued assets to their lower fair values
& - To eliminate a R/E deficit
& - Thus facilitate the declaration of dividends.
- Not Legal
18
Q
Quasi- Reorganization: Procedures
A
- Revalue assets to Current FV & liabilities to their PV.
- No net increase in asset value is permitted & the write-down is charged directly to retained earning.
19
Q
Acc. Other Comp. Inc Components are Not?
A
- Included in determining Net Income
& - Therefore do not enter into Retained Earnings.
20
Q
Treasury Stock is?
A
- Corp’s own stock that has been issued to shareholders & subsequently reacquired but not retired.
- Not entitled to any of the rights of ownership given to common shareholders
- Shares held as treasury stock are not considered to be outstanding stock.
21
Q
Methods of Accounting for Treasury Stock & Difference ?
A
- Cost Method & Legal (Stated/Par) Method
- Difference between the 2 methods is the timing of the recogn. of ‘G/L’ on Treasury Stock transactions.
22
Q
Cost Method is?
A
- Carried at their Reacquisition Cost
- APIC from Treasury Stock is:
~ CR for Gains &
~ DR for losses when Treasury stock is reissued at prices that differ from the original selling price. - Net Income or R/E will never be increased through Treasury Stock transactions.
23
Q
Date of Declaration
A
- Date the board of directors formally approves a dividend
- Liab. is created & R/E is Reduced (Debit)
24
Q
Cash Dividends
A
- Paid only on Authorized, issued & Outstanding shares
- Not paid (or declared) on Treasury Stock
25
Property (In- Kind) Dividends
- Non- Reciprocal transfers of nonmonetary assets from the company to its shareholders
- Subtracted from R/E like Cash Dividends
26
Liquidating Dividends
- When Dividends to shareholders exceed Retained Earnings.
27
Stock Dividends on Treasury Stock
- Generally NOT distributed on Treasury Stock B/C not considered outstanding
- Company is maintaining a ratio of treasury shares to shares outstanding in order to meet stock option or other contractual commitments
- State law requires that treasury stock be protected from dilution
28
Stock Splits on Treasury Stock
- Usually Not applied to Treasury Stock B/C such stock is not considered outstanding
Exceptions:
- Company is maintaining a ratio of treasury shares to shares outstanding in order to meet stock option or other contractual commitments
- State Law requires that treasury stock be protected from dilution
29
Compenstory Stock Options/Purchase Plans
- Valued at the FV of the options issued
- Option Price= Exercise price/ Strike Price
- FV economic pricing method= Black-Scholes Method
30
Date of Declaration
| [Property (In- Kind) Dividends]
- Property to be distributed should be restated to FV
&
~Any G/L should be recognized in income
31
Vesting Period
- Employees has to perform services in order to earn the right to exercise the options.
32
C/S Shares Issued Formula
= Treasury Stock+ Shares Outstanding
33
APIC increase in R/E when Stocks are given for services provided?
Fair Market Value of the Stocks given Minus the Par Value.
34
Current Year N.I.
(Asset -Liab)
-(Capt. Stock - Cash Dividends)
- APIC
= N.Inc.
35
In a Compensatory stock option plan which grant & exercise date are different, Outst. account should be reduced?
At the Exercise Date
36
Under the Intrinsic Value Method, a Corp. measures the value of the intital investment by?
Number of Shares
X
(Market Price-Exercise Price)
37
Common Stock reported as a Liability
-Contains a Unconditional Redemption Feature
38
- Cost Method & Legal (Stated/Par) Method Similarity?
- G/L are recorded as a direct adj. to stockholders' equity & NOT included in the determination of Net Income.
39
When common stock and preferred stock are issued in a lump sum purchase- how is APIC allocated?
APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.
40
When is APIC recorded on a stock subscription?
- APIC increases on date subscription is Recorded
| - Not on the date paid for or issued
41
To what extent is retained earnings restricted if legally restricted due to Treasury Stock?
It will be restricted to the extent of the balance in the Treasury Stock account.
42
When are dividends in arrear recorded for cumulative preferred stock?
They are not accrued until declared.
43
When are dividends in arrears included as a disclosure and not an accrual in the financial statements?
If a year passes and no Cumulative Preferred Stock is declared
44
What is the gain or loss when a non-monetary asset is distributed to a shareholder?
The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company's books
45
What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?
The effect on R/E is the Carrying Amount of the asset
R/E will be debited when the dividend is declared for the FMV of the asset
- Which is more (or less) than the carrying amount
Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash
The net effect of the entry is that RE will decrease by the CV of the asset
46
When is Retained Earnings debited for FMV of Stock for a stock dividend?
When Stock Dividend is LESS than 25% of Common Stock outstanding
47
When is Retained Earnings debited for Par Value for a stock dividend?
When Stock Dividend is GREATER than 25% of common stock outstanding
48
What is the effect of a stock dividend or a stock split on total shareholder equity?
Stock dividends and stock splits both have no effect on Total Shareholder Equity
49
What is the effect on APIC from a stock split?
Stock splits only affect par value
- APIC remains the same.
50
When is Compensation Expense recorded at the Time of Grant for a stock option?
- If options are exercisable immediately
| - They are based on past service.
51
What is the primary purpose of a quasi-reorganization?
- To eliminate a deficit balance in RE by restating its assets to Fair Value
- It does not directly protect a company from its creditors
52
How is return on Common Stockholder's Equity calculated?
(Net Income - P/S Dividends) / Average Common Stockholders Equity Note: Average CSE : Common Stock + RE
