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FAR > F7- Stkholder Equity > Flashcards

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”
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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.
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3
Q

Common shareholders Preemptive Rights

A
  • To a proportionate share of any additional common stock issued if granted in the articles of incorporation.
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4
Q

Book value per Common Share Calc.

A

= Common Shareholders’ equity/Common shares Outstanding

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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

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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.
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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.
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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
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9
Q

Preference Upon Liquidation

A
  • Include a preference to assets upon liquidation of the entity
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10
Q

Convertible Preferred Stock

A
  • May be exchanged for common stock
  • At the option of the stockholder
  • At a specific conversion rate.
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11
Q

Callable (Redeemable) Preferred Stock

A
  • May be called (repurchased) at a specific price

- At the option of the issuing corp.

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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.
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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
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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.
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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

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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.
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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
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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.

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19
Q

Acc. Other Comp. Inc Components are Not?

A
  • Included in determining Net Income
    &
  • Therefore do not enter into Retained Earnings.
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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.
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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
Q

Property (In- Kind) Dividends

A
  • Non- Reciprocal transfers of nonmonetary assets from the company to its shareholders
  • Subtracted from R/E like Cash Dividends
26
Q

Liquidating Dividends

A
  • When Dividends to shareholders exceed Retained Earnings.
27
Q

Stock Dividends on Treasury Stock

A
  • 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
Q

Stock Splits on Treasury Stock

A
  • 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
Q

Compenstory Stock Options/Purchase Plans

A
  • Valued at the FV of the options issued
  • Option Price= Exercise price/ Strike Price
  • FV economic pricing method= Black-Scholes Method
30
Q

Date of Declaration

[Property (In- Kind) Dividends]

A
  • Property to be distributed should be restated to FV
    &
    ~Any G/L should be recognized in income
31
Q

Vesting Period

A
  • Employees has to perform services in order to earn the right to exercise the options.
32
Q

C/S Shares Issued Formula

A

= Treasury Stock+ Shares Outstanding

33
Q

APIC increase in R/E when Stocks are given for services provided?

A

Fair Market Value of the Stocks given Minus the Par Value.

34
Q

Current Year N.I.

A

(Asset -Liab)
-(Capt. Stock - Cash Dividends)
- APIC
= N.Inc.

35
Q

In a Compensatory stock option plan which grant & exercise date are different, Outst. account should be reduced?

A

At the Exercise Date

36
Q

Under the Intrinsic Value Method, a Corp. measures the value of the intital investment by?

A

Number of Shares
X
(Market Price-Exercise Price)

37
Q

Common Stock reported as a Liability

A

-Contains a Unconditional Redemption Feature

38
Q
  • Cost Method & Legal (Stated/Par) Method Similarity?
A
  • G/L are recorded as a direct adj. to stockholders’ equity & NOT included in the determination of Net Income.
39
Q

When common stock and preferred stock are issued in a lump sum purchase- how is APIC allocated?

A

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

40
Q

When is APIC recorded on a stock subscription?

A
  • APIC increases on date subscription is Recorded

- Not on the date paid for or issued

41
Q

To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

A

It will be restricted to the extent of the balance in the Treasury Stock account.

42
Q

When are dividends in arrear recorded for cumulative preferred stock?

A

They are not accrued until declared.

43
Q

When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

A

If a year passes and no Cumulative Preferred Stock is declared

44
Q

What is the gain or loss when a non-monetary asset is distributed to a shareholder?

A

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
Q

What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

A

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
Q

When is Retained Earnings debited for FMV of Stock for a stock dividend?

A

When Stock Dividend is LESS than 25% of Common Stock outstanding

47
Q

When is Retained Earnings debited for Par Value for a stock dividend?

A

When Stock Dividend is GREATER than 25% of common stock outstanding

48
Q

What is the effect of a stock dividend or a stock split on total shareholder equity?

A

Stock dividends and stock splits both have no effect on Total Shareholder Equity

49
Q

What is the effect on APIC from a stock split?

A

Stock splits only affect par value

  • APIC remains the same.
50
Q

When is Compensation Expense recorded at the Time of Grant for a stock option?

A
  • If options are exercisable immediately

- They are based on past service.

51
Q

What is the primary purpose of a quasi-reorganization?

A
  • 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
Q

How is return on Common Stockholder’s Equity calculated?

A

(Net Income - P/S Dividends) / Average Common Stockholders Equity Note: Average CSE : Common Stock + RE

FAR (24 decks)

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