F7 - Stockholders Equity & Cash Flow

Question 1

What is outstanding stocks

Answer 1

Stocks owned by shareholders rather than corporation it self.

= issued stocks - treasury stocks

Question 2

Difference between Common and Preferred stocks

Answer 2

Common stocks have voting rights but the are not guaranteed dividends upon dissolution.

Preferred stocks usually have voting rights & have preference in dividends.

Question 3

Preferred stocks types:

Answer 3

1) Cumulative and Non- Cumulative

2) Participating or Partially Participating.

Question 4

Difference between Cumulative and Non- Cumulative preferred stocks

Answer 4

Cumulative feature provides that all or part of the preferred dividend not paid in any cumulative year must be paid in future before dividends be made to common shareholders. Accumulated amount is referred to as dividends in arrears.

Participating means that preferred stocks participate in additional dividends preference.

Question 5

What is Paid In Capital

Answer 5

Is generally contributed in excess of par value and also impacted by Quasi reorganization, issuance of a liquidating dividends, conversion of bonds.

Question 6

Retained Earnings Formula

Answer 6

Net income
- Dividends
+- Prior Period Adjustments (Correction of Error)
+- Accounting changes reported retrospectively
+ Adjustments from Quasi reorganization

• RE is not affected by treasury stock UNLESS the company reissue them at a loss and there is no enough paid in capital to absorb the loss.

Question 7

Classifications of Retained Earnings

Answer 7

1) Appropriated; means that RE are not available to pay dividends because they have been restricted for legal or contractual reason
2) Unappropriated
* When the purpose of appropriated amount has been achieved it should restore to unappropriate RE.

Question 8

What is Quasi Reorganization

Answer 8

It allows a corporation with a significant deficit in RE to eliminate the deficit and have fresh start by restating overvalued assets to their lower fair values (and thus reduce depreciation)

For Example P8 or 166

Question 9

Treasury Stocks

Answer 9

Are corporation own stocks that has been issued to shareholders and subsequently reacquired.

Question 10

Methods of accounting for Treasury Stocks

Answer 10

1) Cost Method; Stocks are recorded at their reacquisition cost, a gain or loss will be determined when the stocks are REISSUED or RETIRED and the original issue price and book value do not enter into the accounting.

Paid in capital will increase/decrease if stocks are reissued at price differ from reacquisition price although if paid in capital is not enough RE will be impacted.

2) Par Method (Legal Method); Stocks are recorded by reducing the amount of par value and additional paid in capital at the time of the original sale.

Paid in capital will increase/decrease is stocks are repurchased at prices differ from original selling price.

Examples P10,11 or P168, 169

Question 11

Distributions to shareholders (Dividends types)

Answer 11

1) Cash Dividends
2) Property Dividends; must be remeasured at FV
3) Scrip Dividends; Special form of notes payable and in such cases the principal amount will be reduced from RE and interest is payable in the I/S.
4) Liquidating Dividends; when dividends to shareholders exceed RE.
5) Stock Dividends have 2 type:
a. Treatment as small dividends 20 -25% , the treatment will be reducing RE by par value of the stocks
DR RE
CR Common Stock
CR Paid in capital (Plug)

• No change on total equity will happen.
  6) Stock Split; No journal entry is required.

Question 12

Accounting for stocks issued to employees

Answer 12

Compensation expense is calculated on the grant date and is allocated over the service period.

The expense is not impacted by the exercise of the options, it should be accounted for weather the option is exercised or not.

Example: The option FV over 2 years service period is 50000$

for the 2 years entry will be and the entry will not impact total equity
Dr Compensation Expense 25000
Cr Additional paid in capital - stock option 25000

Journal at exercise date
Dr cash
Dr paid in capital - stock option 50000
   Cr Common Stocks
   Cr Additional paid in capital in excess of par (Common stock) Plug

Question 13

Purpose of Cash Flow Statement

Answer 13

To provide information about the sources of cash and the use of cash

1) Operational
2) Investment
3) Financing

Question 14

Direct Method for computing operational cash flow

Answer 14

1) Cash received from customers=
Revenue
- Increase in AR
\+ decrease in AR
\+ Increase in unearned revenue
- decrease in unearned revenue
2) Interest received
3) Interest paid
4) Dividends received
5) Receipt of insurance proceeds and lawsuit settlements
6) Cash received from the sale of trading securities.
7) Income tax paid
8) cash paid to acquire trading securities
9) Cash paid to suppliers
COGS
\+ Increase in Inventory
- Decrease in Inventory
- Increase in AP
\+ Decrease in AP

Question 15

Indirect method to compute operational cash flow

Answer 15

Net Income
+ Depreciation, amortization, depletion
+ Losses
- Gain
- Earning from affiliate
+- increase/decrease in current assets (Inverse to cash)
+- increase/decrease in current liabilities (Direct to cash)

Question 16

Investing and Financing activities

Answer 16

Cash flow from investing activities:

1) Making loans to other entities and collection of these loans are considered investing activities
2) Purchasing/Disposing trading securities if classified as non current assets, available for sale and held to maturity.
3) Purchasing bonds payable
4) Acquiring/Disposing PP and E
5) Acquiring another entity.

Cash flow from financing activities:

1) Equity:
a. Issuing stocks
b. Paying dividends and repurchasing stocks
2) Debt:
a. Obtaining resources by issuing bonds, notes and other borrowing
b. Payment of principle of debt.