F7: Stockholders' Equity, Cash Flows, and Ratio Analysis Flashcards
Stockholder’s Equity
owners’ claim to the net assets of a corp
- presented on statement of financial position (BS)
- 5 major components: 1) capital stock 2) APIC 3) retained earnings or deficit 4) AOCI 5) treasury stock
- for consolidated FSs, any noncontrolling interest must be shown in equity as well
- cap stock can’t ever be used to pay dividend
- but APIC and RE can
Capital Stock (legal capital)
Stockholder’s Equity
the amt of capital that must be retained by the corp for protection of creditors
Par Value
- GR: PS is issued w par value, but common stock may or may not
- no par CS may be issued as true no-par or no-par stock w a stated value
- any excess of amt received over par or stated value is accted for as APIC
Authorized, Issued, and Outstanding
- authorized: corp’s charter contains amts of each class of stock it may legally issue
- issued: all or part can be issued
- outstanding: amt issued to shareholders (bc some issued can be in treasury stock)
- number of shares of each class of stock authorized, issued, and outstanding must be disclosed
Common Stock
Capital Stock (legal capital)
basic ownership interest in a corp
- bear ultimate risk of loss and receive ultimate benefits of success
- not guaranteed dividends or assets upon dissolution
- generally control management
- right to vote, right to share in earnings of corp, and right to share in assets upon liquidation after creditors’ claims and preferred shareholders
- may have preemptive rights to proportionate share of any add. CS issued if granted in the articles of incorporation*
Book Value per Common Share
= common shareholders’ equity / common shares outstanding
Common Stockholders’ Equity Formula
= total shareholders’ equity - PS o/s (at greater of call price or par value) - cumulative preferred dividends in arrears
Preferred Stock
Capital Stock (legal capital)
may include preference for dividends, which may be cumulative or non-cumulative and participating or nonparticipating
- may also include preference in liquidation
- usually, does not have voting rights
Cumulative PS
- all or part of preferred dividend not paid in any year accumulates and must be paid before dividends to CS
- accumulated amt is referred to as dividends in arrears
- dividends in arrears is not a legal liability, but must be disclosed in total on a per share basis either parenthetically on BS or in footnotes
Non-Cumulative
- does not accumulate
Participating PS
- “share equally then pro rata”
- based on total capitalization*
- participating: PS share w CS dividends in excess of specific amt
- fully participating: PS participate in excess dividends w/o limit
- partially participating: PS participate in excess dividends, but to limited extent
- non-participating: PS limited to dividends by their preference, do not share in excess dividends
Convertible PS
- may be exchanged for CS (at option of stockholder) at specific conversion rate
- “complex”
Callable PS
- may be called (repurchased) at specified price (at the option of issuing corp)
- aggregate or per share amt at which PS is callable must be disclosed on BS or footnotes
Mandatorily Redeemable PS
- classified as liability, unless redemption is required to occur only upon liquidation or termination
- issued w a maturity date
- or unconditional redemption feature
- must be bought back by comp on maturity date
APIC
Stockholders’ Equity
APIC is gr contributed capital in excess of par or stated value
- can also arise from many other diff types of transactions
- ex: sale of TS at a gain, quasi-reorganization, issuance of liquidating dividends, conversion of bonds, and declaration of small stock dividend
- APIC from these ^ may be aggregated and shown as one amt on the BS
Retained Earnings
Stockholders’ Equity
accumulated earnings (or losses) to date that have not been paid out as dividends
- does not include TS or AOCI
- if RE has negative balance, it’s a deficit
Net Income/Loss
- Dividends (cash, property, and stock) Declared
+/- prior period adjustment
+/- accounting changes reported retrospectively
+/- adjustment from quasi-reorganization
= RE
Appropriations
Retained Earnings
the purpose of appropriating RE is to disclose to the shareholders that some RE are not available to pay dividends
- bc restricted for legal or contractual reasons or discretion of management
- may not be used to absorb costs or losses and may not be transferred to income
dr: RE (unappropriated), cr: RE appropriated for (purpose) - when purpose of appropriation has been achieved, should be restored to unappropriated RE
Quasi-Reorganization
Retained Earnings
- an accounting adjustment, not legal reorg
- revise capital structure as if it had been legally reorg
- *allows corp w a significant deficit in RE to eliminate it and have a “fresh start”
- requires formal approval by shareholders
Purpose
- to restate overvalued assets to lower fair values (and thus reduce future depreciation to have our earnings go up) and to eliminate a RE deficit (thus facilitate the declaration of dividends)
stated capital down, earned goes up
Procedures
- revalue assets to current FV and liabilities to their present values (no net increase in asset value is permitted, and the write-down is charged directly to RE, thus increasing the deficit temporarily)
- bring RE to 0 against APIC (if APIC is insufficient to absorb deficit, more APIC can be created by reducing the par or stated value of the stock, thus reducing capital stock)
- RE on BS must be dated to show date of the adjustment, and it must continue to be disclosed until it’s insignificant
Accumulated Other Comprehensive Income
Stockholders’ Equity
PUFE”R”
- pension adjustments
- unrealized gains and losses on AFS securities
- foreign currency translation adjustments
- deferred gains and losses on effective portion of cash flow hedges
- revaluation surplus (IFRS only)
not included in net income, thus do not affect RE
- recognized in period they occur and combined w net income to determine OCI
Treasury Stock*
Stockholders’ Equity
corp’s own stock issued to shareholders and subsequently reacquired (but not retired)
- not entitled to CS rights (right to vote or receive dividends)
- portion of RE equal to cost of TS may be restricted and not used for dividends
- reduces SE, debit balance
- 2 methods of accounting for TS: primary diff is timing of recognition of “gain or loss” on TS transactions
- under both methods, the gains and loss are direct adjustments to SE, do not include in NI (or RE)
- TS not considered o/s
- SE same for both, difference is presentation
- Cost Method
- recorded and carried at reacquisition cost
- gain or loss determined when TS reissued or retired
- original issue price and BV of stock do not enter into accting
- APIC credited for gains and debited for losses when TS *reissued at prices different from reacq. cost
- losses may decrease RE if APIC is not enough
- NI or RE will never be increased though - Legal (or Part/Stated Value) Method
- TS recorded by reducing amts of par value and APIC received at time of original sale
- gain or loss when *buy back share (not reissue)
- TS at par (not cost)
- TS debited for its par value, APIC-CS debited for pro rata share of original issue price, APIC credited for gains and debited for losses when TS repurchased at price that differs from the original selling price
- losses may also decrease RE if APIC-TS acct isn’t large enough
- sources of capital associated w original issue are maintained
Retirement of TS
- when TS is acquired w intent of retiring (regardless of whether it happens or not) and
- price paid is > par/stated value, excess may be charged against APIC or RE
- price paid is < par/stated value, diff credited to APIC
Cost METHOD
dr: CS, dr: APIC -CS, dr: RE, cr: TS (at cost)
Par value Method
dr: CS, cr: TS (at par value)
Donated Stock
Treasury Stock
company’s own stock received as a donation from a shareholder
- no change in total SE, but # of shares o/s decreases, resulting in higher book value per CS
- at FMV
dr: donated TS (at FMV), cr: APIC
if sold
dr: cash (at sales price), dr: APIC (if SP < original FMV)
cr: APIC (if SP > original FMV), cr: donated TS (at book value or original FMV)
Accounting for a Stock Issuance (to non-employees)~
Stockholders’ Equity
Stock Issued Above Par
- dr: cash, cr: capital stock for par, cr: APIC for excess over par
Stock Issued at Par
- dr: cash, cr: capital stock
Stock Issued Below Par
- dr: APIC
- discount represent contingent liability to original owners
Stock Subscriptions
- contractual agreement to sell a specified # of shares at an agreed upon price on credit
- upon full payment of subscription, a stock certificate evidencing ownership is issued
Sale of Sub
dr: subscription receivable, cr: capital stock subscribed, cr: APIC
- subs not paid for at year end are a contra-equity, offsetting par and APIC of not paid
- if paid after YE but before issuance date, subscription receivable may be an asset and increase APIC
Collection of Subs
- dr: cash, cr: subscription receivable
Issuance of Stock Previously Subscribed
- dr: CS subscribed, cr: CS (issued)
Default/Forfeiture of a Subs
- if all or part os not collected, reverse applicable portion of original entry and 1) issue stock in proportion to amt paid, 2) refund partial payment or 3) retain partial payment by a credit to APIC as liquidated damages for breach of contract
Stock Rights
- provide an existing shareholder w opp. to buy add. shares
- usually carries price below market price on date the rights are granted
- issuance of stock rights requires memo entry only
- rights may subsequently be redeemed by comp, which causes decrease in SE in amt of redemption
Other Stock Valuation Issues
- stock issued for outside services should be recorded at FV
- trading price of stock is best evidence of FV, if not available then use par (not FV of services*)
- stock issued in basket sale w other securities should be allocated based on relative FMV of different securities
Dividend
Distributions to Shareholders
pro rata distribution by a corp based on shares of stock and represents distribution of earnings
- as long as not appropriated
- cash dividend is most common but there are other types
F7-15 to F7-21 I skipped bc lazy lol
Terminology
Distributions to Shareholders
Date of Declaration
- date board of directors formally approves a dividend
- liability created (dividend payable) and RE reduced (debited)
Date of Record
- no J/E
- date BoD specifies names of shareholders to receive dividends are determined
Date of Payment
- date which dividend is actually disbursed by the corporation or its paying agent
Stock Dividends
Distributions to Shareholders
- shareholder: no div income, just cost basis per share lowered
- % of dividend in proportion to total shares o/s before the dividend
- Small Stock Dividend <20-25%
- reduce RE by FMV of stock
- dr: RE, cr: CS, cr: APIC
- total SE not changed - Large Stock Dividend >20-25%
- reduce RE by par
- dr: RE, cr: common stock distrbutable
- dr: common stock distributable, cr: capital stock
- total SE not changed
Stock Dividends on TS
- GR not distributed on TS, EXCEPT
a) company maintaining a ratio of TS to o/s stock to meet stock option or other contractual commitments or
b) state law requires that TS be protected from dilution
Cash Dividends
- distribute cash to shareholders on CS or PS
- paid from RE
- not paid on TS
Property Dividends
- on date of declaration, property should be restated to FV and any gain/loss recognized in income (JE to take out prop)
- dividend liability and related debit to RE should be recorded at FV of asset transfered
Scrip Dividends
- special form of notes payable
- corp commits to paying a dividend later
- when there is a cash shortage
- date of declaration, dr: RE, cr: note payable
- some bear interest
Liquidating Dividends
- when dividends exceed RE
- excess is debited first to APIC then to CS or PS
- reduce total PIC
Stock Splits
when corp. issues add. shares of it’s stock to current shareholders and reduces the par value per share proportionally
- memo entry is formality
- no JE
- does not affect RE or total SE
Reverse Stock Splits
- reducing # of shares o/s and increases par proportionally
Stock Splits on TS
- GR not applied to TS EXCEPT
a) company maintaining a ratio of TS to o/s stock to meet stock option or other contractual commitments or
b) state law requires that TS be protected from dilution
Disclosure of Info about Capital Structure
F7-17 to F7-18
Accounting for Stocks Issued to Employees
Stockholders’ Equity
Noncompensatory Stock Option/Purchase Plans
- under GAAP, if meets all requirements:
a) substantially all full-time employees meeting limited employee qualifications may participate
b) stock is offered to eligible employees equally, but plan may limit the total amt of shares that can be purchased
c) time permitted to exercise rights is limited to a reasonable time
d) any discount from market price is no greater than would be a reasonable offer of stock to shareholders or others
- do not require the recognition of compensation expense by sponsoring company
- no JE until stock purchased- regular entry
GAAP vs IFRS
- IFRS, all considered compensatory
Compensatory Stock Option/Purchase Plans
- valued at the FV of the options issued
- FV determined by specific pricing model like Black-Scholes method
- vesting period is period over which employee has to perform services in order to earn the right to exercise the options
- service period is usually vesting period, starts to be valued at date of grant* (?)
- FV method: total compensation expense measured by applying FV. calculated on grant date of options, allocated over service (vesting) period
Expiration of Options
- dr: APIC-stock options, cr: APIC- expired stock options
Statement of Changes in Shareholders’ Equity
Stockholders’ Equity
provides specific info about changes in an entity’s primary equity components
- under GAAP, comprehensive income may be presented as a separate category in the statement of equity (prohibited under IFRS)
GAAP vs IFRS
- GAAP permits presentation of statement of changes in stockholders’ equity either as a primary FS or w/i notes to FS
- IFRS and SEC require it presented as a primary financial statement
Earnings Per Share
GAAP and IFRS both require all public entities to present earnings per share on face of IS
- entity’s capital structure determines manner in which EPS is disclosed
simple capital struct: only common stock o/s (nothing convertible)
- present basic per share amts for income from cont ops and NI on face of IS
all others (complex): present basic and diluted EPS
discontinued ops: present basic and diluted for that item on face of IS or in notes to FS
Simple Capital Structure (basic EPS only)*
Earnings Per Share
issues only CS, no convertible
- present EPS for income from cont ops and for NI on face of IS
*Basic EPS = (NI - PD) / weighted avg # of CS o/s (WACSO)
Income Available to CS
- non-cumulative PS: dividends declared
- cumulative PS: dividends accumulated
WACSO =
shares o/s at beg. of period
+ shares sold during period (time-weighted basis)
- shares reacquired during period (time-weighted basis)
+ stock dividends and stock splits (as of beg of period)
- reverse stock splits (as of beg of period)
- if prior periods presented, effects of stock dividends and splits must be retroactively adjusted for those periods
- if stock div or split occurs after end of period but before FS issued, should enter calculation
- stock issued in business combination: if acquisition method used, weighted-avg is measured from date of combination
Complex Capital Structure (report basic and diluted EPS)*
Earnings Per Share
has securities that can potentially be converted to CS and would dilute EPS (of CS)
- both basic and diluted must be presented
- just 1 potentially dilutive security needed:
a) convertible securities
b) warrants and other options
c) contracts that may be settled in cash or stock and
d) contingent shares
Diluted EPS Formula*
= (income available to CS shareholder + *interest on dilutive securities) / WASCO, assuming all dilutive securities are converted to CS
Dilution from Options, Warrants, and their Equivalents*
Complex Capital Structure
- use treasury stock method
- no change to numerator, just increases denominator
Dilutive vs Antidilutive
- dilutive if avg price > strike price (exercise price)
- in the money
Treasury Stock Method*
- # of shares issued - ((# of shares * exercise price) / avg market price) = add. shares to WASCO
- previously reported EPS data should not be retroactively adjusted for changes in market price
