F7-Stockholders Equity, Cash Flows, Ratios

Question 1

Define Common Stock

Answer 1

Residual Ownership Interest

Question 2

Common Stock Properties

Answer 2

• Voting Rights
• Dividend Rights
• Share in assets after creditors & PS holders

Question 3

Preferred Stock Properties

Answer 3

• Convertible, callable
• Redeemable
• Dividends cumulative and/or participating

Question 4

Two alternative methods of accounting for Treasury Stock

Answer 4

• Par Value Method

- Cost Method

Question 5

Summarize Cost Method

Answer 5

• Recorded, carried, and reissued at reacquisition cost
• Any “gain” credited to PIC
• Any “Loss” charged against “gains” and then retained earnings
• Reported as a deduction from total Stockholders Equity

Question 6

Summarize the Par Value Method

Answer 6

• Recorded at par value
• Excess to PIC - Treasury Stock, or
• Deducted from RE after charged to any PIC - Treasury
• Reported as a deduction from total Stockholders Equity

Question 7

List the significant dates with respect to cash dividends

Answer 7

• Date of Declaration: Becomes a liability and reduces RE
• Date of Record: No JE, memorandum entry only
• Date of Payment: Actually paid

Question 8

List 5 types of dividends

Answer 8

• Cash
• Liquidating: Return of Investment
• Property: FMV of asset given up, with G/L recognized
• Scrip: Promise to pay dividend in future
• Stock: increase legal capital. If < 20%-25% record at Market Value; if > 20%-25% record at Par Value

Question 9

Threshold for treating stock dividends as Large vs. Small

Answer 9

Small < 20%-25%

Large > 20%-25%

Question 10

Accounting treatment of small stock dividend

Answer 10

FV of additional shares issued at the date of declaration is transferred from RE to Capital Stock & APIC
DR: Retained Earnings 75,000
CR: Common Stock 50,000
CR: PIC 25,000

Question 11

Accounting treatment of Large stock dividend

Answer 11

Par Value of additional shares issued is transferred from RE to Capital Stock

Record Declaration:
DR: Retained Earnings
CR: Common Stock Distributable

Record Distribution:
DR: Common Stock Distributable
CR: Capital Stock, $xx Par Common

Question 12

Disclosure Requirements of Capital Structure

Answer 12

• Rights and Privileges of various securities
• Number of shares issued
• Liquidation preference of preferred stock
• Redemption requirements related to redeemable stock

Question 13

Identify Two types of stock options

Answer 13

• Non-compensatory: All employees may participate, offered equally as a percentage of salary. Discount no greater than offered to stockholders.
• Compensatory: Compensation cost is determined on the grant date, using option pricing model.

IFRS: always compensatory

Question 14

Describe the compensation and allocation of compensation expense under compensatory stock option plans.

Answer 14

• Cost based on FV of equity investment awarded, which is determined by option pricing model.
• Expensed and allocated over the service period.

Question 15

Describe Accounting for unexercised, expiring stock options

Answer 15

Any balance in APIC - Stock Options is reclassified to APIC - expired stock options. Previously recognized compensation expense is not adjusted.

DR: APIC- Stock Options
CR: APIC - Expired Stock Options

Question 16

What is the basic formula used for calculating EPS

Answer 16

Income available to common shareholders/Weighted Average number of common shares outstanding

Question 17

Compare Basic and Diluted EPS

Answer 17

Basic: Simple Capital Structure

Diluted: Complex Capital Structure

Question 18

Name the potentially dilutive securities or instruments

Answer 18

• Stock Options and Warrants and their equivalents
• Convertible securities (Bonds and PS)
• Contracts that may be settled in stock or cash
• Contingent issuable shares

Question 19

What is the anti dilution rule

Answer 19

Rule of conservatism

• if increases EPS or decreases loss per share, do NOT include in the calculation.
• Each potential common share is considered separately in sequence from most dilutive to least, with options and warrants included first.

Question 20

List the reporting requirements for EPS

Answer 20

• Face of Income Statement
• Equal prominence for Basic and Dilutive
• EPS for discontinue ops or extraordinary can be on the IS or in footnotes.

Question 21

What are the 3 sections of the Statement of CashFlows

Answer 21

• Operating activities - cash flows from income statement transactions and current assets/liabilities
• Investing activities - cash flows from concurrent assets
• Financing activities - cash flows from debt and equity

Question 22

Name the two methods of presenting cash flows from operating activities. Which method is preferred

Answer 22

• Direct
• Indirect
  Direct is preferred

Question 23

If using the direct method of cash flows, what additional information needs to be included

Answer 23

A recon of Net Income to Net Cash provided by operations needs to be provided as a supplemental schedule. (Not required under IFRS)

Question 24

Name the common adjustments made to cash flows from operating activities using the indirect method.

Answer 24

CLAD
Current assets and liabilities
Losses and gains
Amortization and depreciation
Deferred items

Question 25

Name the most common classes of cash receipts and disbursements included in cash flows from operating activities using the direct method

Answer 25

• Cash received from customers
• Cash paid to suppliers and employees
• Interest received and paid
• Dividends received
• Purchases and sales of trading securities (if appropriate)
• Income taxes paid