FAR 7 Flashcards
Major Components of Stockholder’s Equity
- Capital stock
- APIC
- Retained earnings or deficit
- AOCI
- Treasury stock
Common stockholders’ equity formula
Total shareholders’ equity
- Pref stock outstanding ( at greater of call price or par)
- Cumm preferred div in arrears
= Common shareholders’ equity
BV per common share formula
Common SE equity/ Common shares outstanding
Cumulative preferred stock
All or part of pref div not paid in any year accumulates b/f div can be paid to common shareholders.
Also called dividends in arrears
Participating Pref Stock
Provides that pref SE share with common SE in dividends in excess of a specific amount.
“Share equally then pro rata”
Examples of transactions including APIC
- Sale of treasury stock at a gain
- Quasi-Reorg
- Issuance of liquidating dividends
- Conversion of bonds
- Declaration of small stock div
Retained Earnings Formula
Net income/loss - Div (cash, property, stock) declared \+/- prior period adjustments \+/- accounting changes reported retrospectively \+ adjustment from quasi reorg = RE
Quasi Reorg - Summary/Purpose
Accounting adjustment, eliminate deficit in RE, “fresh start”.
Restate overvalued assets to their lower FV (reduce depreciation) eliminate RE deficit
Quasi Reorg- Procedures
Revalue assets to current FV and liabilities to PV (no net increase in asset value permitted, write-down charged to RE.
Bring RE to zero against APIC
Quasi Reorg - J/E to eliminate deficit in RE
Dr. Common stock
Cr. Retained Earnings
Cr. APIC
In essence, you will reduce APIC by lowering par value of common stock to wipe away RE deficit.
2 Methods of Treasury Stock Accounting
Cost Method - majority of time used
Legal or Par/Stated Value Method
Direct adjustment to SE not included in determination of NI
Treasury stock - cost method
Treasury stock recorded and carried at their re-acquisition cost. Gain/Loss determined when treasury stock is reissued or retired. Never hits NI.
Ex: Reissue above cost
Dr. Cash
Cr. Treasury stock (qty x buy back price)
Cr. APIC (difference b/t buy back price and sale price)
Treasury stock - Legal Par/Stated Value Method
Reduce amounts of par value and APIC received at time of original sale.
Ex: Buy back above issue
Dr. Treasury stock (qty x par)
Dr. APIC (same rate as when sold)
Dr. RE (only if no balance in APIC)
Cr. Cash
Ex Buy back below issue price
Dr. Treasury stock (qty x par)
Dr. APIC (same rate as when sold)
Cr. Cash
Cr. APIC - T/S
Sale of subscriptions J/E & Issuance of Stock Previously Subscribed J/E
Dr. Subscriptions receivable
Cr. Common stock subscribed
Cr. APIC
Dr. Common stock subscribed (use par)
Cr. Common stock (issued)
Exercise of Stock Rights
Dr. Cash
Cr. Common stock (par value)
Cr. APIC (residual)
Dividend Date of Declaration
Date board of directors formally approves dividend.
Dr. RE
Cr. Liability (dividends payable)
Liquidating Dividends
Occur when dividends to SE exceed RE. Dividends in excess of RE first debited to APIC and then to common or pref stock.
Reduce total PIC.
Treatment of Small Stock Dividend
< 20%-25% of shares previously outstanding, transfer from RE to common stock & APIC
Dr. RE (# of shares x FMV)
Cr. Common stock
Cr. APIC
Treatment of Large Stock Dividend - > 20-25%
J/E at declaration
Dr. RE
Cr. Common stock distributable (use qty x par)
J/E to record distribution
Dr. Common stock distributable
Cr. Capital stock, par
EPS - Income Available to Common Shareholders Formula
Net income
- div declared on non-cumm pref stock (regardless if paid)
- div accum on cumm pref stock (regardless if declared)
Basic EPS Formula
Income available to common shareholders/
Weighted avg # of common shares outstanding
Stock dividends & splits regarding weighted average common shares outstanding
Must be treated as though they occurred at the beginning of the period.
If occurs after end of period but b/f FS issued, retroactively state as well.
Diluted EPS Formula
Income available to common stock shareholders + interest on dilutive securities/
WA # of common shares, assuming all dilutive securities are converted to common stock
Dilutive Effect on weighted average common shares
Only dilutive when “in the money”
Difference b/t # of shares assumed issued and # of shares assumed to be purchased with proceeds should be included in # of shares (denominator) for diluted EPS.
Diluted EPS and formula to computer additional shares for options & similar instruments (denominator)
Number of Shares -
of shrs x exercise price/ avg market price
= additional shares outstanding
Convertible Bonds - Dilution
if converted method, assumed converted to common stock at beginning of period or at the time of issue if later
Add to numerator (income)- interest expense, net of tax, due to the assumed conversion of bonds to common stock - basically as if it did not happen
Antidilution
Use results of assumed conversion only if diluted. Each potential dilutive security used separately in determining dilution or antidilution.
Tests for dilutive or antidilutive effects based on income from continuing operations
Diluted EPS > Basic EPS, antidilutive, DO NOT USE
Convertible Pref Stock & Dilution Calculation
Does not affect numerator but does affect denominator
Categories of Statement of Cash Flows
Operating - Income Statement, CA & CL excluding current notes payable and current portion of L/T debt
Investing - Inv Securities & Noncurrent Assets
Financing - Noncurrent liabilities & Equity
Similarities & Differences between Direct & Indirect Method related to SCF
Presentation wise….
Operating activities differ
Investing & Financing activities are the same
Direct Method
Non-cash items such as depreciation, amortization, depletion, and income from affiliates under the equity method do not appear in direct method operating cash flow.
Relationship of Assets, Liabilities, Equity to operating cashflows- Indirect
Assets = Inverse relationship
Assets increase = outflow
Assets decrease = inflow
Liabilities & Equity = Direct relationship
Liabilities & Equity up = inflow of cash
Liabilities & Equity down = outflow of cash
Direct Method - Cash Received from Customers
Report separately-
Assets- inverse
liabilities - direct
Revenues - Increase in receivables \+ Decrease in receivables \+ Increase in unearned revenue - Decrease in unearned revenue = Cash received from customers
Direct Method - Cash paid to suppliers (outflow)
Assets - direct,
Liabilities - inverse
COGS \+ increase in inventory - decrease in inventory - increase in A/P \+ decrease in A/P = Cash paid to suppliers
Direct Method - Cash paid to employees
Liabilities - inverse
Salaries & Wages Expense
- increase in wages payable
+ decrease in wages payable
= Cash paid to employees
Indirect Method - Short - Cut Cash Flow Effects
Changes in debit balance accounts = inverse relationship
Changes in credit balance accounts = direct relationship
Indirect Method - Gains/Losses in Ops Activities
Gains - Usually out of ops to investing
Subtract from net income
Losses - Usually out of ops into investing
Add to net income
Items to remember are included in operating cashflow
Collecting interest on an investment
Collecting dividends on an investment
Paying interest on debt
IFRS Differences on cash flows
Transaction - mainly more tied to source, more options
Interest Received- CFO or CFI Interest Paid - CFO or CFF Div Received - CFO or CFI Div Paid - CFO or CFF Taxes Paid - CFO, CFI, CFF
