FAR7 Flashcards
Par Value
Usually Preferred Stock is issued at par (common stock may or may not be)
Any excess over the par is APIC
Common Stock
Basic ownership interest in a corporation (ultimate risk of loss and receive ultimate benefit of success), right to vote and last in line for dividends at liquidation
Book Value per Common Stock
Common shareholder’s equity / CS outstanding
Common Stockholders’ Equity Formula
Total shareholders’ equity
- PS outstanding
- Cumulative Preferred dividends in arrears
= Common shareholders’ equity
Preferred Stock
May include preference relating to dividends, which may be cumulative or non-cumulative and participating or non-participating (may include preference relating to liquidation)
Cumulative PS
Accumulated amount is referred to as dividends in arrears (not a legal liability)
Participating PS
Share equally then pro rata between PS and CS
Convertible PS
May be exchanged for CS at a specified conversion rate
Callable PS
May be called at a specified price (disclosed in B/S footnotes)
Mandatorily Redeemable PS (liability)
Issued with a maturity date (must be brought back by the company on the maturity date)
= CS w/an unconditional redemption feature
Exception to classified as liability if occurs upon liquidation or termination
Retained Earnings
Accumulated earnings (or losses) during the life of the corporation that have not been paid as dividends
RE formula
Net income (current year) - Dividends (cash, property, stock) declared \+/- Prior period adjustments \+/- Accounting changes reported (retro) \+ Adjustment from quasi-reorganization = change in RE
Quasi-Reorganization
Is an accounting adjustment that revises the capital structure of a corporation (restates assets to their lower FV thus eliminating RE deficit) special purpose
Treasury Stock
Reduces SE (DR balance) issued then subsequently reacquired
Cost Method for Treasury Stock
Carried at their reacquisition cost (G/L determined at reissue) Losses may also decrease RE
Par Method for Treasury Stock
Carried at par value (G/L calculated upon buy back)
Date of Declaration
The date the board of directors formally approves a dividend
Dividend (retained earnings reduced)
Dividend Payable (liability created)
Date of Record
The date the board of directors specifies as the date the shareholders receive the dividend (No JE)
Date of Payment
The date on which the dividend is actually disbursed by the corporation
Dividend Payable
Cash
Cash Dividend
Paid from retained earnings (only paid on authorized, issued and outstanding stock)
Property (in-kind) Dividends
Restated to fair value at the declaration date and any gain or loss should be recognized in income (cost 70, A/D 20, FMV 100)
FMV 100
A/D 20
Bldg-cost 70
Gain 50 (FMV - book value)
Stock Dividend
No dividend income reported by shareholder,
Cost basis decreases depending on the size (%) of the dividend in proportion to total shares outstanding
Small Stock Dividend
Reduce RE by FMV stock (less than 20%)
Large Stock Dividend
Reduce RE by Par of stock (more than 25%)
Stock Split
Shares outstanding doubles and par (stated) value per share is cut in half (if 2-1 split), no change in stated capital
Compensatory Stock Option
Valued at the fair value of the options issued (for matching principle)
Vesting period
The period over which the employee has to perform services in order to earn the right to exercise the options (recognized over the service period = vesting period usually)
Liquidating Dividend
amount in excess of retained earnings balance
Date of the grant
Equity instruments issued for employee services based on the FMV of the award
Total Compensation Expense
Market price of the share on date of grant
x # of restricted shares awarded
Intrinsic Value of Call option
of shares options x (market price of the stock on the date of grant - exercise price)
Compensation Cost
Recognized as an expense over the periods of employment attributable to the option
Basic EPS Formula
Income available to common shareholders = Net income - Preferred Dividends
/ Weighted-average # of CS o/s “WACSO”
Cumulative vs. Non-cumulative Preferred stock
Cumulative = dividends accumulated in the period (paid) Non-cumulative = dividends declared in the period
Weighted average number of Common Shares outstanding (WACSO)
Shares outstanding at the beginning of the period
+ Shares sold during the period
- Shares reacquired during the period
+ Stock dividends and stock splits (retro adj.)
- Reverse stock splits (retro adj.)
= WACSO for the entire period
WACSO: Stock Dividends and Stock Splits
Must be treated as if they occurred at the beginning of the period (retrospective for all periods presented)
Complex Capital Structure
Report Basic and Diluted EPS if…
(i) Convertible securities
(ii) Warrants and other options
(iii) Contracts that may be settled in cash/stock
(iiii) Contingent shares
Diluted EPS Formula
Income available to common stock shareholder + interest on dilutive securities
/ Weighted-average number of common shares, assuming all dilutive securities are converted to common stock
Anti-dilutive
Options or warrants “out of the money” = antidilutive should not be reported
example: strike price > avg market price
Rule of conservatism
Denominator (added) Diluted EPS Formula
# of shares - [(# of shares x exercise price)/average market price] = additional shares outstanding
of shares - (cash received/# of shares repurchased)
Numerator (added) Diluted EPS Formula
Convertible Bonds:
Interest expense x (1 - tax rate)
Earnings per share disclosure
Required for all companies with publicly traded common stock or potential CS/registration including:
Stock options, Stock warrants, Convertible securities, “Contingent stock” agreement
Direct Method: Cash received from customers
\+ Revenues - Increase in receivables \+ Decrease in receivables \+ Increase in unearned revenue - Decrease in unearned revenue = Cash received from customers (increases cash)
Direct Method: Cash paid to suppliers
\+ Cost of goods sold \+ Increase in inventory - Decrease in inventory - Increase in A/P \+ Decrease in A/P = Cash paid to suppliers (decreases cash)
Direct Method: Cash paid to employees
+ Salaries and wages expense
- Increase in wages payable
+ Decrease in wages payable
= Cash paid to employees (decreases cash)
Direct Method: Cash paid for other expenses
\+ Other operating expenses - Decrease in prepaid expenses \+ Increase in prepaid expenses \+ Decrease in accrued liabilities - Increase in accrued liabilities = Cash paid for other expenses (decreases cash)
Indirect Method: Operating Activities
Net Income per I/S "accrued inflow" \+ Depreciation and Amortization (discount) \+ Losses - Gains and Amortization (premium) - Equity earnings Current Assets Increase: SUBTRACT Current Liabilities Increase: ADD
Investing Activities (Indirect and Direct Method)
Change in non-current assets (decreases total)
- Increase = buy outflow “inverse”
- Decrease = sell inflow
1. All sums lent/repaid (principal only)
2. Purchase/sale of noncurrent assets
Financing Activities (Indirect and Direct Method)
Change in interest bearing debt and equity
- Increase = inflows “direct”
- Decrease = outflows
1. All sums borrowed/repaid (principal)
2. Issuance/repurchase of own company stock
3. Dividends paid (not received)
Supplemental Disclosures
Both (indirect and direct method):
1. Noncash Investing and Financing Activities
2. Accouting policy
Indirect: 3) Cash paid for interest/income taxes
Direct: 3) Reconciliation
Operating Activities (direct method)
- Cash received from customers (+)
- Cash paid to suppliers/employees (-)
- Interest received (+) and paid (-)
- Dividends received (+)
- Purchases (-) and sales (+) of trading securities
- Income taxes paid (-)
- All other cash transactions not accounted for elsewhere
