Financial Lecture 7

Question 1

Define common stock and list the basic properties.

Answer 1

Common stock: Residual ownership interest

Question 2

List some common properties of preferred stock.

Answer 2

Convertible, callable

Question 3

Describe the adjustments of a quasi-reorganization.

Answer 3

Assets are restated at fair value

Question 4

What are the two alternative methods of accounting for treasury stock?

Answer 4

Cost method: Par value method

Question 5

Summarize the cost method of accounting for treasury stock.

Answer 5

Recorded, carried, and reissued at reacquistion cost

Question 6

Summarize the par value method of accounting for treasury stock.

Answer 6

Reported as a deduction from capital stock

Question 7

List the significant dates with respect to cash dividends.

Answer 7

Date of Declaration

Question 8

List five types of dividends.

Answer 8

Cash

Question 9

What is the threshold for treating stock dividends as large vs. small stock dividends?

Answer 9

Small stock dividend Large stock dividend

Question 10

What is the accounting treatment of small stock dividends?

Answer 10

Fair value of additional shares issued at the date of declaration is transferred from retained earnings to capital stock and additional pain-in capital.

Question 11

What is the accounting treatment of large stock dividends?

Answer 11

Par value of additional shares issued is transferred from retained earnings to capital stock.

Question 12

Identify the disclosure requirements about capital structure.

Answer 12

Rights and privileges of various securities outstanding

Question 13

Identify two types of stock options.

Answer 13

Noncompensatory Compensatory

Question 14

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

Answer 14

Compensation cost

Question 15

Describe the accounting for unexercised, expiring stock options.

Answer 15

Any balance in “additional paid-in-capital–stock options” is reclassified to “additional paid-in-capital–expired stock options.” Previously recognized compensation expense is not adjusted.

Question 16

What is the basic formula used for calculating EPS?

Answer 16

Income available to common shareholders

Question 17

Compare basic and diluted EPS.

Answer 17

Basic Diluted

Question 18

Name the potentially dilutive securities or instruments.

Answer 18

Stock options and warrants and their equivalents

Question 19

What is the antidilution rule?

Answer 19

Any conversion, exercise, or contingent issuance

Question 20

List the reporting requirements for EPS.

Answer 20

Face of income statement, with equal prominence for basic and diluted per-share amounts, for both income from continuing operations and net income.

Question 21

What are the three sections of the statement of cash flows? What cash flows are included in each section?

Answer 21

Operating activities

Question 22

Define cash equivalents.

Answer 22

Cash equivalents: Cash equivalents are highly liquid investments with maturities of three months or less that are readily convertible into cash with insignificant risk of changes in value.

Question 23

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

Answer 23

Direct and indirect method

Question 24

If using the direct method of presenting cash flows from operating activities, what additional item needs to be included in the statement of cash flows under U.S. GAAP?

Answer 24

A reconciliation of net income to net cash provided by operations needs to be provided as a supplemental schedule. (Not required under IFRS.)

Question 25

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

Answer 25

Current assets and liabilities

Question 26

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

Answer 26

Cash received from customers