Ivory Book Flashcards
Book Value per share of common sotck is determined how?
Determined completely from the published FSs.
What is Book Value per share of common stock?
The amount per share that common shldrs would receive if the corporation were to liquidate all assets for Book Value and pay off all liabilities at Book Value and pay Preferred Shldrs any Dividends in Arrears.
Is Book Value per share of common stock a required disclosure?
No not a required disclosure.
Book Value per Share Calculation is:
TOTAL shldrs equity - (total Preferred Equity) / Number of Common Shares Outstanding
What is earnings per share (EPS)? and is it a requried disclosure?
Earnings per share is the amount of a company’s net income earned for each share of its outstanding COMMON stock. EPS is the single most important statistic used for evaluating companies because EPS is a standard measure of operating performance that applies to companies of different sizes and different industries. EPS is a required disclosure.
What are the 2 types of EPS calculations?
Basic EPS and Diluted EPS
Diluted EPS calcualtions are used when?
When corporations have dilutive securities such as convertible preferred stock as a portion of shldrs equity.
where is the required disclosures of EPS?
On the face of the income statement
What should be disclosed is Basic EPS= Diluted EPS?
Just disclose Basic EPS
What is the Basic Earnings Per Share Calculation?
Net Income- Current year preferred dividends/ Weighted average common shares outstanding
What does the numerator of the Basic EPS consist of?
- Net income after income taxes and all other items, not including
- Comprehensive income items.
- Subtract only the current year’s preferred dividends
- Noncumulative preferred stock dividends declared (paid or not) and
- Cumulative preferred stock dividends (declared or not)
- Undistributed accumulated dividends on preferred stock for prior years do not affect the current year calculation, they were included in Basic EPS in prior years.
Stock dividend or splits are calculated as if it occurred when?
occurred at the beginning of the year.
What is Diluted Earnings per Share?
To dilute something is to make it thinner, weaker, less robust. As such, Diluted Earnings per share are interesting only if weaker or lower than Basic Earnings per share.
When must diluted earnings per share be disclosed?
if Diluted Earnings per Share, when calculated, is LOWER than Basic EPS, it must be disclosed.
Why do we disclose the lower of Basic or Diluted EPS?
The conservatism principle of accounting requires that FSs reflect the worst case situation in an instance where two different scenarios could occur.
what is anti-dilutive?
This means the potential action would increase EPS; this situation will NOT be reported.
What is the calculation of Diluted EPS?
Net income- current year preferred dividends+ effect of dilutive securities / Weighted average common shares outstanding
What are the 2 methods for Diluted EPS?
If converted: used for convertible bonds and convertible preferred stock
Treasury stock: used for options and warrants.
The If Converted method for a convertible bond assumes:
As such, in the If Converted method, the numberator is increased by the amount of the previously deducted interest expense, net of tax, or the preferred dividend associated with those potential common shares. The denominator is increased by the additional shares assumed converted.
Potentially Dilutive Securities include:
- Convertible Bonds (always dilutive)
- Convertible Preferred Stocks
- Detachable Stock Warrants (Dilutive when Market Price > Exercise Price)
- Non-Detachable Stock Warrants (Dilutive when Market Price> Exercise PRice)
- Contingent shares (dilutive when Market Price > Exercise Price)
What is the Treasury Stock method used for?
Is used in determining the dilutive effect of OPTIONS and WARRANTS. This method assumes that the proceeds from the exercise of options and warrants are used to purchase (buy back) common stock for the treasury.
Example: assume 3,000 optionis are outstanding with an exercise (strike) price of $30 per common share. If the market price of the CS is $45 per share, computation of the incremental shares outstanding using the treasury stock method would be?
- Proceeds from exercise of 3,000 options (3,000x$30) $90,000
- Shares issued upon exercise of options 3,000
- Treasury shares purchasable with proceeds ($90,000/$45) 2,000
- Incremental shares outstanding (potential common shares only) 1,000.
What is business combination?
When one entity acquires CONTROL of another business entity, generally involving the payment of cash or issuance of stock.
How many forms of business combinations are there and what are they?
There are four.
- Statutory Merger
- Statutory Consolidation
- Stock Acquisition
- Variable Interest Entity (VIE)
What is Statutory Merger?
- Only one of the combined entities continues to operate
- the acquired company is dissolved (liquidated) by transferring its ASSETS and LIABILITIES to acquiring (purchasing) company
- all operating activities are recorded through the acquirer.
What is Statutory Consolidation?
- Both the “original” companies are dissolved (liquidated) and a new entity is created
- The assets and liabilities of original companies are transferred to the newly created entity.
What is Stock Acquisition?
- One company (the parent) acquires the voting shares of another entity (the subsidiary)
- Both companies continue to operate as separate legal entities
- For financial reporting, the two related entities prepare consolidated FSs.
What is Variable Interest Entity (VIE)?
- The investor does not hold the investee’s stock
- Legal agreements give the investor the right to the majority of the investee’s risks and rewards
- Control of a VIE is determined by WHO absorbs the majority of the risks and rewards. If the entity is able to finance its activities without guarantees from the investor, than the entity is not a VIE
- The entity which absorbs the majority of the VIE’s lossess and or gains MUST consolidate the VIE in a manner similar to that of stock investments.
