Lesson 14 (Equity Financing) Flashcards
what are the two different ways a company can go out and raise cash ?
- debt financing
- equity financing
- loans; repay, with interest
- liable for amount of loan
- relationship ends with repayment
which way of raising funds is this ?
debt financing
- no responsibility to repay
- investor takes risk
- investor rewarded by companies future success
which way of raising funds is this ?
equity financing
what are the two categories of equity ?
- contributed capital (common stock)
- retained earnings
this is the amount that owners have contributed through the purchase of stock
what is this ?
* capital stock
contributed capital
this is the net income earned by the company not paid out as dividends
what is this ?
retained earnings
what are the two types of capital stock ?
- preferred stock
- common stock
if a dividend is paid the preferred stockholders must be paid in full before common stockholders can receive a dividend
what is this ?
dividend preference
- has dividend preference - means if a dividend is paid the preferred stockholders must be paid in full before common stockholders can receive a dividend
- is set at a fixed percentage
- typically do not have voting rights
which capital stock is this ?
preferred stock
- have voting privileges on election of board of directors and vote on significant activities of management
- dividend rates are determined by the board of directors based on the corporations profitability
- receive dividends after preferred stockholders
which capital stock is this ?
common stock
is the accounting for preferred and common stock the same ?
yes
- a monetary amount assigned to each class of stock for accounting purposes only
- has no relationship to market value
what is this ?
par value
when stock is sold to owners (stockholders), the stock account is only recorded at ______ - the excess of the selling price of the stock over the par value is recorded in the equity account called ______ ?
par value; paid in capital
do transactions involving our own stock effect the income statement ?
no
each class of stock has three types of shares
what are they ?
- authorized shares
- issued shares
- outstanding shares
the total number of shares of stock that the company is allowed to set to the public
which type of shares is this ?
authorized shares
the total number of shares that have been sold to the public
which type of shares is this ?
issued shares
the total number of shares actually in the hands of stockholders (i.e, shares currently owned by stockholders)
which type of shares is this ?
outstanding shares
a corporations own stock that had been issued but was subsequently re acquired
what is this ?
treasury stock
- to reduce the shares outstanding and thus increase the market value per share
- to remove shares from the market to avoid a hostile takeover
- to use in employee stock option programs
- to give cash back to existing shareholders
what are these examples of ?
reasons why companies would want to re acquire their own stock
treasury stock results in a decrease to stockholders equity on the balance sheet, so it is classified as a ?
contra equity account with a normal balance on the debit side
what is treasury stock considered what stock?
considered issued stock but not outstanding stock
* does no have voting rights
* cannot receive dividends
when is treasury recorded ?
at its re acquisition cost
treasury stock is not recorded at ?
par value
if we sell our re-issuance of treasury stock for more than it cost us then you record the excess in ?
the equity account;
Paid in capital - treasury
when treasury stock is re-issued, always remove the treasury stock from the balance sheet at its?
reacquisition cost
if we sell out re-issuance treasury stock for less that the re-acquisition cost then you do what ?
reduce paid in capital - treasury by debiting the account for the difference
if a deficit still exists after debiting the paid in capital - treasury account, then you reduce ?
retained earnings for the remaining deficit
distribution to the owners (stockholders) of a corporation
what is this ?
dividends
cash distributions of earnings to stockholders
what is this ?
cash dividends
- dividends must be declared by the board of directors before they can be paid
- the corporation is not legally required to declare (and subsequently pay) dividends
- dividends are not classified as an expense and thus do not impact net income. rather, dividends are paid out of net income
these are ?
characteristics of cash dividends
dividends are classified as a contra equity account because they reduce equity (specifically retained earnings)
so the normal balance of dividends account is a ?
debit
once a dividend is declared, what is created ?
a liability
what are the 3 important dates relating to dividends ?
- date of declaration
- date of record
- date of payment
the date the corporations board of directors formally decides to pay a dividend to stockholders
which date relating to dividends is this ?
date of declaration
the date which a stockholder must own the stock in order to receive the declared dividend
which date relating to dividends is this ?
date of record
the date on which a corporation pays dividends to its stockholders
which date relating to dividends is this ?
date of payment
dividends are only paid on what shares ?
outstanding shares
no dividends are paid on what shares ?
treasury shares
what is the day retained earnings is reduced and a liability is established ?
date of declaration
stockholder must own the stock on this day to receive the dividend
which date is this ?
date of record
the day stockholders are given cash
what date is this ?
date of payment
most preferred stock is ?
cumulative
*preferred stockholders must be paid both current and prior years unpaid dividends before common stockholders can receive any dividends
prior years unpaid preferred stock dividends
what is this ?
dividends in arrears
dividends in arrears do not represent _____
but must be disclosed in the _____ statements
actual liabilities; financial
measures the amount of profit earned per dollar of invested capital
what is this ?
return on equity (ROE)
do you want higher or lower return on equity ?
higher is better
measures the amount of net income associated with each share of common stock what is this ?
earnings per share (EPS)
do you want higher or lower earnings per share ?
higher is better
measures investors expectations regarding the growth potential and earnings stability of a company
what is this ?
price earnings ratio (P/E ratio)
do you want higher or lower Price earnings ratio ?
higher is better
