Liabilities & Equity

Question 1

What is a Warranty Liability?

Answer 1

• Reports the estimated amount that a company will have to spend to repair or replace a product during its warranty period
• Application of expense recognition principle

Question 2

Whats an example for warranty?

Answer 2

-Written guarantee for a product

—> Holds the maker of a product responsible to repair or replace defective parts

Question 3

What are the shareholder rights?

Answer 3

• Vote
• Dividends
• Liquidation (share of the asset)
• Preemption (opportunity to keep share)

Question 4

Whats the difference between Ordinary Shares and Preference Shares?

Answer 4

-Ordinary Shares —> common stock
-Preference Shares:
—>receive dividends first
—>seniority (liquidation priority)
-cumulative preference shares

Question 5

Whats the Authorized share capital?

Answer 5

Max. number of shares a company can issue under its constitution

Question 6

What are outstanding shares?

Answer 6

Total numbers of shares owned by shareholders

Outstanding = Issued Shares - Treasury Shares

Question 7

Whats the use of Treasury Shares?

Answer 7

• Offer employee stock option compensation
• Avoid hostile takeover bids
• Increase reported Earnings per Share by reducing outstanding shares

Question 8

What are the significants of treasury shares?

Answer 8

-Gains or losses are not recorded in the same income statement
—>but recognized in share capital
-Most common usage of treasury shares is stock compensation
-Retirement of stock
—> canceling

Question 9

Name the three forms of Dividends

Answer 9

1. Cash Dividends
2. Share Dividends
3. Non-cash asset Dividends

Question 10

What is the criteria for cash dividends?

Answer 10

Companies must have:

• Enough Retained Earnings to declare Dividend
• Enough Cash to pay dividend

Question 11

Whats the function of Share Dividends?

Answer 11

-Increase Share Capital and decrease Retained Earnings
—> conserve Cash
-Reduce market price of shares
—> make them attractive to more investors