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MGT 8803 > Module 1: Financial Accounting > Flashcards

Module 1: Financial Accounting Flashcards

1
Q

Proprieterships & Partnerships

A

Business is owned by a single owner or partners

Legally NOT separate from owners

Unlimited liability (bank can go after owners)

No taxation of business (owners pay taxes)

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2
Q

Corporation

A

Legally separate entity from owners

Limited liability (cannot go after shareholders if default on loans)

Double taxation (both shareholders and business pay taxes)

Shareholders –elect–> Board –appoint–> Management

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3
Q

Assumptions of corporations discussed in this course

A

Separate entity (biz and owners are separate)

Unit of Measurement (can agg everything to a common unit – $ –)

Going Concern (company is not going out of biz)

Periodicity (can arbitrarily choose a time period and report financial results)

Materiality (only info useful for decision making is disclosed)

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4
Q

Users of financial reports

A

Investors (shareholders)

Creditors (banks)

Gov’t Agencies (SEC)

Company Management (only non-outsiders listed)

Financial Analysts

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5
Q

Generally Accepted Accounting Principles (GAAP)

A

Governed by SEC, often delegated rule-making to FASB (made up of reps from public accounting firms, industry, gov’t agencies and academia)

Separate from Tax Accounting (used by IRS)

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6
Q

International Financial Reporting Standards (IFRS)

A

At one point considered switching in the US to too much push back

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7
Q

Qualities of Financial Statements

A 
Understandability
Timeliness
Full Disclosure
Comparability (trends over time and to other companies)
Objectivity
Decision Relevance

**last two sometimes at odds, accuracy not included by financial statements contain so much estimation and judgement calls

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8
Q

3 Required Financial Statements

A

Balance Sheet

Income Statement

Statement of Cash Flow

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9
Q

Balance Sheet

A

Measure of financial position at point in time

Snapshot at one moment, what biz has and what it owes

A = L + OE

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10
Q

Accounting Equation

A

Assets = Liabilities + Owners Equity

Resources = Sources provided by creditors + Sources provided by owners

Resources = Claims to assets

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11
Q

Assets

A

Listed on Balance Sheet

Resources owned or rights to receive resources

  • Physical (cash, buildings, inventory, equipment)
  • Intangible (copyrights, patents, trademarks)
  • Legal Rights (eg rights to receive payments, like Macys sells merch on credit, asset is A/R)
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12
Q

Common asset accounts

A 
Cash
Accounts Receivable, Notes Receivable 
Inventory 
Investments
Buildings, equipment, land
Copyrights, Patents

**presented in order of liquidity (which convert to cash first)

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13
Q

Valuation of Assets

A

Historic costs (most OBJECTIVE)
Sales value (most DECISION RELEVANT)
Replacement cost
General price level costs (adj for inflation)

**historic costs are the only ones that do not involve judgement or estimation

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14
Q

COST PRINCIPLE

A

On BALANCE SHEET assets are usually evaluated at historic cost

Long ago regulators decided OBJECTIVITY is most important

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15
Q

Liabilities

A

obligations owed to creditors (money, goods/services)

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16
Q

Common Liability accounts

A 
Accounts payable
Notes payable
Interest payable
Accrued salaries/wages 
Deferred/unearned revenues (when paid in advance of providing goods or services)
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17
Q

Classified Balance Sheets

A

Distinguish between current and long term assets/liabilities

Current assets/liabilities: conversion to cash or due within 1 year

Long-term assets/liabilities: conversion or due > 1 year

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18
Q

Stockholders Equity

A

OE for corporations

Capital stock (what the company received when selling shares)

Retained earnings (accumulated earnings since inception less dividends paid out)

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19
Q

Dividends

A

A distribution of earnings, only occurs when board decides to (not required to)

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20
Q

Statement of Retained Earnings

A 
Beginning Retained Earnings
\+ Net Income
- Dividends
--------------------------------------------
= Ending Retained Earnings
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21
Q

Statement of Stockholders Equity

A 
Beginning Stockholders Equity
\+ Net Income
- Dividends
\+ Issuance of Capital Stock
------------------------------------------------
= Ending Shareholders Equity
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22
Q

Different types of accounting

A

Cash Basis Accounting

Accrual Basis Accounting

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23
Q

Cash Basis Accounting

A

Revenues or expenses are recognized only when cash is received or paid out

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24
Q

Accrual Basis Accounting

A

Revenue Recognition Principle: revenue is recognized when earned (as soon as goods are delivered or services are performed)

Earning process is considered complete even if cash is not collected

Used by GAAP

Matching principle

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25
Q

Matching Principle

A

costs are reported as expenses in SAME time period as related revenues

costs that cannot be matched w specific revenues are spread over time periods that benefit

If macys buys good in December 2019 but sells them in January 2020 the expense is recognized in January (same period revenues occur)

2 year insurance policy for 10k beginning of 2019, MP says spread cost as expense over 2 years with 5k in 2019 and 5k in 2020

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26
Q

Income Statement

A

Shows results of a companies OPERATIONS (ie successes or failures) OVER A TIME PERIOD (min 1 year)

Not point in time like Balance Sheet

Fiscal year is whatever 12 month period chosen by company (sometimes 52 weeks sometimes 53)

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27
Q

Single Step Income Statement

A

Revenues Earned
- Expenses Incurred
——————————
= Net Income

**lists ALL revenue and expenses using accrual basis accounting & MP
Typically starts with Net Sales

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28
Q

Gross Margin

A

Net Sales
- Cost of Goods Sold
——————————–
Gross Margin

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29
Q

Earnings Per Share

A

On Income Statement

Dividends paid is not used as an expense to calculate earnings bc it is a distribution of earnings

Net Income (or Loss) / # Share of Stock

Fully diluted EPS includes all potential stock (eg Stock Options) in the denominator (will always be equal to or less than standard EPS)

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30
Q

Statement of Cash Flows

A

How did the company receive and use cash

Important bc when using accrual basis accounting there is no focus on cash in the Income Statement

Reports the amount of cash collected and paid out by a company in OPERATING, FINANCING, and INVESTING activities

\+/- Operating Cash
\+/- Investing Cash
\+/- Financing Cash
-----------------------------
= change in cash from beginning of PERIOD to end of PERIOD
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31
Q

Operating Activities

A

Cash flow related to day-to-day activities

Considered most important section

Cash inflow - cash receipts from selling goods or providing services

Cash outflow - payments to purchase inventory and to pay operating expenses

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32
Q

Direct vs. Indirect Methods for Stating Cash Flow

A

Direct: explicitly state where cash came from and went (hard)

Indirect: starts w/ net income from income statement and makes adjustments to get cash flow from operating activities (much simpler, most common in US, not allowed by IFRS

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33
Q

Investing Activities

A

Buying/Selling LONG-TERM assets (land, buildings, equipment, etc)

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34
Q

Financing Activities

A

Focus: liabilities and stockholder equity items

Cash obtained from or repaid to owners & creditors (loans made or received, repayments of laons, stock issuance)

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35
Q

Enron

A

reported an item in the operating section that should have been reported in the investing section to make operating cash flows look better

said to be their biggest violation of GAAP among many

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36
Q

Notes to Financial Statements

A

Summary of significant accounting policies & assumptions, estimates, and judgements

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37
Q

Audits

A

Issuedby INDEPENDENT CPA firms

attest to whether financial statements are aligned with GAAP (not to the accuracy bc so much of the statements involve judgement and estimation)

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38
Q

Audit opinions

A
  • Unqualified (clean)
  • Modified (auditor objects to something)
  • Adverse (a publicly held company will be delisted, this is really bad and no one wants this)

**financial statements are the responsibility of the company’s management NOT the CPA

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39
Q

Sarbanes-Oxley Act of 2002

A

Opinions on Internal Controls

SOX

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40
Q

“Financial position”

A

refers to the balance sheet

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41
Q

“Results of Operation”

A

refers to the Income Statement

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42
Q

“Cash Flows”

A

Found on the cash flow statement

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43
Q

Cash

A

First Item on Balance Sheet

Anything a bank will accept for deposit

Checks
Money Orders
BANK credit slips (eg Mastercard/Visa etc – not Macys card, which is an A/R)
Cash Equivalents (anything that can be converted w/i 3 mos., eg securities w. maturities of 3 mos or less)

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44
Q

Accounts Receivable

A

Second Item on Balance Sheet

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45
Q

bad debt expense

A

once sale is made it is final, cannot undo it from reports so we record BAD DEBT EXPENSE on the INCOME STATEMENT per the matching principle

Does not carry over from one year to the next

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46
Q

Contra Asset Account

A

When you take a deduction from an account to get the net amount

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47
Q

Allowance for bad debts

A

Estimate Losses using one of 2 estimation methods

“Contra Asset” Account

A/R (net) = A/R - Allowance for Bad Debts

Allowance Account (unlike bad debt expense) is a BALANCE SHEET ACCOUNT –> does carry over from one year to next (amnt at end of one year becomes balance at beginning of next year)

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48
Q

Percentage of Credit Sales Method

A

simply take a percentage of all credit sales and add to allowance for bad debts account

Ex: Bad debt expense = 2% of $500k in credit sales = $10k

  --> list $10k on income statement as bad debt expense and add to running allowance on BS

Cons: does not consider anything about A/R of what is already in bad debts

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49
Q

Percentage of Receivables Method

A

New Allowance for Bad Debts = % of Ending Balance in A/R

Bad Debt Expense = New Allowance for BD - Previous Allowance for B/D

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50
Q

Aging of Receivables

A

Prev Allowance for BD: $1.8k
End balance in A/R: $100k

 <30 days: $62k * 0.01 = $620 31 - 60 days: $15k * 0.03 = $450 61 - 120 days: $20k * 0.07 = $1.4k > 120 days: $3k * 0.2 = $600

New Allowance for BD = 620 + 450 + 1400 + 600 = 3070
Bad Debt Expense = 3070 - 1800 = 1270
–> recorded on Income Statement & added to allowance account on BS

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51
Q

Notes Receivable

A

Formal contracts signed when a customer buys merch or services on credit

Specific due dates for the payments, interest that must be paid, interest RATES

CURRENT if due w/i one year

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52
Q

Principal (N/R)

A

Face Amount (amnt borrowed)

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53
Q

Interest Rate (N/R)

A

% of principal maker is charged to borrow money

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54
Q

Maturity Value

A

Maturity Value = Principal + Interest

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55
Q

Interest

A

Interest = Principal * Interest Rate * Fraction of Time Corresponding to IR

IR is generally annual so time would be fraction of year

Ex: 5000 * 0.14 * 90/365 = 172.60

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56
Q

Selling Notes Receivable

A

Companies do not always like to wait for due date so sell AR or NR

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57
Q

When A/R are sold

A

Factoring Accounts Receivable

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58
Q

When N/R are sold

A

Discounting Notes Receivable

59
Q

Recourse

A

Company A sells something in exchange for N/R

Before due, A takes N/R to bank where it is discounted w/ recourse

If B defaults, bank can go after A

When A discounted the note they got a Contingent Liability (does NOT need to be reported on balance sheet & as expense on IS bc NOT LIKELY to occur

BUT

If a contingent liability is likely to occur and is estimatable MUST be recorded as liability on BS and expense on IS)

60
Q

Inventory

A

Goods either manufactured or purchased for resale

61
Q

Who owns goods in transit

A

Whoever is responsible for shipping cost

If seller pays for shipping: sale is NOT recorded until shipping is complete

If buyer pays for shipping: sale is recorded at beginning of shipping process

62
Q

Goods on Consignment

A

Title/ownership remains with vendor unless 100% transferred

Consigner does not record consigned goods on balance sheet

63
Q

Cost of Goods Sold

A 
Beginning Inventory 
\+ Net Purchases 
- Ending Inventory (aka cost of goods not sold)
-----------------------------
= Cost of Goods Sold
64
Q

Net purchases

A 
Purchases
\+ Freight-In (if paid for shipping)
- Purchase returns & allowances
- Purchase discounts
----------------------------------------------
= Net Purchases

** allowances are deducted for defects etc.

65
Q

Where does inventory used to determine COGS appear

A

Income Statement

66
Q

Gross Margin

A

Gross Method vs. Net Method

Gross Method shows higher sales revenue BUT must assume ownership risks, if acts as BROKER between buyer and seller must use NET METHOD

Evaluate controls model, if you act as principle instead of agent can report Gross Method

67
Q

Gross Method

A

Sales of item cost $150 for $250

sales rev (250)
- cogs (150)
———————
= gm (100)

68
Q

Net Method

A

Sales of item cost $150 for $250

sales rev (100)

69
Q

2 Types of Inventory Systems

A

Perpetual Inventory System

Periodic Inventory System

70
Q

Perpetual Inventory System

A

High Value Items

Records updated every time purchase or sale is made

**if note in financial statement reads “we occasionally do physical inventory counts to confirm records” mean company is using perpetual system and confirm w. physical check

Only Method that allows for determination of SHRINKAGE (lost inventory)

71
Q

Periodic Inventory System

A

Used for Low Value Items

Physical Inventory Count (once per year go check)

records not updated every time purchase is made

Cannot determine SHRINKAGE / SWELLAGE using this method

72
Q

Specific Identification

A

Can identify which batch a product came from and determine exact cost

Car dealership for example

73
Q

First-In First-Out (FIFO)

A

Use if BALANCE SHEET Is most important bc wil show HIGHER profits from LOWER cogs

Presumes cost is from first batch

Best measure of ENDING INVENTORY

74
Q

Last-In First-Out

A

Use if INCOME STATEMENT is most important or for TAX ACCOUNTING (bc shows HIGHER cogs and LOWER profits)

Presumes what is sold first is from latest purchase made

Best reflection of COGS (most up-to-date)

75
Q

Weighted Average

A

Average cost of all purchases made weighted by number of units

76
Q

LIFO Conformity Rule

A

If you use LIFO for tax accounting must also use for GAAP financial reporting (as far as inventories are concerned)

**you can use FIFO for tax accounting and LIFE for financial just not other way around

77
Q

Lower of Cost or Net Realizable Value

A

Inventories are reported at lower of the cost amount or net realizable value

Net Realizable Value: market value less any selling or disposable costs

Justified by Principle of Conservatism

78
Q

Principle of Conservatism

A

Companies like to report high profits and high assets

due to overstatement concern we have inventory lowered if amount goes below cost

Inventory is reported at less than cost when either future value is in doubt bc of damage, obsolescence, etc OR if can be replaced at new price less than OG cost

79
Q

Prepaid rent

A

If prepay rent for 2 year record some for first year and some for second

Transferred to expenses over time (when benefits are received)

Due to matching principle not recorded when payment is made but rather spread over periods where we benefit from expense

80
Q

Marketable Secuities

A

MAJOR exception to the COST principle

short term investments in stocks or bonds –> MARK TO MARKET

bonds reported at cost if intention is to hold to maturity, otherwise MARK TO MARKET

81
Q

Mark to Market

A

Okay to make exception to cost principle bc objectivity is considered to be included in market numbers

can lower amounts below cost if market is lower but if higher must raise

82
Q

Long-Term Investment Accounting

A

Depends on % of ownership

83
Q

Ownership > 50% of another companies stock

A

must CONSOLIDATE financial statements (combine as if one company)

84
Q

Ownership 20% - 50%

A

must us EQUITY METHOD

do not recognize when they receive the dividends but AS THE EARNINGS OCCUR

“significant influence” voting wise, could potentially affect dividend payouts w/ votes)

85
Q

Ownership < 20%

A

MARK TO MARKET (same as short term)

86
Q

Example of Ownership 20% - 50%

A

Under “Basis of Consolidation” section on notes

If sears owned 40% of another companies stock and other company has $100k in profits, search has to report 40% of $100k ($40k) as INCOME from INVESTMENT even if receive 0 dividend payouts

87
Q

2 types of assets

A

Fixed (Tangible) Assets

Intangible Assets

88
Q

Fixed (Tangible) Assets

A

Land –> NO DEPRECIATION
Buildings, Equpt, Land Improvements –> DEPRECIATION
Natural Resources –> DEPLETION

89
Q

Intangible Assets

A

Amortization

90
Q

Depreciation/Depletion/Amoritization

A

Related to Matching Principle

Process of cost allocation that assigns the cost of the asset to periods benefitted

Includes freight, installation, tests, etc required to prepare equipment for initial use

91
Q

CAPITALIZED INTEREST

A

Normally when interest is incurred it is recorded as an expense on the income statement BUT this is an exception

Interest is treated as an asset during construction period, turns into an expense when depreciations are taken

capitalization = treating something as an asset instead of an expense

92
Q

Expenditures on existing assets

A

Ordinary Expenditures: benefit ONLY period in which made (expensed on INCOME STATEMENT)

Capitalized Expenditures: benefit company over several periods (not just current) –> capitalized on BALANCE SHEET, treated as assets, depreciated over period benefitting, usually preferred so profits are maximized

93
Q

Rule guiding capitalization

A

Must either increase EXPECTED life or asset OR CAPACITY of asset (like a new wing of a building)

94
Q

Lifespan of asset

A

Intended trumps useful if shorter

95
Q

Straight Line Method of Depreciation

A

Cost of asset is allocated equally over the periods of estimated life

Annual Amnt = (Cost - Salvage Value) / Useful Life

**majority of public companies use this

96
Q

Units of Output Method of Depreciation

A

more output produced, more depreciation recorded

97
Q

Accelerated Depreciation

A

More expense in earlier years

Sum of Year Digits
Double Declining Balance

Reasons:

Assets become obsolete and lost more productivity in earlier years
Assets more productive in earlier years so gen more rev (MP)
Later years likely more repairs and maintenance

98
Q

Balance Sheet Presentation of Depreciation

A

Equipment
- Accumulated Depreciation
—————————————-
Equipment NET (aka Book Value)

**Contra Asset account similar to allowance for bad debts, deduction from related asset account to arrive at net asset account

99
Q

Disposal of Assets

A

Generally cause either a gain or a loss

IF:

Proceeds > Book Value –> Gain on Sale (like revenues)
Proceeds < Book Value –> Loss on Sale (like an expense)

INCOME STATEMENT

100
Q

Natural Resources

A

Oil Fields, Copper Mines, ETC

DEPLETION EXPENSE : similar to units of output method of depreciation

101
Q

Intangible Assets: Definite Life

A

Amoritization over argmin{economic life, legal life}

ex: if patent legal life is 20 years but mgmt deems useful life to be 5 years amoritize over 5 years

102
Q

Intangible Assets: Indefinite Life

A

NOT AMORITIZED

Tested for IMPAIRMENT on annual basis, compare book value vs. est of future cash flows, if deemed less than future flows asset is deemed impaired and loss is recorded on INCOME STATEMENT

103
Q

Goodwill

A

Occurs when an entire business unit or company is purchased

Purchase price of business - Fair market value of net assets and liabilities

^ if this is greater than 0 than goodwill is recorded

**result of value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology

104
Q

Expense of R&D

A

Per US GAAP R&D is generally expensed immediately

Bc so much uncertainty about whether benefit will ever come

EXCEPTION: Software R&D

105
Q

Software Development Costs

A

Special form of R&D, can be capitalized bc economic viability can be determined more accurately and earlier than other R&D

Capitalization begins when TECHNOLOGICAL FEASIBILITY is reached

——————————–|-TechFeas——————————-|-GenRelease———————–|
R&D expensed on IS-|-R&D costs capitalized on BS—–|Costs expensed on IS———-|

Capitalization ends and amoritizations begins once product is available for public

106
Q

Technological feasibility

A

Sufficiently to a point where mgt believes specs have been reached (eg it will work)

107
Q

Current Liabilities

A

Debts/Obligations due w/i one year

Accounts Payable
Wages Payable
Income Taxes Payable 
Accrued Interest
Unearned Revenues (eg gift cards)
108
Q

Working Capital

A

Working Capital = Current Assets - Current Liabilities

109
Q

Contingent Liabilities

A

Probable and reasonably estimated: record on BALANCE SHEET and INCOME STATEMENT (eg warranty liabilities)

Reasonably possible OR amnt cannot be reasonably estimated: disclosure in Notes (most common: LAWSUITS)

Remote (very small possibility): no need to disclose

110
Q

Example of warrant liability (probable and reasonably estimated)

A

Product sold in 2019, 2year warranty, warranty claim made for defect in 2020:

revenue was recorded in 2019 WHEN SALE MADE company also records ESTIMATED warranty liability AS WELL AS expense on Income STatement

111
Q

LONG-TERM LIABILITIES

A

Not due within one year

Transferred to current liability states year before due (“current maturities of long term debt and commercial paper”)

112
Q

Time Value of Money

A

Considered in measurement and recording of long term liabilities

Dollar in future is < dollar now

113
Q

Present value of liability

A

Future amounts are discounted to obtain future value

114
Q

Operating Lease

A

Simple, short-term rental agreement

115
Q

Capital Lease

A

Asset & Liability are recorded at PRESENT VALUE of future payments (eg treated as a purchase)

criteria: lease term > 1 year

Leases sometimes preferred by companies bc don’t have to claim liabilities (was a loophole before)

116
Q

Deferred Taxes

A

Results from TIMING differences between taxable income on Income Statement and taxable income for IRS

NOT referring to perm differences, like interest on municipal bonds for example, which is treated as revenue on IS but not on IRS statement; some companies will use straight line depreciation for IS and accelerated for IRS

117
Q

Bonds Payable

A

Type of liability

Debt instruments sold to public and publicly traded (must repay principle and interest)

118
Q

Face Value

A

amount to pay when bond MATURES (not necessarily selling price of bond)

aka: “par value”

selling price determined by stated rate and market rate

stated interest rate < mkt rate –> DISCOUNT

stated interest rate > mkt rate –> PREMIUM

119
Q

Debentures

A

Unsecured bonds (lack collateral)

120
Q

Balance sheet presentation of DISCOUNT

A

Bonds Payable (face amnt)
- discount on BP
————————–
= Bonds payable (net) (carrying value)

$100k
- $3k
———–
= $97k

121
Q

Balance sheet presentation of PREMIUM

A

Bonds payable (fact amnt)
+ premium on BP
————————–
= Bonds payable (net) (carrying value)

$100k
+ $4k
———-
= $104k

122
Q

Convertible bonds

A

can be converted to stocks

123
Q

Callable bonds

A

Company issuing bonds can require you redeem before maturity (would do this if paying 5% interest rate but rate drops to 2%, calling in the bond allows them to issue new bonds paying only 2%)

gain or loss on early retirement

cash paid > carrying value: LOSS on retirement
cash paid < carrying value: GAIN on retirement

^ recorded on INCOME STATEMENT

124
Q

2 things company can use to raise money from public

A

Borrowing in form of bonds or issuing shares of stocks

125
Q

Pros/Cons of Bonds

A

Cons:

Must repay bonds
Must pay interest
Interest reduces net income bc reported as expense

Pros:

No dilution of ownership

126
Q

Pros/Cons of Stocks for Borrowing

A

Pros:

No repayment of stock
Need not pay dividends (but can)
Dividends do not reduce net income (not reported as expenses)

Cons:

Dilutes ownership

127
Q

Paid-in-capital

A

accounts involving capital stock

stockholders equity = PIC + retained earnings

128
Q

Authorized shares

A

Authorized = # Issues + # Unissued

129
Q

Issued Shares of stock

A

Issued = # Outstanding + # Treasury

Outstanding: still in hands of stockholders (have voting rights, receive dividends etc)

Treasury: shares company bought back

130
Q

Preferred stock

A

Dashes on balance sheet mean authorized but not yet issued

Get dividends first

If company liquidates creditors get paid first, then preferred stockholders, then common

131
Q

Common stock

A

hold main voting rights (true owners)

decide on board of directors

can be split into classes where some classes have diff number of votes per share

132
Q

Par (stated) value

A

nominal value assigned to and printed on face of each share of stock

nothing to do w market value

company cannot issue stock below par value

dividends cannot be paid from, this is for creditors

generally VERY low

133
Q

Treasury Stock

A

when company buys back from shareholders

CONTRA-Equity account (not an asset but deduction)

can increase EPS by buying back shares

purchase of treasury stock is recorded at cost

NO gain or loss reported on sales of treasury stocks

134
Q

Retuned earnings

A

Cash dividends decrease retained earnings

date of declaration –> liabilitiy : when board votes to pay dividends div payment becomes liabilitiy

date of record –> who gets dividends is whoever owns on this date

date of payment

135
Q

Current dividend preference

A

preferred shareholders get dividend rate % of total par

common get remainder

136
Q

Ex of current dividend payout

A

Company has 10,000 shares of 5% p. stock, $10 par value

current dividend preference = 0.05 * 10,000 * 10 = 5000

–> if company declares $4.8k dividends, preferred shareholders get it all (common none)

–> if declares $5,500 preferred gets $5,000, common gets $500

137
Q

Cumulative dividend preference

A

preferred stockholders get current div pref PLUS dividends in arrears (missed from past years)

Company has 10,000 shares of 5% p. stock, $10 par value, no dividends for past 3 years

cumulative dividend preference = 4 * 5000 = 20,000

if company declared $18k in dividends, pref gets all and 2k remains in arrears

if declared $25k, common gets $5k

138
Q

Dividends in Arrears

A

Do not represent actual liabilities -> NOT recorded

reported in notes

139
Q

Stock dividends

A

distribution of additional stock in proportion to current holdings

why? don’t have cash , would rather use cash elsewhere, accounting
–> ALLOWS transfer from RETAINED EARNINGS to PAID IN CAPITAL

Effects: Increases # of shares outstanding
Transfers retained earnings to PIC

No effect on :

Assets
Total Stockholders Equity
% ownership of stock by shareholders

140
Q

Stock splits

A

Increases # of net shares
Decreases par value per share

No affect on accounts

Why?

To reduce market value per share of stock (more affordable)

141
Q

Reverse stock split

A

Decreases number of shares
Increase par value per share (no efffect on accounts)

Why?

some stock exchanges have min trading prices for stocks
as do some institutional investors (eg pension funds)

142
Q

Noncontrolling Interests

A

Portion of owners equity not controlled by parent company

Reported in stockholders equity section

143
Q

Stock based compensation

A

Must report as expenses on income statement

MGT 8803 (1 decks)

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