Shareholder's Equity

Question 1

What is Shareholder’s Equity?

Answer 1

The company’s net worth. The amount that would be returned to shareholders if all assets were liquidated and all debts were paid.
SE = Total Assets - Total Liabilities

Question 2

What is it sometimes referred to as?

Answer 2

Net Assets

Question 3

What is Net Assets?

Answer 3

All total Assets - All total Liabilities

Question 4

Equity is ______ interest. Why?

Answer 4

Equity is the residual (what remains) interest because it is whats left when liabilities are subtracted from assets-the residual.

Question 5

What does “residual” mean?

Answer 5

What remains. Therefore, equity is considered “residual interest” because it is what assets remain after all liabilities are removed from it.

Question 6

What is share capital? (Capital stock)

Answer 6

The money a company raises by issuing common or preferred stock.

Share capital, represented by share certificates, represents ownership in a corporation.

Question 7

What is Shareholder’s Equity made up of? (generally)

Answer 7

It is made up of:
-the net contribution to the firm by the owners (contributed capital)
-the firm’s cumulative earnings retained in the business

Question 8

What is par value?

Answer 8

The minimum price per share that a company sets when issuing its stock.

-(Also known as nominal value)
-Par value is similar to face value but specifically applies to stocks.

-Is printed on the stock/share certificate

Question 9

What is face value?

Answer 9

A nominal value of a financial instrument such as bonds or shares/stocks. It represents the amount of money the holder will receive from the issuer when the security matures, according to the terms of the instrument.

Question 10

What is a nominal value?

Answer 10

An unadjusted value of an asset not taking into consideration/not adjusted for deductions and premiums. (eg, taxes, expenses, inflation).

Question 11

What is a financial instrument?

Answer 11

Assets that can be traded. (stocks, bonds, etc).

Question 12

What’s the difference between face value and par value?

Answer 12

-They are the same except par value is specifically for stocks/shares.
-Face value applies broadly to bonds and stocks, while par value specifically refers to the minimum price per share for stocks.
-They provide a baseline for transactional purposes and legal documentation, but they may not reflect the actual market value of the instrument.

Question 13

What is contributed surplus?

Answer 13

Contributed surplus (capital surplus), is money received by a company from shareholders that is above the par value (minimum price) of the company’s shares.

Question 14

What are voting shares?

Answer 14

Basically just common shares, which usually have voting rights. (give shareholders the right to vote on corporate matters such as electing the board of directors, approving mergers, and other significant decisions.)
Sometimes they are referred to as voting shares in certain context.

Question 15

What are dividends?

Answer 15

Payments made by a corporation to its shareholders, typically in the form of cash but sometimes as additional shares of stock.

Question 16

What is contributed capital?

Answer 16

The total amount of capital that shareholders have contributed to a company by purchasing its stock.

(Contributed capital specifically refers to the capital contributed by shareholders through purchasing shares of the company. It does not include capital or funds provided directly by the owner(s) of the business outside of the issuance of shares.)

Question 17

What is retirement of share capital?

Answer 17

When a company buys back some of its own shares from shareholders. This reduces the total number of shares available in the market.
(cancellation or elimination of a portion of a company’s shares).

Question 18

What type of businesses can have shareholders equity?

Answer 18

Only corporations.
(Partnerships and sole proprietorships have owners interests but no share capital).

Question 19

What are the different classes of shares?

Answer 19

Common shares
Preferred Shares
Preferred Convertible Shares

Question 20

Can private companies have shareholders?

Answer 20

Yes, but they are limited as they can not be traded on public markets. (Maximum of 50).

Question 21

What are preferred shares?

Answer 21

Shares that have a priority claim on dividends over common shares.
They typically receive fixed dividends at a predetermined rate, which must be paid before any dividends can be distributed to common shareholders.
(In some cases, preferred shares may have cumulative dividends, meaning any missed dividends accumulate and must be paid before common shareholders receive dividends.)

Question 21

Why might a Canadian private company choose to use ASPE over IFRS?

Answer 21

ASPE is simpler and more cost effective. (Avoids the more complex IFRS standards/requirements).

It just comes down to that particular company and their needs. If they decide they may want to go public at some point they might want to use IFRS instead.

Question 22

Why are voting rights given to common shareholders and not preferred shareholders?

Answer 22

Because common shares represent ownership in the company, with a direct stake in its governance.
Preferred shareholders are seen more as creditors rather than owners, as preferred shares are like a cross between common stock and a bond/debt security)

Question 23

What is a debt security?

Answer 23

A financial instrument representing a creditor relationship with an entity, that owes a debt to the holder of the security.
(eg. a bond).
In simpler terms, a debt security is like an IOU or a loan that an investor gives to a company or government in exchange for regular interest payments and a promise to get their money back at a specific future date. It’s a way for organizations to borrow money from individuals or institutions and for investors to earn income by lending their money out.

Question 24

What is treasury stock?

Answer 24

When a firm buys back its on shares and holds them for eventual resale.
(rather than the shares being retired or cancelled they are held by the company itself in its “treasury”.
Treasury stock is not common in Canada because the CBCA provides that corps must retire the shares they buy back immediately.

Question 25

What type of account is treasury stock?

Answer 25

A conta-equity account (it’s reducing equity). Reducing the capital stock of the firm.

Note:
There’s no gain or loss when dealing with it’s own stock. So it doesn’t matter really what the original price the stocks were sold for vs what they buy their own stock back for.