Shareholders' Equity & Ratios (18.7) Flashcards
Define owners’ equity
Owners’ equity is the residual interest in assets that remains after subtracting an entity’s liabilities.
what is included in owners’ equity?
Owners’ equity includes contributed capital, preferred stock, treasury stock, retained earnings, non-controlling interest, and accumulated other comprehensive income.
define contributed capital
Contributed capital (also known as issued capital) is the amount contributed by equity shareholders.
describe par value of common stock
The par value of common stock is a stated or legal value. Par value has no relationship to fair value.
Some common shares are even issued without a par value. When par value exists, it is reported separately in stockholders’ equity. In that case, the total proceeds from issuing an equity security are the par value of the issued shares plus “additional paid-in capital.”
define authorized shares
Authorized shares are the number of shares that may be sold under the firm’s articles of incorporation.
define issued shares
Issued shares are the number of shares that have actually been sold to shareholders.
define outstanding shares
The number of outstanding shares is equal to the issued shares less shares that have been reacquired by the firm (i.e., treasury stock).
define treasury stock
Treasury stock is stock that has been reacquired by the issuing firm but not yet retired. Treasury stock reduces stockholders’ equity. It does not represent an investment in the firm. Treasury stock has no voting rights and does not receive dividends.
Describe attributes of preferred stock
Preferred stock has certain rights and privileges not conferred by common stock. For example, preferred shareholders are paid dividends at a specified rate, usually expressed as a percentage of par value, and have priority over the claims of the common shareholders in the event of liquidation.
Preferred stock can be classified as debt or equity, depending on the terms. For example, perpetual preferred stock that is non-redeemable is considered equity. However, preferred stock that calls for mandatory redemption in fixed amounts is considered a financial liability.
define non-controlling interest
Noncontrolling interest (minority interest) is the minority shareholders’ pro-rata share of the net assets (equity) of a subsidiary that is not wholly owned by the parent.
define retained earnings
Retained earnings are the undistributed earnings (net income) of the firm since inception, the cumulative earnings that have not been paid out to shareholders as dividends.
define ‘accumulated other comprehensive income’
Accumulated other comprehensive income includes all changes in stockholders’ equity except for transactions recognized in the income statement (net income) and transactions with shareholders, such as issuing stock, reacquiring stock, and paying dividends.
Comprehensive income is equal to _____ _____ plus _____ _____ _____
Comprehensive income is equal to net income plus other comprehensive income.
Define The statement of changes in stockholders’ equity
The statement of changes in stockholders’ equity summarizes all transactions that increase or decrease the equity accounts for the period. The statement includes transactions with shareholders and reconciles the beginning and ending balance of each equity account, including capital stock, additional paid-in-capital, retained earnings, and accumulated other comprehensive income.
A vertical common-size balance sheet expresses each item of the balance sheet as a percentage of _____ ______
A vertical common-size balance sheet expresses each item of the balance sheet as a percentage of total assets.
what are the 3 liquidity ratios
Liquidity ratios include the current ratio, the quick ratio, and the cash ratio.
what do liquidity ratios measure
Liquidity ratios measure the firm’s ability to satisfy its short-term obligations as they come due.
How is current ratio calculated
current ratio = current assets / current liabilities
How is quick ratio calculated
quick ratio = (cash + marketable securities + receivables) / current liabilities
- can also think of this as (current assets - inventory) / current liabilities
how is cash ratio calculated
cash ratio = (cash+marketable securities) / current liabilities
*can also think of this as (current assets - inventory - receivables) / current liabilities
what are the 4 solvency ratios
Solvency ratios include the long-term debt-to-equity ratio, the total debt-to-equity ratio, the debt ratio, and the financial leverage ratio.
what do solvency ratios measure
Solvency ratios measure the firm’s ability to satisfy its long-term obligations.
how is LT debt to equity ratio calculated?
long-term debt-to-equity = long-term debt / total equity
how is total debt to equity ratio calculated?
total debt-to-equity = total debt / total equity
how is debt ratio calculated?
debt ratio = total debt / total assets
how is financial leverage ratio calculated?
financial leverage = total assets / total equity
List the limitations of balance sheet ratio analysis
Analysts must understand the limitations of balance sheet ratio analysis:
Comparisons with peer firms are limited by differences in accounting standards and estimates. Lack of homogeneity as many firms operate in different industries. Interpretation of ratios requires significant judgment. Balance sheet data are only measured at a single point in time.
When calculating solvency ratios, debt is considered to be any interest-bearing obligation. On the other hand, the _____ _____ ratio captures the impact of all obligations, both interest bearing and non-interest bearing.
When calculating solvency ratios, debt is considered to be any interest-bearing obligation. On the other hand, the financial leverage ratio captures the impact of all obligations, both interest bearing and non-interest bearing.
