Stockholder's Equity, Cash Flows, Ratio Analysis Flashcards
Retained Earnings: Definition
Retained earnings is accumulated earnings (or losses) that have NOT been paid out as dividends.
Acc. RE is reduced by distributions to stockholders and transfers to APIC for stock dividends.
Retained earnings DOES NOT include:
1) Treasury stock
2) OCI
RE: Formula
Net Income/(Loss)
- Dividends (Cash, FMV property, and stock) that have been declared
+/- Prior period adj. (Corrections of error)
+/- Retrospective accounting changes
+ adj. from a quasi-reorganization
=
RE!
Rule about Gain/(Loss) on purchase/sale of Treasury stock?
THERE IS NONE.
Any “difference” goes to APIC, and if there is not enough APIC to absorb the loss, the loss will be debited (Subtracted) from “Retained Earnings”.
What is a liquidating dividend comprised of?
Total cash div. declared (LESS) RE
Any excess is considered “Liquidating.”
What does:
Issuing Shares
Purchasing Shares
Re-issuing shares
mean?
Issuing shares: outstanding shares + all treasury shares!!
purchasing: BRINGING TO TREASURY. Deduct from Outstanding C/S.
Re-issue: Refers to Treasury shares being re-issued. add back in to Common stock.
How to get to Net Income from A, L, and E
Assets (less) Liabilities = Total Equity (incl. C/s, apic, and RE component)
Thus to find net income for the year you can use elements of Equity, to figure out based on retained earnings. Formula:
Beg. RE – $0
Plus NET Inc. —(Squeeze: 9)
LESS Divs Paid (13)
End RE: 13
It’s like BASE Formula except RE, plus NI, less divs.
What are “Appropriated Retained earnings”?
Appropriated retained earnings are retained earnings that have been set aside by action of the board of directors for a specific use.
The intent of retained earnings appropriation is to not make these funds available for payment to shareholders.
Once the “purpose” of the appropriation has been achieved, it should be restored back to unappropriated retained earnings.
Are common and preferred stock both recorded at par value?
Yes.
What happens when you issue Pref. Stock with detachable common stock warrants?
How do you account for warrants outstanding?
A: at “Fair Val” of warrants
This Fair Val of warrants is credited to APIC.
When is the stock options outstanding account reduced?
Exercise date.
What is the entry when a stock dividend is issued?
EG:
30% dividend on 500,000 shares of common stock
(to RE: .3 div rate * 500,000 sh. x $10 par val.) (see below)
RE $1.5 Mil
CS: $1.5 Mil
will Net Income or R/E ever be increased through treasury stock transactions?
No.
Should Net Income be calculated net of tax?
YEP.
Interest per year?
eg. $4.5 Mil Note Payable
non-compounding interest will be 10% per year (or $450,000/yr) x 5 yrs = $2,250,000
When are equity instruments for employee services valued?
Date of grant.
What is relative capitalization?
Use to explain breakdown of dividends vs. capitalization of both Common and Pref. stock
Par Value Method of Accounting for Treasury Stock
Using par value method, a company can retire re=acquired Treasury Stock by recognizing GAIN as APIC,
and LOSS as loss to retained earnings.
Cost Method of Accounting for Treasury Stock
Cost method includes accounting for treasury stock transactions with separate “Treasury stock” entries.
EG: Acquiring own stock in treasury shares is done at COST value,
Selling own T_stock uses that “cost value” to write off T-stock and the rest goes to APIC, pos or neg.
ERGO:
Common Stock calculations will not be affected by the treasury transactions on the books.
Difference between “stocks issued” and “stocks outstanding?”
In a word - the dif. is treasury stock.
Treasury Stock. Sometimes a company wants to buy back some of its stock shares. When the shares are reacquired, the stock is known as treasury stock. Treasury stock is the difference between the number of shares outstanding and the number of issued shares.
When a company acquires a common stock dividend, where does it go?
Debited to retained earnings.
EG:
C/S dividend of 30% on $1000 worth of common stock… DR $300 to retained earnings.
Intrinsic Value of a Call Option Formula?
share options x (Mkt Price - Exercise Price)
100 X ($10 - $9)
How to arrive at EPS denominator?
Use Weighted Avg. method
(EG midway through the year is about half of the amount)
- Preferred stock only gets involved if “Convertible”
Common Stock: Simple Capital Structure weighted EPS method
basic EPS =
income available to shareholders / weighted avg. number of Common shares outstanding (WACSO)
Example Calculation: Net Income (less any preferred stock requirements in total) / avg. COMMON shares outstanding (so don't include pref. shares outstanding)
“Contingent Share”
Shares of company stock that are issued only if certain conditions are met. Contingent shares are similar to stock options, warrants and other convertible instruments in that there is a level of uncertainty associated with their issue. For example, for contingent shares to be issued, the corporation must generate earnings that exceed a certain threshold. Contingent shares are also important for common stock holders since the contingent shares can dilute the ownership of existing shareholders.
NOT INCL: shares issuable upon exercise of stock option
