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Financial Accounting and Reporting > Stockholders Equity > Flashcards

Stockholders Equity Flashcards

1
Q

Stockholders Equity

Describe the book value method

A

The book value method is one of two alternative GAAP methods of accounting for a conversion transaction (convertible preferred stock or bonds). It values the new security issued (usually common stock) at the carrying value (book value) of the old (converted) security. No gain or loss is recognized on the transaction. (Contrast to the market value method.)

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2
Q

Stockholders Equity

Describe the par value method

A

The par value method is a method for accounting for the purchase and resale of treasury stock that uses the two-transaction view: as (1) the purchase and retirement and (2) the subsequent reissuance of the shares. The par value method uses a contra-capital stock account: for purchases, it reduces capital stock, contributed capital, and/or retained earnings; for resale, it increases capital stock and contributed capital. The par value method has the same effect on total stockholders’ equity as the cost method but apportions the amount to the component equity accounts.

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3
Q

Stockholders Equity

Describe Basic EPS

A

Basic EPS

Net income - Dividends)/
( Weighted-average no. of common shares outstanding

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4
Q

Stockholders Equity

Describe Diluted Basic EPS

A

Diluted EPS

Net Income + Interest (Net of Tax) ) / (WACS + WAPS

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5
Q

Stockholders Equity

Give an example of acquiring Treasury stock using the cost method.

A

Acquisition: Treasury stock (at cost) $216,000
(6,000 sh x $36/sh)
Cash $216,000
Reissue: Cash (3,000 sh x $50/sh) $150,000
Treasury stock (at cost)
(3,000 sh x $36/sh) $108,000
Additional paid-in
capital
(3,000 sh x ($50/sh - $36/sh)) $42,000

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6
Q

Stockholders Equity

True or False

In computing weighted-average number of shares (also called weighted-average common shares), retroactive application is given to stock splits, stock dividends, and shares of common stock issued in a business combination accounted for as a pooling of interests (i.e., they are treated as if they were outstanding for all of any periods presented).

A

True

In computing weighted-average number of shares (also called weighted-average common shares), retroactive application is given to stock splits, stock dividends, and shares of common stock issued in a business combination accounted for as a pooling of interests (i.e., they are treated as if they were outstanding for all of any periods presented).

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7
Q

Stockholders Equity

True or False

FASB ASC 505-20-30-3 provides that for issuances of additional shares less than 20% or 25%, the issuing corporation should transfer from earned surplus (retained earnings) “an amount equal to the fair value of the additional shares issued.” Thus, retained earnings should be charged for an amount equal to the market value of the shares issued in a 10% stock dividend.

A

True

FASB ASC 505-20-30-3 provides that for issuances of additional shares less than 20% or 25%, the issuing corporation should transfer from earned surplus (retained earnings) “an amount equal to the fair value of the additional shares issued.” Thus, retained earnings should be charged for an amount equal to the market value of the shares issued in a 10% stock dividend.

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8
Q

Stockholders Equity

True or False

Dividends in arrears represent a liability

A

False

Dividends in arrears are undeclared and unpaid cumulative dividends on preferred stock and are said to have been “passed.” They must be disclosed in the notes to the financial statements. (They do not represent a liability because they are not an enforceable obligation until declared by the board of directors.) Dividends in arrears must be deducted from net income in earnings per share computations (on common stock).

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9
Q

Stockholders Equity

Define Basic Earnings per Share (EPS)

A

Basic EPS = Net Income/ (Weighted Average Common Shares)

Basic EPS measures the performance of an entity over the reporting period based on its outstanding common stock. The calculation is to divide the income attributable to common stock by the weighted-average number of common shares outstanding.

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10
Q

Stockholders Equity

Define Diluted Earnings Per Share

A

Diluted EPS measures the performance of an entity over the reporting period based on its outstanding common stock while giving effect to all dilutive potential shares that were outstanding. The calculation includes income attributable to common stock plus adjustments resulting from the issuance of dilutive potential common shares. This adjusted income figure is divided by the weighted-average number of common shares outstanding increased by the dilutive potential common shares.

Diluted EPS = Net Income + Interest net of tax / ((Weighted Average Common Shares) + Incremental common shares from assumed conversion of bonds)

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11
Q

Stockholders Equity

Defining Liquidating Dividends

A

Liquidating dividends are distributions to shareholders from other contributed capital accounts rather than retained earnings. A liquidating dividend represents a return of the shareholders’ investment, rather than a return on the investment.

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12
Q

Stockholders Equity

True or False

The total fair value of the compensation for the stock options must be decided at the grant date, and the total compensation must be recognized evenly over the vesting period during which it is earned.

A

True

The total fair value of the compensation for the stock options must be decided at the grant date, and the total compensation must be recognized evenly over the vesting period during which it is earned.

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13
Q

Stockholders Equity

True or False

A corporation recognizes gain or loss on treasury stock transactions

A

False

A corporation does not recognize gain or loss on treasury stock transactions. Additional paid-in capital and retained earnings are affected by treasury stock transactions.

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14
Q

Stockholders Equity

The times preferred dividend earned ratio is

A

Net Income/ Preferred Stock Dividends Total

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15
Q

Stockholders Equity

Define intrinsic method

A

The intrinsic method is the excess of the market price over the exercise price.

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16
Q

Stockholders Equity

When does an APIC increase happen on Stock Subscriptions?

A

APIC increases on the date the subscription is recorded, not on the date paid for or issued.

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17
Q

Stockholders Equity

What is the effect on Retained Earnings of a company when a stock dividend is issued?

A
  1. If a stock dividend 25% of the C/S outstanding, debit retained earnings for the Par Value of the stock.
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18
Q

Stockholders Equity

True or False

Stock Dividends and Stock Splits both have no effect on Total Shareholder Equity.

A

True

Stock Dividends and Stock Splits both have no effect on Total Shareholder Equity.

19
Q

Stockholders Equity

True or False

Stock Splits affect both APIC and par value

A

False

Stock Splits only affect par value. APIC stays the same.

20
Q

Stockholders Equity

What is the interest rate used to discount stock options?

A

The interest rate used to discount stock options is the Risk- free interest rate.

21
Q

Stockholders Equity

In terms of options, what is the measurement date for share based payments classified as liabilities called?

A

Settlement date.

22
Q

Stockholders Equity

True or False

Compensation costs for share-based payments classified as liabilities are measured by the change of the fair value of the instrument for each reporting period.

A

True

Compensation costs for share-based payments classified as liabilities are measured by the change of the fair value of the instrument for each reporting period.

23
Q

Stockholders Equity

What is the purpose of a Quasi Reorganization?

A

Stockholders Equity

The purpose of a Quasi Reorganization is the eliminate a deficit balance in RE by restating its assets to fair value.

24
Q

Stockholders Equity

What is the formula for Return on Common Stockholders Equity?

A

Return on CSE = (NI - P/S dividends) / (Com. Stock + RE)

25
Q

Stockholders Equity

How is Total Book Value calculated when calculating book value per share of C/S?

A 
Total Stockholders Equity
- Total preferred stock
- Preferred Stock dividends in arrears
- Preferred Stock Liquidation Premium
= Total Book Value
26
Q

Stockholders Equity

True or False

Stock options increase shares outstanding only if they are dilutive.

A

True

Stock options increase shares outstanding only if they are dilutive.

27
Q

Stockholders Equity

When are stock options considered dilutive?

A

Stock options are considered dilutive if the exercise price is LESS than the market value.

28
Q

Stockholders Equity

True or False

The reporting of dividends in arrears is achieved through disclosure either on the face of the balance sheet or in the notes.

A

True

The reporting of dividends in arrears is achieved through disclosure either on the face of the balance sheet or in the notes.

Dividends in arrears are not an accrued liability until actually declared.

29
Q

Stockholders Equity

Define dilution (dilutive)

A

A reduction in EPS resulting from the assumption that convertible securities were converted, that options or warrants were exercised, or that other shares were issued on the satisfaction of certain conditions

30
Q

Stockholders Equity

Define antidilution (antidilutive)

A

An increase in earnings-per-share amounts or a decrease in loss-per-share amounts

31
Q

Stockholders Equity

Define potential common stock

A

A security or other contract that may entitle its holder to obtain common stock during the reporting period or after the end of the reporting period (FASB ASC 260-10-20).

32
Q

Stockholders Equity

Define Weighted-average common shares (WACS)

A

The number of shares determined by relating (a) the portion of time within a reporting period that common shares have been outstanding to (b) the total time in that period (FASB ASC 260-10-20). In computing WACS, retroactive application is given to stock splits, stock dividends, and shares of common stock issued in a business combination accounted for as a pooling of interests (i.e., they are treated as if they were outstanding for all of any periods presented).

33
Q

Stockholders Equity

Define Basic EPS

A

The amount of earnings for the period available to each share of common stock outstanding during the reporting period

34
Q

Stockholders Equity

Define Diluted EPS

A

The amount of earnings for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period

35
Q

Stockholders Equity

What are the three things to consider when working with diluted earnings per share?

A
  1. Interest payable
  2. Depreciation/ amortization
  3. Taxes
36
Q

Stockholders Equity

True or False

Stock splits change the number of shares outstanding and the par value per share, but the total par value outstanding does not change.

A

Stockholders Equity

True

Stock splits change the number of shares outstanding and the par value per share, but the total par value outstanding does not change.

37
Q

Stockholders Equity

Retained Earnings are appropriated under what circumstances?

A

Legal requirements, contractural requirements, or through the discretion of the board of directors.

38
Q

Stockholders Equity

True or False

Compensation expense is not affected by changes in the market value of the stock after the measurement date.

A

True

Compensation expense is not affected by changes in the market value of the stock after the measurement date.

39
Q

Stockholders Equity

True or False

In computing basic earnings per share, a company would include dividends on nonconvertible preferred stock.

A

True

In computing basic earnings per share, a company would include dividends on nonconvertible preferred stock.

40
Q

Stockholders Equity

True or False

Using the cost method of accounting, additional paid in capital from treasury stock is credited when treasury stock is reissued at excess.

A

True

Using the cost method of accounting, additional paid in capital from treasury stock is credited when treasury stock is reissued at excess.

When reissued AT MORE THAN COST, the difference is recorded as paid-in capital from treasury stock transactions.

41
Q

Stockholders Equity

True or False

When Treasury stock reissued AT LESS THAN COST, the difference is recorded as a debit from Retained Earnings from treasury stock transactions.

A

True

When Treasury stock reissued AT LESS THAN COST, the difference is recorded as a debit from RETAINED EARNINGS from treasury stock transactions.

42
Q

Stockholders Equity

True or False

Both the intrinsic value method and the fair market value method use the grant date to measure the cost for stock issued to employees.

A

True

Both the INTRINSIC VALUE method and the FAIR MARKET VALUE method use the GRANT DATE to measure the cost for stock issued to employees.

43
Q

Stockholders Equity

True or False

Legal and consulting costs are a current expense while registration and issuance costs reduce Additional Paid-in Capital.

A

True

Legal and consulting costs are a current expense while registration and issuance costs reduce Additional Paid-in Capital.

Financial Accounting and Reporting (15 decks)

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