Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ACC 312 > Stockholders Equity > Flashcards

Stockholders Equity Flashcards

1
Q

Equity Capital

A

Ownership dilution
Buy-backs vs. Dividends
Impact on EPS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Debt Financing

A

No ownership dilution
Net Income Impacts
Leverage and Credit Risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

3 primary forms of business organization

A

Proprietorship
Partnership
Corporation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Special characteristics of the corporate form

A

Influence state of corporate law
Use of capital stock or share system
Development of a variety of ownership interests

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Corporate form of organization

A

Corporation must submit articles of incorporation to the state in which incorporation is desired

State issues charter

Advantage to incorporate in a state that favors corporate organization (Delaware)

Accounting for SE follows the rules of each state

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Two primary sources of equity

A

Contributed Capital (Common stock, Preferred Stock, APIC)

Retained Earnings (Less: Treasury Stock)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Fundamental Accounting Equation (broken down SE)

A 
A = L + SE
A = L + Contributed Capital + Retained Earnings
A = L + Contributed Capital + Net Income - Dividends
A = L + Contributed Capital + Rev - Exp - Dividends
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Capital Stock (Share System Privileges)

A

To share proportionately in profits and losses
To vote for directors
To share proportionately assets upon liquidation
Preemptive right to subscribe to new share

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Common Stock

A

Claim on firm’s assets after the stated obligations (bear risk, but share in success)

Voting and Dividend rights attached

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Preferred Stock

A

Entitled to a fixed rate of dividend that is senior
Dividends can be cumulative (paid before common stock)
Usually do not have voting rights
Convertible to common stock (optional)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Authorized shares

A

Number of shares that can be issued as stated in company’s articles of incorporation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Issued shares

A

Number of authorized shares that a company has distributed to shareholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Outstanding shares

A

Number of issued shares still owned by shareholders

shares issued - treasury stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

APIC

A

Amount of par value received by company upon share issuance in excess of par value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Par value

A

Maximum responsibility of shareholders in the event of insolvency (ceremonial/irrelevant)

Legal capital per share must be retained in the business

No relation to issue price (very low)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Accounting for market prices

A

Only changes in issued share capital, not the ownership f this share capital relevant

Accounts only reflect the money originally paid to purchase the share (not market value)

Share capital figure in accounts will change if:

  • new shares are issued
  • the company repurchases its own shares
17
Q

Advantages of “No-Par Value” Stock

A

Avoids contingent liability

Avoids confusion over recording par value vs. market value

18
Q

Disadvantages of “No-Par Value” Stock

A

Some states levy high tax on these issues

The total issue price for no-par stock may be considered legal capital, reduces flexibility of paying dividends

Some states require “stated-value” per share… which is basically like par value anyway

19
Q

Issuing multiple classes of stock

A

Proportional method: market value of all securities are known

Incremental method: market value of at least one, but not all securities are known.

20
Q

Stock issued in non-cash transaction

A

Companies should record at fair value of the stock issued OR fair value of the non cash consideration received (whichever is more determinable)

21
Q

Hidden risks of non-cash transaction

A

Watered stock: overvaluation of assets

Secret reserves: undervaluation of assets

22
Q

Direct costs incurred to sell stock

A

Underwriting costs
Accounting and legal fees
Printing costs
Taxes

Should be reported as reduction of APIC

23
Q

Motives to stock buybacks

A

Signal undervaluation (improve market efficiency)

Less stocks –> higher EPS

Efficient return of cash in the absence of investment opportunities

To re-issue shares to directors/employees under bonus and stock compensation plans, and/or use in future acquisitions

“Gear up” balance sheet (increase leverage) to make an unattractive takeover target

Clean-up share register/manage costs

24
Q

Two forms of buyback

A 
Cost method (widely/preferred)
Par (Stated) value method
25
Q

Treasury shares

A

Stocks that company buys back

26
Q

Treasury Stock account

A

Contra-equity account that reduces shareholders equity for buybacks

27
Q

Accounting for share buy-backs

A

After eliminating Paid-in Capital from Treasury Stock, we debit any excess of cost over selling price to RE

Treasury stock transaction can never increase RE, but it can reduce

Transactions in treasury stock will never increase or decrease current year earnings

28
Q

Dividend Policy

A

Covered by state specific laws and tax laws
Generally paid out of RE
Don’t need profits in the current year
Cannot be paid out of legal capital (par value)

Company should not pay dividends unless both the present and future financial position warrant the distribution

29
Q

Why don’t companies pay dividends in amounts equal to their legally available retained earnings?

A 
Maintain agreements with creditors
Meet state incorporation requirements
To finance growth or expansion
To smooth out dividend payments
To build up cushion against possible losses
30
Q

SEC and dividends

A

SEC encourages companies to disclose their dividend policy in their annual report, especially if:

  • have earnings but
  • do not expect to pay dividends in the foreseeable future
31
Q

Types of stock of dividends

A

Cash dividends
Property dividends
Liquidating dividends
Stock dividends

All dividends (except stock) dividends, reduce total stockholders’ equity

32
Q

Stock Dividends

A

Pro rata basis

Used when management wishes to “capitalize” part of the earnings

33
Q

Small Stock Dividends

A

If stock dividend is less than 20-25 percent of the common shares outstanding, company transfers fair market value from RE (small stock dividend)

34
Q

Large Stock Dividends

A

Accounting based on par value of the stock issued

When declared, transfer amount equal to par value of stock issued from RE to contributed capital

35
Q

Stock Splits

A

Issue additional shares of stock to shareholders based on number of shares currently owned

No effect on total paid-in capital, RE, or total SE

Number of shares increase as par/stated value per shares decrease

36
Q

Preferred Stock

A

Unlike common stock, preferred stock can have the following features:

  • fixed dividend
  • preference as to dividends (may be cumulative)
  • preference as to assets in the event of liquidation
  • absence of voting rights
  • participating (dividends)
  • convertible to common stock
  • callable (mandatory buy-backs)
  • redeemable (debt-like securities)
37
Q

Presentation of SE

A

Analysts use SE ratios to evaluate a company’s profitability and long-term solvency

38
Q

3 SE Ratios

A

Rate of return on common stock equity
Payout ratio
Book value per share

ACC 312 (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions