Stockholders' Equity Pt. 1 Flashcards
What is legal capital?
the amount of capital that must be retained by the corporation for the protection of creditors; the part or stated value of both preferred and common stock is legal capital and is frequently referred to as “capital” stock
generally, the preferred stock is issued with a par value, but common stock may be issued with or without a par value
the number of shares of each class of stick authorized, issued, and outstanding must be disclosed
What is common stock?
the basic ownership interest in a corporation. Common shareholders bear the ultimate risk of loss and receive the ultimate benefits of success, but they are not guaranteed dividends or assets upon dissolution. Common shareholders generally control management, have the right to vote, the right to share in earnings of the corporation, and the right to share in assets upon liquidation after the claims of creditors and preferred shareholders are satisfied
common shareholders may have preemptive rights to a proportionate share of any additional common stock issued if granted in the articles of incorporation
book value per common share = common shareholders’ equity / common shares outstanding
total shareholders’ equity - preferred stock outstanding (at greater of call price or par value) - cumulative preferred dividends in arrears = common shareholders’ equity
What is preferred stock?
an equity security with preferences and features not associated with common stock. Preferred stock may include a preference relating to dividends, which may be cumulative or noncumulative and participating or nonparticipating. Preferred stock may also include a preference relating to liquidation, but does not usually have voting rights
Cumulative vs noncumulative preferred stock
cumulative = all or part of the preferred dividend not pain in any year accumulates and must be paid in the future before dividends can be paid to common shareholders; referred to as dividends in arrears and is not a legal liability but must be disclosed in total and on a per share basis
noncumulative = dividends not paid in any year do not accumulate; the preferred shareholders lose the right to receive dividends that are not declared
Participating vs nonparticipating preferred stock
participating = preferred shareholders share with common shareholders in dividends in excess of a specific amount; the participation may be full or partial. Fully participating means that preferred shareholders participate in excess dividends without limit; generally, preferred shareholders receive their preference dividend first, and then additional dividends are shared between common and preferred shareholders. Partially participating means preferred shareholders participate in excess dividends, but only to a limited extent (a percentage limit)
nonparticipating = preferred shareholders are limited to the dividends provided by their preference; they do not share in excess dividends
T/F: mandatorily redeemable preferred stock must be classified as a liability
True; unless the redemption is required to occur only upon the liquidation or termination of the reporting entity
it is issued with a maturity date and similar to debt, it must be bought back by the company on the maturity date
What is additional paid in capital (APIC)?
contributed capital in excess of par or stated value; it can also arise from many other different types of transactions like the sale of treasury stock at a gain
What is retained earnings?
it is accumulated earnings/losses during the life of the corporation that have not been paid out as dividends; it is reduced by distributions and transfers to APIC for stock dividends; it does not include treasury stock or accumulated other comprehensive income; if it is negative, it is called a deficit
net income/loss - dividends (cash, property, and stock) declared +/- prior period adjustments +/- accounting changes reported retrospectively = retained earnings
it may be classified as either appropriated or unappropriated; the purpose of appropriating retained earnings is to disclose to the shareholders that some of the retained earnings are not available to pay dividends because they have been restricted for legal or contractual reasons or as a discretionary act of management for a specific contingency purpose (ex. plant expansion); an appropriation of retained earnings may not be used to absorb costs or losses and may not be transferred to income
What makes up accumulated other comprehensive income?
pension adjustments, unrealized gains/losses on available-for-sale debt securities and hedges, and foreign currency translation adjustments
these are recognized in the period in which they occur and are combined with net income to determine comprehensive income
What is treasury stock?
a corporation’s own stock that has been issued to shareholders and subsequently reacquired; the two methods of accounting for treasury stock are the cost method and the par/legal method
the primary difference between the two methods is the timing of the recognition of gain/loss on treasury stock transactions; under both methods, the gains/losses are recorded as a direct adjustment to stockholders’ equity and are not included in the determination of net income; also under both methods, shares held as treasury stock are not considered to be outstanding shares
What is the cost method for treasury stock?
it is used by entities 95% of the time; the treasury shares are recorded and carried at their reacquisition cost; a gain/loss will be determined when treasury stock is reissued or retired and the original issue price and book value of the stock do not enter into the accounting
losses may decrease retained earnings if the additional paid in capital from treasury stock account does not have a balance large enough to absorb the loss; net income or retained earnings will never be increased through treasury stock transactions
What is the par/legal method for treasury stock?
it is used by entities 5% of the time; the treasury shares are recorded by reducing the amounts of par value and additional paid in capital received at the time of the original sale
losses may decrease retained earnings if the additional paid in capital from treasury stock account does not have a balance large enough to absorb the loss; the sources of capital associated with the original issue are maintained
