Thursday Intermediate Flashcards
What is stockholder’s equity
Claim the shareholders of the corporation have to the company’s net assets.
3 parts of stockholder’s equity
Paid in capital (share capital, invested capital)
Treasury Stock
Retained Earnings
What is common stock?
Residual ownership in the corporation after any remaining net assets claims are paid
These owners may vote for board of directors.
What is par vale
The value of the stock in the corporate articles of incorporation and usually an arbitrary number. This is printed on the face of the stock certificate, reflecting the cost of the stock.
What is preferred stock? What are two features used in preferred stock
Preferred stock shows traits of debt and equity. If a corporation sells its assets and closes its doors, preferred shareholders get the money back they invested in the corporation + any dividends owed to them. (after creditors are paid off).
No voting in preferred stock
2 potential features:
Cumulative: reight to receive regular dividends that were declared in previous years but not paid. The stockholders who are expecting money from previous years are in arrears.
Also participating (uncommon): when you have the right to extra dividends beyond the stated amount.
What is stock outstanding and how is it calculated?
Means it has been sold to investors. there is outside ownership.
Outstanding = issued - treasury.
What is Additional paid in capital or Paid in capital: excess of par?
Excess over par value that shareholders paid to buy the stock
What is treasury stock and why buy treasury stock? What is the normal balance?
Shares of corporate stock a company sold to investors and has since bought back?
Why?: To prevent someone from buying too much of a company and do a hostile takeover. Fewer shares trading in the open market reduces the chance of another company purchasing controlling interest in the corporation. NOTE: there are no gains or losses on treasury stock transactions.
Treasury stock has a normal debit balance because it is a contra stockholder’s equity account.
What two stockholders equity accounts have normal debit balances?
Treasury stock and dividends.
What is retained earnings?
earned capital minus dividends. All the net earnings you’ve made and retained since day 1 of operating.
What are types of dividends? When are recorded?
Cash
Property
Stock dividends
How to pay a dividend
first take it out of retained earnings and put in dividends payable on the date of declaration, then pay it on the date of payment.
What is a stock split? When does a company do this?
Increases number of shares outstanding by issuing more shares to current stockholders proportionately by the amount they already own. It decreases the value of each share, but gives you more shares.
A company does this when it thinks its trading price is too high. stock splits artificially reduce the price per share.
What is the difference between simple and and complex capital structures?
simple refers to no convertible securities, stock options, or warrants that dilute the amount of money that a stockholder could earn (decrease earnings per share).
What are potential common shares and some examples
Anything that has any potential to turn into shares of stock.
Examples: preferred stock, stock options, and contingently issuable shares.
What are employee stock options?
An employee stock option (ESO) is commonly viewed as a complex call option on the common stock of a company, granted by the company to an employee as part of the employee’s remuneration package.[1] Regulators and economists have since specified that “employee stock options” is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options but are not in and of themselves options (that is they are “compensation contracts”).
Stock options are always a call option, the right to buy stock at a later date (within a time period). The price of the option is set at the date of issue.
Freezing stock
Stock options are contracts that allow you to buy or sell specific amount of a particular stock at a certain price within a set period of time. The set price is called the strike price. When you (the stock option holder) make use of your right to buy/sell stock according to the terms of the option, you are exercising the option. Call options are options giving you the right to buy stock. Put options are options giving you the right to sell stock. Employers grant call options to employees. Let’s take an example: Let’s say you are hired by Google and they offer you options to buy 100 shares of Google stock at $400 within the next 5 years. This stock option gives you the right to buy 100 shares of Google stock at exactly $400 any time within the next 5 years. Let’s say it’s after four years now. Suppose Google stock is at $300 now, now your options are worthless, because you could buy Google stock in the market for $300, much less than the $400 price offered by your stock option. Now suppose Google stock is at $500 now, then if you exercise your option, you could buy 100 shares at $400. Then you can turn around and sell it on the stock market for the current price of $500, making a $100*100=$10000 profit.
So the stock option is basically not worth anything if currently the stock price is lower than your option strike price. But as long as your option has not expired, it’s possible that the stock price could go above your strike price and make your stock options worth something.
What is a put option?
A put option: The right (not obligation) to sell. If I think Microsoft ($50/share) stock is going to go down, I can go to a friend that wants to buy 100 shares and say that I will sell him the shares at $20/share within a month. He agrees but charges me $1/share that is nonrefundable. I have the right to sell to him at $20/share.
If the price lowers to $25, I don’t want to go buy the shares because I will no longer make a profit by selling the shares. I lost the 100 of the $1/share of nonrefundable deposit I paid my friend. My friend actually made a profit off my wrong judgment.
But if the price would have gone to $15, below the price I can sell it to him, I make a $5 per share profit (minus the $1 per share profit I spent on the deposit… I made $4/share = $400.
Puts are a bet that the market price will fall, but it locks in your price to sell.
What are different classes of stock?
The most common reason for this is the company wanting the voting power to remain with a certain group; therefore, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group who are given ten votes per share while a second class would be issued to the majority of investors who are given one vote per share.
Is a stock split a dilution of shares?
No, shareholders’ interest is represented by more–though less valuable–shares.
What is different about the previous year’s EPS when using comparative income satements?
It should reflect the increased shares from the stock dividend.
What is diluted EPS?
The worst case scenario for the common stockholders., that all of the potential common shares are exercised
What do we know about dilution of EPS and stock options?
The calculation of diluted EPS assumes that the shares specified by stock options were issued at the exercise price and that the proceeds were used to buy back treasury stock as many of those shares as can be purchased at the market price during the period.
Why is it plausible that the exercised stock options are exercised and the company used the money to buy back shares as treasury stock/
If the options were exercised, more shares would be needed to issue to option-holders. As discussed in the previous chapter, many firms routinely buy back shares either to issue to option-holders or to offset the issuance of new shares.
What are share issue costs and how are they handled in GAAP? in IFRS?
Share issue costs are the incurrances of legal, promotional, and accounting services necessary to make the sale.
in gaap we record cash in from the sale of common stock as net of the share costs.
in IFRS: accounting is similar to debt issue costs or debt transactions
