Accounting Final

How is treasure stock reported on the balance sheet?

On the balance sheet, treasury stock is carried at its cost (the cash the corporation pays to acquire the stock) and is shown as a deduction (a negative amount) on the balance sheet. Thus, total stockholders' equity is net of treasury stock, which is known as a contra-equity account.

What are the major reasons for a stock split?

Reduce the share price of the stock. It is believed that when the stock price is very high, few investors can afford to purchase the stock. Another possible reason is to lead shareholders to believe that there has been some distribution of value.

Define issued shares

Shares that have been sold and issued to stockholders are the company's issued stock.

Define Split-Off

The parent company exchanges shares that it owns in a subsidiary for shares of the parent company owned by its shareholder

Define Earned Capital

Earned capital represents the cumulative net income that the company has earned, less the portion of that income that has been paid out to shareholders in the form of dividends.

What items are typically reported in SSE under Accumulated Other Comprehensive Income (AOCI)?

Other Comprehensive Income (OCI) represents changes in stockholders' equity that are caused by factors other than net income and transactions with the company's shareholders. Some examples include unrealized gains (losses) on available-for-sale securities, foreign currency translation adjustments, unrealized gains (losses) on certain types of derivatives, and pension liability adjustments.

Define Par Value Stock

Stock that has a face value printed (identified) on the stock certificate. Historically, par value was the minimum selling price for one share.

Define treasure stock

Stock, previously issued, that the corporation has reacquired from shareholders.

What features can make preferred stock similar to debt?

1. Dividends are cumulative. 2. Dividends are nonparticipating. 3. Preferred stockholders have preference to assets in liquidation.

Define Spin-Off

The distribution of shares of a subsidiary company to shareholders in the form of a dividend.

Can a Split-off result in a gain?

Yes, if the distribution of shares to the shareholders is not pro rata, which means that shareholders can opt to exchange their shares or not.

What features can make preferred stock similar to common stock?

1. Dividends are not cumulative. 2. Dividends are fully participating. 3. It is convertible into common stock. 4. Preferred stockholders do not have a preference to assets in liquidation.

Define Contributed Capital

Contributed capital represents the total investment "contributed" by shareholders when they purchase stock. It is considered contributed because the company is under no legal obligation to repay the shareholders.

How can the number of shares issued be more than the number of shares outstanding?

Shares that have been sold and issued can be subsequently reacquired by the corporation—these shares are called treasury stock. When treasury stock is held, the issued shares exceed the outstanding shares.

What is a stock dividend?

Distribution of additional shares of a corporation's stock to its existing stockholders.

What is the difference between the accounting for a small stock dividend and a large stock dividend?

All stock dividends transfer capital from retained earnings to contributed capital. For a small stock dividend, this transfer is recorded at the market price of the shares at the time of the dividend. For a large stock dividend, the transfer is made at the par value of the stock. Thus, large stock dividends are treated like stock splits.

Can this result in a gain/loss?

No

What are typical features of preferred stock?

1. Preferential claim to dividends and to assets in liquidation 2. Cumulative dividend rights 3. No voting rights

Why might a corporation acquire treasury stock?

A corporation might repurchase treasury stock to give to employees who exercise stock options or to offset dilution resulting from option grants. It is also used by management to prop up stock price when management believes its stock is inappropriately underpriced.

Define authorized shares

A corporation's authorized stock is the maximum number of shares of stock it may issue. When the corporation is formed, its charter specifies the authorized amounts and classes of stock. A corporation can later amend its charter to change the amount of authorized capital, but such actions must be approved by the company's shareholders.

Define stock split

A stock split refers to the issuance of additional shares to the current stockholders in proportion to their ownership interests. This is normally accompanied by a proportionate reduction in the par or stated value of the stock.

How does the account "additional paid-in capital" (APIC) arise?

Contributed capital is dividend into two accounts: the common or preferred stock account at par and additional paid-in capital. The common stock or preferred stock accounts at par increase by the par value of each share issued. But, if companies sell shares for more than par, it is the market price of the stock that determines the company's proceeds. The difference between the share's market price and its par value is added to the additional paid-in capital account.

Employee stock options potentially dilute EPS, what can companies to offset these effects?

Many companies repurchase shares (as treasury stock) in order to offset the dilutive effects of stock options, because stock options increase the number of outstanding shares in the diluted EPS calculation. Stock repurchases typically decrease cash, which has immediate and ongoing economic effects. Some companies increase debt to repurchase stock. Analysts need to be concerned about the consequences of increased leverage solely to prop up diluted EPS.

Describe the accounting for a convertible bond

The company removes the net book value of the debt from the balance sheet. That is, the company removes both the face amount and any associated unamortized premium or discount. The stock is, then, issued for a "purchase price" equal to the bond's net book value (face amount net of any unamortized premium or discount). This purchase price is, then, allocated to common stock and additional paid-in capital.

How can earned capital be considered an investment by the company's shareholders?

When profit is earned, the company can either pay out a portion of that profit as a dividend or reinvest the earnings in order to grow the company. In fact, many companies title the Retained Earnings account as Reinvested Earnings. Earned capital, thus, represents an implicit investment by the shareholders in the form of forgone dividends.