ACCT 2300

Advantages of Equity Financing

-Flexibility -Generally higher rate of return -Dividends can be adjusted according to company's profitability.

Advantages of Preferred Stock

-Flexibility: terms and conditions can be tailored to meet the firm's needs. -In the event of liquidation, preferred stockholders have a right to the company's assets before the common stockholders. -Preferred stock is usually voting stock.

Disadvantages of Equity Financing

-Stock has voting rights, allows new investors to vote , share control of company with new stockholders. -Dividends are not tax deductable, not tax savings, unlike debt - Issuing stock decreases financial ratios (earnings per share)

Convertible Stock

Allows preferred stock to be exchanged for common stock.

Redeemable Stock

Allows stockholders to forfeit their shares for a specified price.

Callable Stock

Allows the firm to eliminate a class of stock by paying the stockholders a specified amount.

Shares

Authorized: The maximum number of shares of stock a company is allowed to issue. Issued: The number of shares of stock a company has sold or transferred to a stockholder. Outstanding: The number of shares of stock a company has issued minus the amount of treasury stock they have repurchased.

Treasury Stock

Company's own stock that was issued to stockholders but has been repurchased by the company from the stockholder and is held for some purpose. Contra-equity account, income statement accounts never involved in TS transactions.

Adjustments

Current asset changes: opposite direction Current liability changes: same direction

Dividends

Current: The current year's amount of dividends due. In Arrears: Dividends that have not been paid from previous years.

Date of Declaration

Day the liability is created. Not the same as the date of distribution (the day it is payed)

Financing

Debt Financing Equity Financing (issuing stock)

Operating Section of SoCF

Everyday cash flow, revenues and expensesBegin with Net Income. Add depreciation, add losses, subtract gains. Current liabilities and current assets reported in this section.

Non-Cumulative Preferred Stock

If a dividend is not declared in the previous year, you never get it.

Cumulative Preferred Stock

If the dividend is not paid in the previous year, it carries over until it is declared and paid.

Investing Section of SoCF

Long term assets on the Balance Sheet; purchase/sale of property, plant, and equipment; purchase/sale of another company's stock or other investments

Financing Section of SoCF

Long-term liabilities or stockholders equity accounts, dividends paid.

Par Value

Minimum issue price not set by market, legal requirement set by the company. Stock cannot be issued below par. An assigned dollar value printed on a stock certificate.

Common Stock

Most shares; always have voting rights; may earn dividends after the preferred stockholders; represents the most risk. Dollar amount in common stock account is always the amount issued at par value.

Preferred Stock

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

Non-Cash investing/financing activities

Reported on supplemental schedule. EX: Issue of stock for patent. Purchase of equipment with a note.

Statement of Cash Flows

Summary of operating, investing, and financing activities of a business. Reports the changes in cash over a period of time and explains those changes.

Cumulative Stock

The right to dividends in arrears before the current-year dividend is distributed.