Chapter 15: Stockholders' Equity

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how do firms separate the total cash proceeds received on issuance of preferred stock?

between par value and APIC in Excess of Par-Preferred

how do firms allocate total proceeds received from issuing equity?

between the par/stated value and the APIC

participating preferred shares

contain a provision requiring that preferred shareholders share ratable in distributions with common shareholders

declaration date

declared by the Board, record liability for cash dividend

property dividends

distributions in any asset other than cash (ex: inventory or investments in shares of other entities)

stock dividends

distributions in the form of the firm's own equity shares

cash dividends

distributions to shareholders in cash

how do preferred shares have a tax disadvantage?

dividends are not tax-deductible, while interest on debt is tax-deductible

participation (or preferred shares) occurs most often when...

dividends to common shareholders exceed the percentage stated for the preferred shares

par value

face or stated value on a share certificate

what is outstanding shares used for?

financial statistics, such as earnings per share and book value per share, and determines those with voting rights

record date

firm determines stockholders entities to dividend

payment date

firm distributes the dividend

ex-dividend date

generally two business days before the record date. investors purchasing the stock on or after this date will NOT receive the dividend

what can companies do with repurchased shares?

hold or retire

what is including in accumulated other comprehensive income (AOCI)?

includes items such as: - unrealized gains and losses on AFS debt securities - foreign currency translation adjustments - certain pension cost adjustments

residual claimants

individuals, other corporations, and institutional investors who buy shares of a company

how is outstanding shares computed?

issued shares - treasury shares

what type of preferred stock is classified as a liability?

mandatorily redeemable preferred stock

what is a downside of preferred shares?

nonvoting

unissued shares

number of shares authorized but not issued

issued shares

number of shares sold or otherwise distributed to shareholders

outstanding shares

number of shares still in the hands of the stockholders

where do firms report AOCI?

on the balance sheet in the stockholders' equity section, along with contributed capital and retained earnings

what par value is usually higher, preferred or common?

preferred because firms usually pay preferred dividends as a fixed percentage of par value

who has preferential rights over common shareholders?

preferred shareholders

if there are stock issue costs, how do you change your journal entry?

reduce cash and APIC by the amount of stock issue costs

dividends

represent a return to shareholders on their investment in a corporation

stock split

results in a proportionate increase in the number of equity shares and a proportion decrease in the share's par value, if the shares have a par value

shareholders can only assert their claims after the company has...

satisfied the senior claims of creditors

retired shares

shares are no longer considered issued (classified as unissued authorized shares)

types of stock dividends

small and large (room for judgment)

contributed capital

the amounts paid in by common and preferred shareholders which includes: - par value - additional paid in capital

if the shares have no par or stated value, firms record total proceeds in...

the common stock account

treasury shares

the corporation's own shares repurchased by the corporation and held for future use - still considered issued shares

additional paid-in capital

the excess of amounts paid in over the par or stated value

what does stockholders' equity represent?

the interest held by the investors

stock dividend is considered "small" if...

the number of shares issued does not exceed 20% to 25% of the previously outstanding shares

a stock dividends is considered a "large" stock dividend if...

the number of shares issued is more than 20% to 25% of the previously outstanding shares

what do treasury shares reduce?

the number of shares outstanding - recorded in a contra-stockholders' equity account and reported as a reduction of total stockholders' equity on the balance sheet

stockholders' equity

the sum of all residual claims against the assets of the firm, measured as assets - liabilities

authorized shares

total number of shares a firm can legally issue. - typically in the company's articles of incorporation

cost method

used to account for treasury stock transactions

what do treasury shares generally not have?

voting rights and cannot receive dividends

where did the concept of par value come from?

when all firms were required to maintain a minimum amount of capital that they could not distribute to shareholders - these minimum capital requirements generally no longer exist, and firms can now issue no part stock

retained earnings

a firm's cumulative earnings or losses that it has not distributed as dividends

comprehensive income

a measure of changes in a company's equity that result from recognized transactions and all economic events of the period other than transactions with owners

liquidating dividends

any distribution that the firm pays for contributed capital instead of retained earnings

how is a small stock dividend valued?

at the fair market value of the shares

how is a large stock dividend valued?

at the par value of the stock

what is AOCI?

(accumulated other comprehensive income) - the aggregation of OCI over the years, and is the third component of stockholders' equity

reissuance of treasury stock (accounts involved)

- *above cost:* excess over cost is APIC-Treasury Stock - *below cost:* reduce APIC-Treasury Stock for the amount below cost if possible. if not, reduce Retained Earnings

companies repurchase outstanding shares for a number of reasons:

- because of stock-based compensation (to offset the effect when workers sell shares back into the market) - to make an acquisition - to support the market price of the stock - to distribute cash to shareholders - to increase per-share earnings

components of contributed capital

- common stock - preferred stock

components of common stock

- common stock issuance - stock splits - stock repurchases, reissuances, and repayments

components of AOCI

- components - reporting

types of preferred stock

- cumulative - participating - convertible - callable - redeemable - fixed dividend

acquisition of treasury stock (journal entry)

- debit treasury stock for the cost of the repurchased shares - credit cash for the amount paid

key dates for dividends

- declaration date - record date - ex-dividend date - payment date

components of retained earnings

- dividends - prior period adjustments

components of comprehensive income

- net income - other comprehensive income

items affecting retained earnings include:

- net income (loss) - dividends - the sale of treasury stock below cost - prior-period adjustments (e.g. make correction by adjusting R/E)

how do preferred shares typically have more priority?

- priority over receiving dividends - priority claim to assets in liquidation

what accounts do stock dividends affect?

- retained earnings decreases - contributed capital increases (the amount depends on the size of the dividend)

what are other names for stockholders' equity?

- shareholders' equity - owners' equity - net assets - net book value

preferred stock provides certain advantages over debt and common equity financing for a corporation:

- used to raise private equity capital without giving up control of the corporation - preferred stock is less risky than debt because, unlike interest on debt, dividends are not mandatory

components of stockholders' equity

1. contributed capital 2. retained earnings 3. accumulated other comprehensive income (AOCI)

accounting steps for small stock dividends

1. dividend value = market price at the declaration date 2. on declaration date: increase the dividends account by the dividend at market value, which will ultimately be closed to retained earnings. 3. increase the common stock dividend distributable account for the par value of the stock. this account is a capital stock account 4. increase APIC for the difference between the market value and the par value of the stock to be distributed. when the dividend is distributed, remove the common stock dividend distributable account with a debit and credit the common stock account

two options for reporting OCI:

1. include components of OCI after net income on one continuous statement summing to comprehensive income 2. present a separate statement of other comprehensive income that begins with net income on the first line and details the components of OCI. this approach results in presenting two statements: one displaying the details of net income and the other displaying the details of other comprehensive income

earned capital

1. retained earnings (RE) 2. AOCI

accounting steps for large stock dividends

1. when declaring a large stock dividend, debit dividends for the par value of the stock 2. credit stock dividend distributable, an equity account, for the par value of the stock 3. when distributing the stock dividend, reduce the stock dividend distributable and increase common stock at par


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