Financial Accounting II SMU

What is the difference between a bond's coupon rate and its market interest rate (yield)?

A bond's coupon rate is the rate of interest it pays annually, while its yield is the rate of return it generates. A bond's coupon rate is expressed as a percentage of its par value. The par value is simply the face value of the bond or the value of the bond as stated by the issuing entity. Thus, a $1,000 bond with a coupon rate of 6% pays $60 in interest annually and a $2,000 bond with a coupon rate of 6% pays $120 in interest annually.

Define stock split. What are the major reasons for a stock split?

A company issues additional common shares to its existing stockholders. 1) Reduce stock price to improve marketability of shares

How do credit (debt) ratings affect the cost of borrowing for a company?

A debt issuer's credit rating can have a major impact on borrowing costs—and an investor's income. An issuer with a high rating will pay much less in borrowing costs, reflected by the interest rates paid, than a low-rated issuer, due to the relatively lower risk involved

What is an accrual? How do accruals impact the balance sheet and the income statement?

Accruals are revenues earned or expenses incurred which impact a company's net income on the income statement, although cash related to the transaction has not yet changed hands. Accruals also affect the balance sheet, as they involve non-cash assets and liabilities.

Define par value stock. What is the significance of a stock's par value from an accounting and analysis perspective?

An amount specified in the corporate charter for each share of stock and imprinted on the face of each stock certificate often determines legal capital for a corporation. Par value is unrelated to the stock market's value. The excess of the issue price OVER par value is added to the APIC P. 8-5 Stock Transactions and Dividends

What is meant by preferred dividends in arrears? If dividends are two years in arrears on $500,000 of 6% preferredstock,and dividends are declared at the end of this year, what amount of total dividends must the company pay to preferred stockholders before paying any dividends to common stockholders?

Dividends in arrears are the cumulative preferred dividends that have not been paid till date. If a company declares dividend, the unpaid dividends on preferred stocks has to be paid first. Total dividends that the company must pay to the preferred shareholders = 500,000 * 0.06 * 3 Total dividends that the company must pay to the preferred shareholders = $90,000

Employee Share Purchase Plans

Employees are permitted to purchase shares directly from the company at a discounted price

Another term for non-controlling interests

Minority Interest

Preferred Stock

Non-voting shares! Has dividend preference (paid before common stock) Liquidation Preference: Paid after assets and liabilities during liquidation. BEFORE COMMON SHAREHOLDERS HIGHER VALUE FOR STOCK THAN COMMON STOCK

Treasury Shares

The number of shares the company has repurchased and holds for resale or employee compensation plans

Market Price

The published price at which a share of stock can be purchased (ask, bid)

Why do companies report a gain or loss when they repurchase their bonds? Is this a real economic gain or loss?

The resulting gains or losses are not real economic gains and losses. Companies report gains or losses on bond redemption because they use historical cost accounting. The redemption gain or loss is offset by the present value of lower (higher) interest payments in the future.

Paid In Capital

The total amount of cash and other assets paid into the company by stockholdersin exchange for capital stock

Par Value

The value of the stock as listed in the charter of the company when the stock is sold. NOT RELATED TO STOCK PRICE

A corporation has total stockholders' equity of $18,995,250 and one class of $2 par value common stock. The corporation has 500,000 shares authorized; 300,000 shares issued; and 15,000 shares as treasury stock. What is its book value per share?

Total # of OS= Total Shares Issued- Treasury Stock 300,000-15,000= 285000 shares Book Value per Share= (Total SE-Preferred Stock)/ # of Common Shares Outstanding (18,995,250-0)/285000= 66.65 per share

What items are typically reported under the stockholders' equity category of accumulated other comprehensive income (AOCI)?

Unrealized holding gains or losses on investments that are classified as available for sale. Foreign currency translation gains or losses. Pension plan gains or losses. Pension prior service costs or credits

What are the basic differences between preferred stock and common stock? That is, what are the typical features of preferred stock?

* The main difference between preferred and common stock is that preferred stock gives no voting rights to shareholders while common stock does. * Preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders. * Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.

How does the account "additional paid-in capital" (APIC) arise? Does the amount of APIC reported on the balance sheet relative to the common stock amount provide any information about the financial condition of the company?

Additional paid-in capital (APIC) is the difference between the par value of a stock and the price that investors actually pay for it. To be the "additional" part of paid-in capital, an investor must buy the stock directly from the company during its IPO. The APIC is usually booked as shareholders' equity on the balance sheet. APIC is a great way for companies to generate cash without having to give any collateral in return.

Conversion Privileges

Allows shareholders to convert Preferred stock into common stock

Initial Public Offering (IPO)

An initial sale of stock to the public

Distinguish between authorized shares and issued shares. Why might the number of shares issued be more than the number of shares outstanding?

Authorized stock is higher than issued and outstanding stock because companies need the flexibility of issuing additional shares without having to return to the regulatory authorities for approval

Dividends

Company profit that is distributed to shareholders. Profit not distributed to shareholders are called RETAINED EARNINGS

Describe the difference between contributed capital and earned capital. Specifically, how can earned capital be considered as an investment by the company's stockholders?

Contributed capital represents the total investment "contributed" by shareholders when they purchase stock Earned capital represents the cumulative net income that the company has earned

What does the term current liabilities mean? What assets are usually used to settle current liabilities?

Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle. Current liabilities are typically settled using current assets, which are assets that are used up within one year.

Restricted Stock Units

Employee will receive a certain amount of shares or cash equivalent on a specific date. SHARES ARE NOT ISSUED UNTIL AFTER THE VESTING PERIOD!

Stock Appreciation Rights (SAR's)

Employees are paid in cash or stock for the increase in share price but do not purchase the shares of stock.

How would you interpret a company's reported gain or loss on the repurchase of its bonds?

Gains and losses from bond redemptions typically arise during refinancing in which new bonds are issued to retire existing bonds. The resulting gains or losses are not real economic gains and losses.

When a company reports negative retained earnings on the balance sheet (a deficit), can we conclude that the company has reported significant net losses on the income statement?

Losses could be from a previous period. You cannot say definitively there is a loss on the income statement. Retained earnings could be from a large payout of dividends as well.

Employee stock options potentially dilute earnings per share (EPS). What can companies do to offset these dilutive effects and how might this action affect the balance sheet?

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.

What features make preferred stock similar to debt? Similar to common stock?

Preferred Stock and debt received regular payments in the form of interest and dividends. Both of them can be converted to common stock Preferred stock represents ownership in the company similar to commons stock

Stock Split

Proportional issuance of shares to stockholders (reduces par value) with no exchange in cash. A stock split does not affect the value of the company. Because of the number of outstanding shares increases, while the value of the company remains unchanged, the share price declines proportionally

Preferred Stock Yeild

Provides investors with a divdend yield that is similar to an interest rate on a bond. The dividend is not tax deducitble so the after tax cost is higher than interest rates on a bond

Board of Directors

Shareholders elected representatives who hire the CEO and oversee company operations

Restricted Stock

Shares are issued to the employee, but the employee cant sell the shares during a restricted period

What are three common forms of stock-based compensation and why do companies use such forms of compensation?

Stock compensation is a way corporations use stock or stock options to reward employees in lieu of cash. Stock compensation is often subject to a vesting period before it can be collected and sold by an employee. Vesting periods are often three to four years, typically beginning after the first anniversary of the date an employee became eligible for stock compensation. Two types of stock compensation are non-qualified stock options (NSOs) and incentive stock options (ISOs). Some companies award performance shares to managers and executives if certain performance metrics are met, such as earnings per share (EPS) or return on equity (ROE).

If a corporation purchases 10,000 shares of its own common stock at $10 per share and resells them at $14 per share, where would the $40,000 increase in capital be reported in the financial statements? Why is no gain reported?

The 40,000 would be in shown in Excess over Par. It would not be a gain because its an excess of the stated value over common stock

Declaration Date

The date the BOD authorizes payment of a dividend

Date of Record

The date the company prepares the list of current stockholders to which dividends will be paid

Market Capitalization (Market CAP)

The market value of all outstanding shares

Authorized shares

The maximum number of shares that a company can sell (issue) without approval from the shareholders

Additional Paid In Capital (APIC)

The money paid over the amount of par for a stock.

Outstanding Shares

The number of shares that are outstanding in the market, # of shares issued - # of shares repurchased by company

Issued Shares

The number of shares that have been sold (issued) to date. This is a cumulative number

What is the typical value of a share in a Employee Share Repurchase Plan

Typically 85% of market value

Residual Claim

When a company voluntarily ceases operations or fails and is liquidated, all assets are sold and liabilities paid. Each shareholder is entitled to their proportional share of the residual cash, if any. Shareholders are residual claimants

Does an employee with restricted stock have voting rights?

Yes, they have the same rights as a shareholder but CANT SELL in the restricted period

What is meant by the market cap of a company and how is it determined?

it is calculated by multiplying the total number of a company's outstanding shares by the current market price of one share.

What information is reported in a statement of stockholders' equity?

par value of common stock and preferred stock, plus any premiums on the stock (the amount above par value that was actually paid on the market, also called paid-in capital) and retained earnings.

Describe the accounting for a convertible bond?

the accounting of the debt instrument that entitles or provide rights to the holder to convert its holding into a specified number of issuing company's shares where the difference between the fair value of total securities along with other consideration that is transferred and the fair value of the securities issued is recognized an expense in the statement of income.

Define treasury stock. Why might a corporation acquire treasury stock? How is treasury stock reported in the balance sheet?

the number of shares repurchased from the open market, it reduces shareholder's equity by the amount paid for the stock. Treasury stock will be a deduction from the amounts in Stockholders' Equity