11 - Reporting and Analyzing Shareholders’ Equity Flashcards
List some advantages of the corporate form of business organization:
- Separate legal entity
- Limited liability of shareholders
- Ease of transferring ownership rights (shares)
- Ability to acquire capital (cash) by issuing shares
- Continuous life
- Separation of management and ownership
- Potential for reduced income tax
List some disadvantages of the corporate form of business organization:
- Increased cost and complexity to follow government regulations
- Increased reporting and disclosure requirements
When a corporation has only one class of shares, that class has the rights and privileges of ________ shares.
When a corporation has only one class of shares, that class has the rights and privileges of common shares.
ordinary shares = common shares
*preferred shares also exist
The amount of share capital that a corporation is authorized to sell is indicated in its ________ of incorporation. It may be specified as either an unlimited amount or a specific number (for example, 1 million shares authorized).
The amount of share capital that a corporation is authorized to sell is indicated in its articles of incorporation. It may be specified as either an unlimited amount or a specific number (for example, 1 million shares authorized).
*most companies in Canada have unlimited
The first time a corporation’s shares are offered for sale to the public, the offer is called an ______ _____ ______.
The first time a corporation’s shares are offered for sale to the public, the offer is called an initial public offering (IPO).
Issued shares are authorized shares that have been _______.
Issued shares are authorized shares that have been sold.
One commonly reported measure of the fair value of a company’s total equity is its ________ ____________.
One commonly reported measure of the fair value of a company’s total equity is its market capitalization.
Market capitalization is calculated by multiplying the number of _______ issued by the share ______ at any given date.
Market capitalization is calculated by multiplying the number of shares issued by the share price at any given date.
Share capital of most types of shares issued is legal capital that cannot be distributed to shareholders unless the shares are ________ to the corporation and _______.
Share capital of most types of shares issued is legal capital that cannot be distributed to shareholders unless the shares are returned to the corporation and cancelled.
Most shares are commonly known as ___ ______ ______ shares, which simply means that the shares have no predetermined value.
Most shares are commonly known as no par value shares, which simply means that the shares have no predetermined value.
Contributed capital is the amount ________ paid, or contributed, to the corporation in exchange for ______ of ownership.
Contributed capital is the amount shareholders paid, or contributed, to the corporation in exchange for shares of ownership.
- consists of share capital
Contributed capital can also include other sources of capital as a result of share transactions, known as additional contributed capital, which can result from certain types of ______ transactions, including the _______ of shares.
Contributed capital can also include other sources of capital as a result of share transactions, known as additional contributed capital, which can result from certain types of equity transactions, including the reacquisition of shares.
Contributed capital is also known as ________ contributed capital.
Contributed capital is also known as additional contributed capital.
When shares are issued for a ______ consideration, they should be recorded at the fair value of the consideration received (for example, goods or services).
When shares are issued for a noncash consideration, they should be recorded at the fair value of the consideration received (for example, goods or services). Mostly in private companies.
*compensation to lawyers or consultants
The terms reacquired and _________ are used interchangeably with respect to stock purchases.
The terms reacquired and repurchased are used interchangeably with respect to stock purchases.
A company may want to buy back shares in an effort to ______ their price. If the number of shares is reduced, the values of certain ratios, such as basic earnings per share, will _____.
A company may want to buy back shares in an effort to increase their price. If the number of shares is reduced, the values of certain ratios, such as basic earnings per share, will rise.
The reacquisition of shares for a public company is often called a ____ ____ ____ ____.
The reacquisition of shares for a public company is often called a normal course issuer bid.
Steps to record a reacquisition and retirement of common shares (or preferred shares):
- Remove the cost of the shares from the share capital account
- Record the cash paid
- Record the “gain” or loss” on reacquisition
If the shares are reacquired at a price below their average cost, the difference is credited to the ________ ________ account.
If the shares are reacquired at a price below their average cost, the difference is credited to the Contributed Surplus account.
If the shares are reacquired at a price above the average cost, the difference is debited first to the ________ _______ account if it has a balance, and then any remaining difference is applied to reduce the _______ ________ account.
If the shares are reacquired at a price above the average cost, the difference is debited first to the Contributed Surplus account if it has a balance, and then any remaining difference is applied to reduce the Retained Earnings account.
Preferred shares have contractual provisions that give them a _______, or _______, over common shares in certain areas.
Preferred shares have contractual provisions that give them a preference, or priority, over common shares in certain areas.
- re: distribution of dividends and, in the event of liquidation, over the distribution of assets.
A dividend preference simply means that the preferred shareholders must be paid dividends ______ any are paid to the common shareholders.
A dividend preference simply means that the preferred shareholders must be paid dividends before any are paid to the common shareholders.
Preferred shares with a dividend preference may contain a cumulative dividend feature. This right means that when dividends are declared to be payable, preferred shareholders must be paid both _________-year dividends and any ________ ______-year dividends before ______ shareholders receive dividends.
Preferred shares with a dividend preference may contain a cumulative dividend feature. This right means that when dividends are declared to be payable, preferred shareholders must be paid both current-year dividends and any unpaid prior-year dividends before common shareholders receive dividends.
- alternative to non-cumulative
When preferred shares are cumulative, preferred dividends that are not declared in a period are called _______ in ______.
When preferred shares are cumulative, preferred dividends that are not declared in a period are called dividends in arrears.
Dividends cannot be paid to common shareholders while any preferred share dividends are in _______.
Dividends cannot be paid to common shareholders while any preferred share dividends are in arrears.
If a company does have dividends in arrears, they would not be considered a ____.
No obligation exists until a dividend is declared by the board of ________ and without the existence of an obligation, no ________ can be recorded.
If a company does have dividends in arrears, they would not be considered a liability.
No obligation exists until a dividend is declared by the board of directors and without the existence of an obligation, no liability can be recorded.
Retained earnings of a company accrue to the common shareholders and, because of this, the price for the common shares will ________ over time if a company is profitable and ______ if it is not.
Retained earnings of a company accrue to the common shareholders and, because of this, the price for the common shares will rise over time if a company is profitable and fall if it is not.
Therefore the price for a common share is usually more volatile than the price for preferred shares.
The major factor affecting the common share price is the ________ of the company whereas the major factor affecting the preferred share price is the level of ________ ______ on these shares.
The major factor affecting the common share price is the profitability of the company whereas the major factor affecting the preferred share price is the level of dividends paid on these shares.
The ________ of preferred shares as an investment is sometimes increased by adding a conversion privilege.
The attractiveness of preferred shares as an investment is sometimes increased by adding a conversion privilege.
________ preferred shares allow the exchange of preferred shares for common shares at a specified ratio.
Convertible preferred shares allow the exchange of preferred shares for common shares at a specified ratio.
