FAR-F7-M1/M2-Stockholder's Equity Part 1 and 2 Flashcards
What is the biggest difference between common stock and preferred stock?
Common stock usually has voting rights and preferred stock doesn’t. Preferred stock usually has dividends and dividend priority and common stock MIGHT not receive dividends
Either with the cost method or the pav method, when a company issues stock, what are the three accounts hit?
Dr. Cash Received XXX
Cr. Common stock (# of shares * par value) (XXX)
Cr. APIC (whatever is above par value) (XXX)
What are the main components of stockholder’s equity?
Stockholder’s equity =
Capital Stock (common stock and preferred stock)
PLUS Additional paid in capital (capital in excess of par)
PLUS Retained Earnings (appropriated and unappropriated retained earnings)
PLUS AOCI
LESS Cost of Shares in Treasury
EQUALS Total Stockholder’s equity of corporation
PLUS Noncontrolling Interest
EQUALS Total Stockholder’s Equity of corporation
Is the following statement true or false? Preferred stock may include preference to dividends, which may be cumulative, noncumulative and participating or nonparticipating.
TRUE. Preferred stock may include preference to dividends, which may be cumulative, noncumulative and participating or nonparticipating.
What are cumulative preferred stock?
Cumulative preferred stock provides that all or part of the preferred dividend not paid in any year accumulates and must be paid in the future before dividends can be paid to common shareholders. The accumulated amount is referred to as Dividends in Arrears.
Is the amount held in Dividends in arrears for cumulative preferred stock considered a liability? Should it be disclosed?
The amount withheld in dividends in arrears for cumulative preferred stock is not a liability but it must be disclosed in the total and as a pre share basis in the footnotes.
What are noncumulative preferred stock?
Noncumulative preferred stock: Dividends not paid in any year DO NOT ACCUMULATE. The preferred sthareholders lose the right to receive dividends that are not declared.
How are dividends shared with participating cumulative preferred stock?
Participating preferred stock basically share dividends equally THEN pro-rata. The principle applied is that with participating cumulative preferred stock, before any pro-ration of dividends exist, the common shareholders must receive an equal % as the preferred shareholders. Then the remaining balance is distributed to preferred stockholders and common stockholders based on the par values of ownership held relative to total capitalization.
How are dividends shared with nonparticipating preferred stock?
When preferred stock is nonparticipating, preferred shareholders are limited to the dividends provided by their preference. They do not share in excess dividends.
Should mandatorily redeemable preferred stock be considered a liability by the issuing company?
Yes. Common stock that contains an unconditional redemption feature should be reported on the issuer’s books as liability on the date of issuance because there is an obligation of a cash outflow in the future that the company has no ability to prevent.
Is the following statement true or false? Cumulative preferred stock dividends are paid on par value (not sales price) of preferred stock and have a PREFERENCE over common stock dividends until all past preferred stock are paid.
TRUE. Cumulative preferred stock dividends are paid on par value (not sales price) of preferred stock and have a PREFERENCE over common stock dividends until all past preferred stock are paid.
Can preferred stock be callable, redeemable or convertible?
Yes, preferred stock can be callable, redeemable and convertible.
What are convertible preferred stock?
Convertible preferred stock may be exchanged for common stock (at the option of the stockholder) at a specified conversion rate.
Is the following statement true or false in relation to convertible preferred stock? Allocate ISSUE PROCEEDS of a basket purchase or sale of convertible preferred stock based on relative fair market values.
TRUE. Allocate ISSUE PROCEEDS of a basket purchase or sale of convertible preferred stock based on relative fair market values.
How is retained earnings generally calculated?
Retained earnings =
Net Income or Loss
LESS dividends declared
PLUS or LESS prior period adjustments (correction of error)
PLUS or LESS accounting principle change
EQUALS retained earnings
Is the following statement true or false. Retained earnings may be classified as appropriated (restricted) or unappropriated. The purpose of appropriating Retained Earnings is to disclose to shareholders that some of the retained earnings are not available to pay dividends because they have been restricted for legal and contractual reasons.
TRUE. Retained earnings may be classified as appropriated (restricted) or unappropriated. The purpose of appropriating Retained Earnings is to disclose to shareholders that some of the retained earnings are not available to pay dividends because they have been restricted for legal and contractual reasons.
Can appropriation of retained earnings be used to absorb costs or losses or to smooth periodic income?
NO. Appropriation of retained earnings cannot be used to absorb costs or losses or to smooth periodic income.
