Lesson 14 (Equity Financing)

Question 1

what are the two different ways a company can go out and raise cash ?

Answer 1

1. debt financing
2. equity financing

Question 2

• loans; repay, with interest
• liable for amount of loan
• relationship ends with repayment
  which way of raising funds is this ?

Answer 2

debt financing

Question 3

• no responsibility to repay
• investor takes risk
• investor rewarded by companies future success
  which way of raising funds is this ?

Answer 3

equity financing

Question 4

what are the two categories of equity ?

Answer 4

1. contributed capital (common stock)
2. retained earnings

Question 5

this is the amount that owners have contributed through the purchase of stock
what is this ?
* capital stock

Answer 5

contributed capital

Question 6

this is the net income earned by the company not paid out as dividends
what is this ?

Answer 6

retained earnings

Question 7

what are the two types of capital stock ?

Answer 7

1. preferred stock
2. common stock

Question 8

if a dividend is paid the preferred stockholders must be paid in full before common stockholders can receive a dividend
what is this ?

Answer 8

dividend preference

Question 9

• has dividend preference - means if a dividend is paid the preferred stockholders must be paid in full before common stockholders can receive a dividend
• is set at a fixed percentage
• typically do not have voting rights
  which capital stock is this ?

Answer 9

preferred stock

Question 10

• have voting privileges on election of board of directors and vote on significant activities of management
• dividend rates are determined by the board of directors based on the corporations profitability
• receive dividends after preferred stockholders
  which capital stock is this ?

Answer 10

common stock

Question 11

is the accounting for preferred and common stock the same ?

Answer 11

yes

Question 12

• a monetary amount assigned to each class of stock for accounting purposes only
• has no relationship to market value
  what is this ?

Answer 12

par value

Question 13

when stock is sold to owners (stockholders), the stock account is only recorded at ______ - the excess of the selling price of the stock over the par value is recorded in the equity account called ______ ?

Answer 13

par value; paid in capital

Question 14

do transactions involving our own stock effect the income statement ?

Answer 14

no

Question 15

each class of stock has three types of shares
what are they ?

Answer 15

1. authorized shares
2. issued shares
3. outstanding shares

Question 16

the total number of shares of stock that the company is allowed to set to the public
which type of shares is this ?

Answer 16

authorized shares

Question 17

the total number of shares that have been sold to the public
which type of shares is this ?

Answer 17

issued shares

Question 18

the total number of shares actually in the hands of stockholders (i.e, shares currently owned by stockholders)
which type of shares is this ?

Answer 18

outstanding shares

Question 19

a corporations own stock that had been issued but was subsequently re acquired
what is this ?

Answer 19

treasury stock

Question 20

• to reduce the shares outstanding and thus increase the market value per share
• to remove shares from the market to avoid a hostile takeover
• to use in employee stock option programs
• to give cash back to existing shareholders
  what are these examples of ?

Answer 20

reasons why companies would want to re acquire their own stock

Question 21

treasury stock results in a decrease to stockholders equity on the balance sheet, so it is classified as a ?

Answer 21

contra equity account with a normal balance on the debit side

Question 22

what is treasury stock considered what stock?

Answer 22

considered issued stock but not outstanding stock
* does no have voting rights
* cannot receive dividends

Question 23

when is treasury recorded ?

Answer 23

at its re acquisition cost

Question 24

treasury stock is not recorded at ?

Answer 24

par value

Question 25

if we sell our re-issuance of treasury stock for more than it cost us then you record the excess in ?

Answer 25

the equity account;
Paid in capital - treasury

Question 26

when treasury stock is re-issued, always remove the treasury stock from the balance sheet at its?

Answer 26

reacquisition cost

Question 27

if we sell out re-issuance treasury stock for less that the re-acquisition cost then you do what ?

Answer 27

reduce paid in capital - treasury by debiting the account for the difference

Question 28

if a deficit still exists after debiting the paid in capital - treasury account, then you reduce ?

Answer 28

retained earnings for the remaining deficit

Question 29

distribution to the owners (stockholders) of a corporation
what is this ?

Answer 29

dividends

Question 30

cash distributions of earnings to stockholders
what is this ?

Answer 30

cash dividends

Question 31

• dividends must be declared by the board of directors before they can be paid
• the corporation is not legally required to declare (and subsequently pay) dividends
• dividends are not classified as an expense and thus do not impact net income. rather, dividends are paid out of net income
  these are ?

Answer 31

characteristics of cash dividends

Question 32

dividends are classified as a contra equity account because they reduce equity (specifically retained earnings)
so the normal balance of dividends account is a ?

Answer 32

debit

Question 33

once a dividend is declared, what is created ?

Answer 33

a liability

Question 34

what are the 3 important dates relating to dividends ?

Answer 34

1. date of declaration
2. date of record
3. date of payment

Question 35

the date the corporations board of directors formally decides to pay a dividend to stockholders
which date relating to dividends is this ?

Answer 35

date of declaration

Question 36

the date which a stockholder must own the stock in order to receive the declared dividend
which date relating to dividends is this ?

Answer 36

date of record

Question 37

the date on which a corporation pays dividends to its stockholders
which date relating to dividends is this ?

Answer 37

date of payment

Question 38

dividends are only paid on what shares ?

Answer 38

outstanding shares

Question 39

no dividends are paid on what shares ?

Answer 39

treasury shares

Question 40

what is the day retained earnings is reduced and a liability is established ?

Answer 40

date of declaration

Question 41

stockholder must own the stock on this day to receive the dividend
which date is this ?

Answer 41

date of record

Question 42

the day stockholders are given cash
what date is this ?

Answer 42

date of payment

Question 43

most preferred stock is ?

Answer 43

cumulative
*preferred stockholders must be paid both current and prior years unpaid dividends before common stockholders can receive any dividends

Question 44

prior years unpaid preferred stock dividends
what is this ?

Answer 44

dividends in arrears

Question 45

dividends in arrears do not represent _____
but must be disclosed in the _____ statements

Answer 45

actual liabilities; financial

Question 46

measures the amount of profit earned per dollar of invested capital
what is this ?

Answer 46

return on equity (ROE)

Question 47

do you want higher or lower return on equity ?

Answer 47

higher is better

Question 48

measures the amount of net income associated with each share of common stock what is this ?

Answer 48

earnings per share (EPS)

Question 49

do you want higher or lower earnings per share ?

Answer 49

higher is better

Question 50

measures investors expectations regarding the growth potential and earnings stability of a company
what is this ?

Answer 50

price earnings ratio (P/E ratio)

Question 51

do you want higher or lower Price earnings ratio ?

Answer 51

higher is better