Ch. 11 - Reporting and Analyzing SE

Question 1

What are the share issue considerations?

Answer 1

Shares can be divided into different types and classes: Common shares and Preferred shares

Question 2

What is share capital?

Answer 2

Is it the investment of cash, or other assets, in the company by shareholder in exchange for common shares or preferred shares.

• Ownership rights are specified in articles of incorporation or in by-laws.
  –> voting, dividends, and liquidation.

Question 3

Share Capital Formula

Answer 3

Share Capital = total common shares + preferred shares

Question 4

What are authorized shares?

Answer 4

It is the maximum allowable number of shares which may be limited or unlimited.

–> Not journalized (illegal)

Question 5

What are issued shares?

Answer 5

They are the authorized shares sold

–> Journalized

Question 6

How does it work for public companies?

Answer 6

The first issue normally conducted through initial public offering (IPO) to which share price is set by company.

After the issue, shares are traded on secondary market on organized exchanges.

Question 7

What is the fair value of shares?

Answer 7

After the initial issue of shares, the share price changes according to the interaction between the buyers and sellers (market forces).

-The share price has no direct effect on the company’s financial position.

• Market cap is the measure of fair value of company’s total equity

Question 8

Market Capitalization Formula

Answer 8

Market Capitalization = (number of shares issued) (share price)

Question 9

What are common shares?

Answer 9

The share capital is the amount shareholders paid to corporation shares. Usually issued for cash.

DR. Cash
CR. Common Shares

ASPE: fair value of shares given up or fair value of consideration received (whichever one is more reliable)

IFRS: record at cash equivalent price (ideally fair value of consideration received)

Question 10

What are preferred shares?

Answer 10

They have contractual provisions awarding priority over common shares.

Dividend preference: pref. shareholders must be paid dividends before they are paid to common shareholders.

Liquidation preference: pref. shareholders have priority claim over common shareholders in distribution of corporate assets in even of liquidation.

–> But they do not usually have voting rights.

DR. Cash
CR. Preferred shares

Question 11

What are dividends and two types?

Answer 11

It is a pro rata distribution of a portion of a company’s retained earnings to shareholders.

1. Cash dividends (most common)
2. Stock dividends

Question 12

What are cash dividends?

Answer 12

In order to declare a cash dividend, a two-party solvency test must be met. (As per the CBCA)

a) Company must have have enough cash or resources to pay liabilities
b) Net realize value of company’s assets must exceed total of company’s liabilities and share capital.

Question 13

Cash Dividends: Three important dates

Answer 13

1. Declaration date
2. Record date
3. Payment date

Question 14

What are stock dividends and important dates?

Answer 14

It is the distribution of corporation’s own shares, rather than cash, to shareholders.

1. Declaration date
2. Record date
3. Distribution date

You must:
1. Satisfy shareholders’ dividend expectations while conserving cash
1. increase marketability of shares
3. Permanently reinvest retained earnings into share capital of corporation

Question 15

What are stock splits?

Answer 15

It involves the issue of additional shares to shareholders according to their percentage of ownership.

It has no effect on SE. (not journalized)

Market value of shares will decrease roughly proportionately to the split.

Main purpose of stock split increase marketability of shares by lowering share price.

In an efficient market, effect of stock split on share price will be inversely proportional to size of stock split.