Chapter 10: Common Share Transactions Flashcards
(41 cards)
What are the two types of shares issued by corporations?
Corporations issue common shares and preferred shares.
What are common shares?
Common shares are the basic voting shares issued by a corporation and are often referred to as residual equity because they rank after the preferred shares for asset distribution upon liquidation of the corporation.
What is the difference between common shares and preferred shares?
Preferred shares grant legal privileges or preferences that common shares do not have, such as priority in asset distribution upon liquidation.
What is par value?
Par value is the nominal value per share established in the charter of a corporation. It has no relationship to the price at which shares are actually sold to investors.
Why do most Canadian companies focus on no par value shares?
The CBCA and most provincial corporation acts prohibit the issuance of par value shares.
Most Canadian companies that still have par value shares outstanding issued them before the CBCA was amended in 1985.
What was the original purpose of specifying a par value for shares?
The original purpose was to establish a minimum permanent amount of capital that the owners could not withdraw as long as the corporation existed, to protect creditors from the company’s bankruptcy.
What is an initial public offering (IPO)?
An IPO involves the first sale of a company’s shares to the public and marks the transition from a private company to a public one.
What is the difference between a primary market and a secondary market?
The primary market is where new issues of shares are sold to the public for the first time, and the secondary market is where existing shares are traded among investors.
What are seasoned new issues or secondary share offerings?
These are additional sales of new shares to the public by a company that has already gone public.
Who typically assists a company with an IPO?
An investment bank usually acts as an underwriter to assist in the sale of shares during an IPO.
What is the accounting entry for issuing common shares for cash?
Debit Cash and credit Common Shares. For example, if a company issues 100,000 common shares for $60 per share, the entry would be a debit to Cash for $6,000,000 and a credit to Common Shares for $6,000,000.
What happens to a corporation’s common share account when shares are issued to employees upon exercise of stock options?
The corporation’s common share account increases by the amount corresponding to the exercised stock options.
What is a secondary market?
A secondary market is where investors who own shares from the initial public offering (IPO) may sell their shares to other investors.
The stock exchange acts as the secondary market.
Are journal entries recorded for trades in the secondary market?
No, trades of shares among shareholders result in a transfer of funds and share ownership between them, but the accounts of the company issuing the shares are not affected.
Therefore, no journal entries are recorded.
Which financial information service providers report on secondary market transactions?
Bloomberg.com, Reuters.com, finance.yahoo.com, and money.msn.com are some of the providers that report the results of millions of transactions among investors trading in all the global secondary markets.
What is an IPO?
An IPO, or Initial Public Offering, is the first sale of shares to the public by a private company.
Why might a company go public?
A company might go public to raise funds needed to expand and meet expected consumer demand or to create a market for its shares if it’s not listed on a major stock exchange.
Are IPOs always safe investments?
No, while IPOs can offer good opportunities for excellent returns by investing in growing companies, there is substantial risk involved, and there are stories of both significant gains and losses in IPO investments.
How do companies record the issuance of shares in exchange for non-cash assets or services?
When a company issues shares to acquire assets or services, the acquired items are recorded at the fair value of the assets or services received.
If the fair value cannot be reliably estimated, then the fair value of the shares would be used.
What would be a journal entry for a company that issues shares in exchange for legal services?
The journal entry would debit legal fees and credit common shares by the value of the legal services received, which is assumed to be equal to the fair value of the shares issued.
What is one advantage of the corporate form regarding equity ownership and management?
The corporate form allows the separation of the management of a business from its equity owners.
Why might offering stock options to managers be beneficial for a corporation?
Stock options can align the interests of managers with those of the company by incentivizing managers to make decisions that will increase the value of the company in the long term.
What is an exercise price in the context of stock options?
The exercise price is the predetermined contract price at which the holder of a stock option has the right to purchase shares in the future.
It is normally equal to the current market price per share when the option is granted.
What is an Employee Stock Option Plan (ESP)?
An Employee Stock Option Plan (ESP) is a form of non-cash compensation that provides executives and employees the incentive to act in the best interests of the corporation, potentially increasing the company’s share price.
