chapter 11: reporting and interpreting shareholder's equity

Question 1

contributed capital

Answer 1

amount invested by shareholders and has two compnents

1. amount initially received from sale of shares
2. contributed surplus that reflect contributions made by shareholders apart from sale of shares

Question 2

retained earnings

Answer 2

generated by profit making activities

net earnings - dividends

Question 3

what is the only business form that law recognizes as a separate entity from the owners?

Answer 3

a corporation

Question 4

what are the benefits that owners of common shares can benefit?

Answer 4

a voice in management

dividends

residual claim

Question 5

residual claim

Answer 5

shareholders may receive proportionate share of the distribution of remaining assets upon liquidation of the company

Question 6

authorized number of shares

Answer 6

maximum number of shares that a corporation can issue to the public

has to be specified in the charter

Question 7

issued shares

Answer 7

number of shares that have been issued

Question 8

outstanding shares

Answer 8

total number of shares that are owned by shareholders on any particular date

Question 9

what must a company do if they want to sell more shares than their authorized number of shares?

Answer 9

they must ask permission to shareholders to be able to change the charter specifying what is the maximum amount of shares that can be issued

Question 10

un-issued number of shares

Answer 10

the number of authorized shares that have never been issued to date

Question 11

treasury shares

Answer 11

shares that have been issued to investors and then reacquired by the issuing corporation

Question 12

earnings per share ratio

formula and meaning

Answer 12

how profitable is the company?

measure of the return on investments that is based on the number of shares outstanding

earnings per share =

net earnings available to common shareholders
______________________________________
average number of common shares outstanding

Question 13

what are the two types of shares that are issued by a company?

Answer 13

common shares

preferred shares

Question 14

which type of shares is issued by ALL corporations?

Answer 14

common shares

Question 15

which type of shares is issued by only SOME corporations

Answer 15

preferred shares

Question 16

common shares

Answer 16

basic voting shares issued by a corporation

often called residual equity

Question 17

why are common shares called residual equity?

Answer 17

because they rank after the preferred shares for dividends and asset distribution upon liquidation of a company

Question 18

how is the dividends rate of a common share determined?

Answer 18

determined by board of directors based on company profitability

if the company not profitable, it can eliminate the dividends

Question 19

how is the dividends rate of a preferred share determined?

Answer 19

determined by contract

if the company not profitable, it can’t eliminate the dividends

Question 20

par value of shares

Answer 20

nominal value per shares specified in the charter

serves as basis for legal capital

issued mostly in US but rarely Canada

Question 21

no par value shares

Answer 21

do not have an amount per share specified in the charter

Question 22

legal capital

Answer 22

permanent amount of capital defined by the law that must remain invested in the business

serves as cushion for creditors

Question 23

initial public offering of shares

Answer 23

when a corporation first sells shares to the public

Question 24

secondary new shares (seasoned new offerings)

Answer 24

additional new shares to the public

Question 25

do the transaction between investors directly affect the company's financial statementS?

Answer 25

nah boy

Question 26

what is the secondary market

Answer 26

such as NYSE or TSE where different shareholders trade shares between themselves

Question 27

stock options

Answer 27

new form of compensation employees buy stocks at a fixed price, no matter what market price is

Question 28

must companies report the difference between what they could have made from selling their shares in the market and what they made due to stock options?

Answer 28

ye boy

Question 29

why would a company repurchase shares

Answer 29

increase price of shares by reducing t¡number of outstanding shares

Question 30

does a company generate a profit if it acquires its own shares at a lower price than the market

Answer 30

nah bruh they are capital transactions, not operating transactions what they do create is contributed surplus credited in shareholders' equity

Question 31

what happens when a company if a company repurchases shares at a higher price than the market price?

Answer 31

whatever there was of contributed surplus gets eliminated ((debited) (a part of it if not all of it)) if all surplus Is eliminated, then you debit (reduce) retained earnings

Question 32

how can dividends be paid other than with cash?

Answer 32

with assets or by using additional shares

Question 33

what are the types of dates on the dividend declaration?

Answer 33

declaration date date of record payment date

Question 34

declaration date

Answer 34

date on which the board of directors officially approved the dividend as soon as they make declaration, liability is created

Question 35

date of record

Answer 35

date on which the corporation prepares the list of current shareholders as shown on its records dividends can only be paid to shareholders who own shares at that date

Question 36

payment date

Answer 36

date at which cash dividends is paid to shareholders of record

Question 37

what are the two requirements necessary for the payment of dividends

Answer 37

sufficient retained retained sufficient cash

Question 38

if a company does not have sufficient retained earnings to pay dividends to remain profitable but still does so, what is an additional criteria?

Answer 38

they must still be able to pay their obligations

Question 39

dividend yield ratio formula and meaning

Answer 39

how much do investors earn on their investments based on dividends dividends per share / market price per share

Question 40

stock dividend

Answer 40

distribution of additional shares of a corporation's own equity on pro rata basis this means that if the company declares stock dividends of 10%, each shareholder will receive 10% of additional share of what they already own

Question 41

if a company declares stock dividends, will the individuals owning the shares become wealthier as if it were cash dividend payments?

Answer 41

nah boy once the stock dividend is declared, the share price falls dramatically

Question 42

do stock dividends change the total shareholder's equity?

Answer 42

nah boy

Question 43

stock splits

Answer 43

increase in total number of authorized shares by a specified ratio (number does not increase retained earnings does not require journal entry but must be disclosed in the notes of financial statements

Question 44

how do you record a small stock dividend? (under 50%)

Answer 44

you record it at he market price of the shares

Question 45

how do you record a large stock dividend? (over 50%)

Answer 45

you record at the average issues price of the share

Question 46

preferred shares

Answer 46

grants additional rights to shareholders who own preferred shares

Question 47

what are the most significant differences of preferred shares?

Answer 47

preferred shares do not grant voting rights preferred shares are less risky than common shares preferred shares typically have a fixed dividend rate

Question 48

preferred shares do not grant voting rights

Answer 48

does not appeal to investors who want control of the company

Question 49

preferred shares are less risky than common shares

Answer 49

have priority over common shareholders regarding dividends and distribution of assets due to liquidation

Question 50

preferred shares typically have a fixed dividend rate

Answer 50

preferred shares don't have a par value they carry a stated values (nominal value) fixed dividend rates (amount per share) attractive to investors who want stable income

Question 51

convertible preferred shares

Answer 51

preferred shares that are convertible to common shares at the option of the holder

Question 52

can preferred shares be redeemable or callable?

Answer 52

yeee

Question 53

how are the preferred shares with a fixed redemption date classified as?

Answer 53

as liabilities

Question 54

how are dividends of the preferred shares with a fixed redemption date classified as?

Answer 54

expenses

Question 55

how are retractable preferred shares classified as?

Answer 55

classified as liabilities because its in the control of the holder

Question 56

what are the two most common dividend preferences available to owners of preferred shareholders?

Answer 56

current dividend preference cumulative dividend preference

Question 57

current dividend preference

Answer 57

always carried by preferred shares requires that current preferred dividends be paid before any dividends are paid on the common shares

Question 58

where are declared dividends declared at?

Answer 58

between the preferred and commons shares

Question 59

cumulative dividend preference

Answer 59

states that if all or part of the current dividend is not paid in full, the unpaid amount (dividends in arrears), must be paid before any common dividends can be paid

Question 60

dividend in arrears

Answer 60

dividends on cumulative preferred shares that have not been declared in prior years they are like a certain restriction on paying dividends cause you still owe some form past periods not reported in statement of financial position, but in the notes

Question 61

sole proprietorship

Answer 61

unincorporated business owned by one individual not necessary to file any legal papers does not pay income taxes

Question 62

partnership

Answer 62

unincorporated business owned by two or more people

Question 63

which are the equity accounts need for a sole proprietorship?

Answer 63

a capital account drawing (withdrawal) account

Question 64

capital account of a sole proprietorship

Answer 64

records investments by the owner accumulate periodic net earnings or loss reflect cumulative total investments by owner * all earnings - withdrawals of ressources

Question 65

drawing (withdrawal) account of a sole proprietorship

Answer 65

used to record owner's withdrawal of cash or assets from the company

Question 66

what are the primary advantages of a partnership

Answer 66

ease of information complete control by partners lack of income taxes on business itself

Question 67

what is the primary disadvantage of a partnership

Answer 67

unlimited liability

Question 68

how is reflected the equity account of a partnership

Answer 68

same as sole proprietorship separated capital accounts drawing (withdrawal) accounts

Question 69

what would investors have to consider when choosing between common shares and preferred shares? which one should they ultimately choose?

Answer 69

an investor has to consider the dividends paid, but the the return on sale of shares as well preferred shares usually guarantee more dividends cash payments, but its prices do not fluctuate sufficiently to make a difference furthermore, often times, preferred shares can be collectable or redeemable at a price slightly above the issuance price not the other hand, common shares do not pay as much dividends, but the investor should only worry about the net earnings and profitability the investor could have a much higher return if the prices go¡f the shares he acquired go up higher than what he bought them for

Question 70

what is the effect of a stock dividend on assets, liabilities' and shareholders' equity

Answer 70

assets and liabilities are not affected Total shareholders' equity should remain the same contributed capital increases and retained earnings decrease by the same amount

Question 71

when paying dividends, are future cash flows necessary to consider?

Answer 71

yeeee boooy

Question 72

if a company has a net loss in a quarterly period, but still pays dividends, what statement does it make to investors?

Answer 72

that although they had losses this quarter, future cash flows and results will be positive they show confidence had they not paid dividends, investors would have been like "mon Che wtf"

Question 73

why would a company repurchase its own shares?

Answer 73

Reduction of the number of common shares outstanding in order to increase earnings per share Increase the price per share by reducing the number of common shares outstanding, A smaller number of outstanding common shares allows the company’s management to maintain control of the company’s operations as well as investment and financing activities, Lack of investment opportunities for the use of cash generated from operations. Planned issuance of additional shares to management personnel as a result of stock options with the desire to maintain the same number of shares outstanding