Module 15: Stockholders' Equity Flashcards
Liquidation Diviidends
(Dividends based on other than earnings) are a return of capital to stockholders and should be disclosed. Paid-in capital is usually debited rather than retrained earnings. Common Stock can not be debited because it is the legal capital which can only be eliminated upon corporate dissolution. Any dividend which exceeds the balance of retained earnings is considered a liquidating dividend.
Property Dividends
Property dividends are accounted for as cash dividends. They are recorded at fair value of the asset transferred with a gain (loss) recognized on the difference between the assets BV and FV at disposition.
Earnings Per Share formula
Net Income - Current Year Preferred Stock Dividends / weighted average number of common stock shares outstanding
Diluted Earnings Per Share formula
Net Income - Current Year Preferred Stock Dividends + Net of Tax Bond Interest Expense /
Weighted Average number of common stock shares outstanding + common stock equivalents
Book Value of Common Stock
(at a point in time) - not a meaningful measure because assets are carried at historical cost.
Common Stockholders Equity/ Shares Outstanding
Stock Splits
Stock splits change the number of shares outstanding and the par value per share. Par value is reduced in proportion to the increase in the number of shares. The total par value outstanding does not change and no change is made to retained earnings. If legal requirements preclude chaining the par or stated value, charge retained earnings only for the par or stated value issued.
Ratios - Debt to Equity
Total Liabilities/ Common Stockholders’ Equity
Preferred Stock
Preferred stock has preferential rights; most commonly the right to receive dividends prior to common stockholders. Generally the dividend payout is specified.
Treasury Stock
A firm’s own stock repurchased on the open market. It is not an asset as firm may not own shares of itself. Instead it is treated as reduction of stockholder’s equity.
Treasury Stock -> Cost Method
Treasury stock is debited for the cost of the treasury stock. Any gain or loss is recognized at the point of resale. A one-transaction viewpoint is used as the firm is treated as a middle “person” for the transfer of stock between two shareholders.
Treasury Stock -> Par Value Method
Unde the par value method, all capital balances associated with treasury stocks are removed upon acquisition. Any excess of treasury stock cost over par value is accounted for by charging “paid-in capital from common stock” for the amount in excess of par received when the shares were originally issued.
Stock Warrants
Issued to existing shareholders so that they can purchase additional shares of stock in order to maintain their ownership percentage.
Contributed Capital
Legal capital + other paid-in amounts
Preferred Stock - Participating
Share with common stockholders in dividend distributions after both preferred and common stockholders receive a specified level of dividend payment.
Preferred Stock - Cumulative
Dividends not paid in any year (dividends in arrears) must be made up before distributions can be made to common stockholders.
