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Flashcards in Owner's Equity Basics Deck (27):

What are the two main categories of Owner's Equity?

1.) Earned
2.) Contributed - primary measurement basis is historical value of direct investments made in the firm by investors, in return for shares of capital stock


What is owner's Equity?

Represents the residual interest in the net assets of an entity that remain after deducting its liabilities.


What is the owner's equity equation?

Total owners equity = Total assets - total liabilities


How are owner's equity items presented on the balance sheet?

In declining order of permanence. More permanent items are shown first (contributed capital)


What are the major types of OE?

1.) Preferred stock - total par value
2.) Common Stock - total par value
3.) APIC Preferred - amount received for preferred stock issuances in excess of par value
4.) APIC common - amount received for common stock issuances in excess of par value
5.) RE - Net of firm's earnings to date less dividends to date, pus or minus other items include PPE
6.) Acc OCI - Running total of OCI
7.) Treasury Stock - cost of company stock purchased by company. Ex. Coke owns Coke stock


In a sole proprietorship, how many OE accounts are there?

Just one, such as John Doe, Capital.


What is common stock?

The means by which ownership is conveyed. If there is only one class of stock, it is common.


How is the number of shares outstanding determined?

The number of shares currently held by stockholders


List the main types of ownerships in business organizations

1.) Sole proprietorship;
2.) Partnership;
3.) Corporation


Define "authorized shares."

The total number of shares that may be issued


What are the advantages of having a corporate structure instead of sole proprietorship, partnership, etc.?

1.) Shareholders have limited liability, corp is a separate legal entity.
2.)Shares are easily purchased or sold (public company)
3.) The actions of one shareholder does not bind the corporation or other shareholders.


What is the biggest disadvantage of the corporate structure?

Double taxation of corporate profits. Corp must pay income taxes and file an annual return. Dividends to shareholders are taxed on their personal return.
-Corporations are also subject to a great deal more regulation than other forms


What is the "legal minimum issue price for capital stock in most states?"

Par value


If a stock has no Par value, what alternatives exist?

1.) Firm may designate stated value which serves same function as par but does not show up on certificate
2.) Firm may not use par value at all, in which case stock is referred to as no par stock.


Any excess of issuance price of a stock over par value is credited to what?



List the types of preferred stock rights

1.) Nonvoting;
2.) Dividend preferences;
3.) Liquidation preferences.


What purpose does legal capital serve?

1.) Establishes minimum investment - minimum investment needed to become a part of the ownership group.
2.) Provides protection for creditors (dividends may not be paid from legal capital).


What is the number of common shares issued?

The number of shares ever issued by the firm but not retired = # of outstanding shares + # treasury shares.


How is the number of shares in the Treasury determined?

The number of shares purchased by the issuing firm and not yet reissued


Define "legal capital."

The par value of the stock or the stated value of the stock issued.


Define "dividends in arrears."

Unpaid dividends for a particular year on cumulative preferred stock. No liability for these until they are declared.


List the types of common stock rights

1.) Voting - can vote on decisions, are not part of day-to-day operations
2.) Dividend - right to dividends, not mandatory
3.) Preemptive - allowed to purchase more stock if more stock is issued so that they do not dilute ownership


When does the firm become liable for Dividends?

When they are declared by the Board of directors.


What is the order of rights in a liquidation?

1.) Creditors
2.) Preferred Shareholders
3.) Common Shareholders


Why is preferred stock called "preferred?

Because these shares usually receive dividends first, usually give up their right to vote


What number of shares is "Earnings per share" and other per share calculations usually based on?

Shares outstanding, that is the number of shares currently held by the stockholders.


What are the disclosures required with OE?

1.) Rights and preferences of each class of stock including liquidating preferences.
2.) Number of shares authorization, issued and outstanding for each class
3.) Par Value for each class
4.) Treasury Shares
5.) Restrictions regarding dividends and dividends in arrears
6.) Call and conversion formula.

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