Owner's Equity Basics

Question 1

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

Answer 1

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

Question 2

What is owner’s Equity?

Answer 2

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

Question 3

What is the owner’s equity equation?

Answer 3

Total owners equity = Total assets - total liabilities

Question 4

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

Answer 4

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

Question 5

What are the major types of OE?

Answer 5

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

Question 6

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

Answer 6

Just one, such as John Doe, Capital.

Question 7

What is common stock?

Answer 7

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

Question 8

How is the number of shares outstanding determined?

Answer 8

The number of shares currently held by stockholders

Question 9

List the main types of ownerships in business organizations

Answer 9

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

Question 10

Define “authorized shares.”

Answer 10

The total number of shares that may be issued

Question 11

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

Answer 11

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.

Question 12

What is the biggest disadvantage of the corporate structure?

Answer 12

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

Question 13

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

Answer 13

Par value

Question 14

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

Answer 14

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.

Question 15

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

Answer 15

APIC

Question 16

List the types of preferred stock rights

Answer 16

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

Question 17

What purpose does legal capital serve?

Answer 17

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).

Question 18

What is the number of common shares issued?

Answer 18

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

Question 19

How is the number of shares in the Treasury determined?

Answer 19

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

Question 20

Define “legal capital.”

Answer 20

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

Question 21

Define “dividends in arrears.”

Answer 21

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

Question 22

List the types of common stock rights

Answer 22

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

Question 23

When does the firm become liable for Dividends?

Answer 23

When they are declared by the Board of directors.

Question 24

What is the order of rights in a liquidation?

Answer 24

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

Question 25

Why is preferred stock called "preferred?

Answer 25

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

Question 26

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

Answer 26

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

Question 27

What are the disclosures required with OE?

Answer 27

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.