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Flashcards in Retained Earnings Deck (20):

What is the calculation to determine

Retained Earnings?

Income to Date

- Dividends declared

+ / - Other adjustments


Retained Earnings


How is the Retained Earnings statement reported?

  1. As a separate statement
  2. As a column in a full Statement of Changes in Owners' Equity


What are the two adjustments to the Beginning Retained Earnings?

  1. Cumulative Effect of an accounting principle change
  2. Prior Period adjustment — the corretion of an error in prior year income


What is a Retained Earnings Appropriations?

  • To inform shareholders that dividends may be reduced for a time and for a particular purpose.
  • No effect on total retained earnings for cash.

Retained Earnings

     Retained Earnings, appropriated for expansion


What are Retained Earnings Restrictions?

An external party places a restriction on the amount of dividends a firm can pay


How are Retained Earnings Restrictions reported?

  • No journal entry required
  • Footnoted


What are Stock Rights?

  • Option to purchase a specified number of shares
    • At a specified price
    • During a specified time period

Often used to convey preemptive right.


What is the JE if a stock right lapsed?

No JE needed


What is the Journal Entry when stock rights are exercised?

Supply Expense (Payment +[Mv-Fv]  [Stock right/ right])

          Stock Rights Outstanding               PLUG

          Cash                                                  Payment  


List the reasons for appropriating retained earnings.

  1. Financial planning;
  2. Legal requirement;
  3. Contractual obligation.


Define "restrictions on retained earnings".

An external constraint placed on a certain portion of retained earnings by an external party.


What is the effect of retained earnings appropriations on assets?

No effect on assets.


How should restrictions and appropriations on retained earnings be reported?

Disclosed in footnotes.


What is often used to convey preemptive rights regarding stocks?

Stock rights.


Define "retained earnings appropriation".

Management's formal communication that a portion of retained earnings has been declared off-limits for dividends.


Describe the accounting entry to record stock rights issued to outside parties for services at exercise of rights.

Record the stock issuance at the exercise price and remove the OE account credited at issuance of the rights.


What happens to excess or residual 

Appropriated Retained Earnings?

Returned to unappropriated retained earnings


What is an Appropriation of Retained Earnings?

  • An appropriation of retained earnings is primarily a device for communicating the intention of management to restrict dividends, so that cash will be conserved for the specified purpose
  • The actual restriction of cash makes that amount of cash unavailable for normal operating use. 


How do you handle issuance of warrants?

The issuance of warrants to shareholders does not require a journal entry, because no resources are expended or received.


How are the exercise of Stock rights treated?

Treated just like an issuance of stock.