F1 M3

What is stockholders’ equity?

The owners’ claim to the net assets of a corporation.

Where is stockholders’ equity presented on the financial statements?

As the last major section of the statement of financial position (balance sheet).

legal capital

The amount of capital that must be retained by the corporation for the protection of creditors.

what equals legal capital for stock?

The par or stated value of both preferred and common stock.

Does common stock always have a par value?

No. Common stock may be issued with or without par value

Additional paid-in capital

The excess of the actual amount received over the par or stated value of stock.

authorized capital stock

The amount of each class of stock a corporation may legally issue per its charter.

issued capital stock

The portion of authorized stock that has been issued.

outstanding capital stock

Issued stock that is in the hands of shareholders (not treasury stock).

what stock disclosures are required?

The number of shares authorized, issued, and outstanding for each class.

common stock

the basic ownership interest in a corporation

what risks and rewards do common shareholders bear

Ultimate risk of loss and ultimate benefits of success

what rights do common shareholders have

Voting rights, right to share in earnings, and right to assets upon liquidation after creditors and preferred shareholders.

preemptive rights

the right to maintain proportionate ownership when new common stock is issued

what is book value per common share?

The amount common shareholders would receive per share if assets were sold at book value and liabilities paid.

formula for book value per common share

Common shareholders’ equity ÷ common shares outstanding.

common shareholders’ equity

total equity – preferred stock (greater of par or call price) – cumulative dividends in arrears

preferred stock

an equity security with preferences and features not associated with common stock

what dividend features can preferred stock have

cumulative or noncumulative; participating or nonparticipating

do preferred shareholders usually have voting rights

no

cumulative preferred stock

unpaid dividends accumulate and must be paid before common dividends

dividend in arrerars

accumulated unpaid preferred dividends

are dividends in arrears a legal liability

No, but they must be disclosed

what is noncumulative preferred stock

dividends not declared do not accumulate

participating preferred stock

preferred shareholders share in excess dividends beyond a specified amount

fully vs. partially participating preferred stock

Fully: no limit on excess dividends.
Partially: limited participation.

nonparticipating preferred stock

preferred shareholders only receive their stated dividends.

liquidation preference

priority claim to assets upon liquidation

when must liquidation preference be disclosed?

When significantly greater than par or stated value

where is liquidation preference disclosed

in the equity section of the balance sheet

convertible preferred stock

preferred stock exchangeable for common stock at a set rate

callable preferred stock

preferred stock that can be repurchased by the issuer at a specified price

What is mandatorily redeemable preferred stock?

Preferred stock with a maturity date that must be redeemed; classified as a liability.

retained earnings

Accumulated earnings not paid out as dividends

what reduces retained earnings

dividends and transfers to APIC for stock dividends

what is a retained earnings deficit

a negative retained earnings balance

retained earnings formula

Net income/loss – dividends ± prior period adjustments ± accounting changes

appropriated retained earnings

Retained earnings restricted for legal, contractual, or discretionary reasons

Can appropriated retained earnings absorb losses

No.

JE to appropriate retained earnings

Dr Retained Earnings (unappropriated)

Cr Retained Earnings (appropriated)

accumulated other comprehensive income (AOCI)

OCI components not included in net income

Examples of AOCI components

Pension adjustments, unrealized gains/losses, foreign currency translation.

where is AOCI shown?

separately in shareholders’ equity

treasury stock

a corporation’s own issued stock that has been reacquired

do treasury shareholders have rights

no voting or dividend rights

are treasury shares outstanding?

no.

two treasury stock accounting methods

Cost method and legal (par value) method

cost method - basic idea

treasury stock recorded at reacquisition costc

cost method - gains and losses

recorded in equity (APIC), not net income

legal method - basic idea

treasury stock recorded by reversing original par and APIC

what happens if treasury stock losses exceed APIC?

retained earnings is reduced

donated stock

A company’s own stock received as a donation

effect of donated stock

No change in total equity; fewer shares outstanding

direct retirement of stock

immediately retiring repurchased shares instead of holding in treasury.

Are gains/losses from treasury stock included in net income?

No—always recorded in equity