FAR Chapter 5

Universal CPA guide. Retained Earnings, Stockholders Equity, and EPS

common stock

basic ownership of a shareholder in a company. have voting rights as well as earning rights after preferred shareholders

capital stock

required amount of capital that must be retained by a corporation for protection of lenders

par value

nominal value of a security. any excess amount received over this value will be applied to APIC

APIC

reflects increases in capital assets in excess of par value that come from transactions engaged by an organization and its own stock

authorized stock

stock that has been authorized to issue to the general public

issued stock

stock that has been actually issued to the general public

outstanding stock

amount of capital stock in the hands of the general public

preferred stock

stock that entitles a shareholder a fixed dividends. priority over any common shareholders

cumulative preferred stock

preferred stock whose annual fixed-rate dividend will accrue until it’s paid, before common dividends. accrued dividends aka dividends in arrears

noncumulative preferred stock

preferred stock where past, omitted dividends do not have to be paid before the dividend can be paid to common shareholders. dividends will not accumulate

participating preferred stock

preferred stock that has been authorized to issue to the general public may be either:

• full participating: preferred shareholders will participate in excess dividends without limitations

• partially participating: preferred shareholders will participate in excess dividends, to a limited extent

convertible preferred stock

preferred stock that may be exchanged for common stock at the option of the shareholder at a specific conversion rate

callable preferred stock

stock that may be called or repurchased at a specified price

cumulative, fully participating, preferred stock priority list

1. distribution of preferred dividends in arrears

2. distribution of current period preferred dividend

3. distribution of current period common dividend

4. distribution of excess dividends in arrears, current period preferred dividends, and current period common dividends

distribution of excess dividends

distributed pro rata to preferred and common shareholders. (preferred stock outstanding / total stock outstanding) x excess amount. (common stock outstanding / total stock outstanding) x excess amount.

common shareholder’s equity

total shareholders equity - preferred stock outstanding - cumulative preferred dividends in arrears

book value per common share

common shareholders equity / common shares outstanding

retained earnings

net income/loss - dividends declared

cost method of treasury stock

• initial issuance of common stock: Dr. Cash for # of shares x issue price, Cr. Common stock for par value, Cr. APIC for excess over par

• repurchase of common stock: Dr. Treasury stock for # shares repurchased x cost to repurchase, Cr. Cash

• reissued treasury stock: Dr. Cash for # shares reissued x reissue price, Cr. Treasury stock for # shares reissued x original repurchase cost, Dr./Cr. APIC for excess

par method of treasury stock

• issuance of common stock: Dr. Cash for # of shares x issue price, Cr. Common stock for par value, Cr. APIC for excess over par

• repurchase of common stock: Dr. Treasury stock for # shares repurchased x par value, Dr. APIC for # shares repurchased x $/share APIC, Dr. Retained earnings, Cr. Cash for # shares repurchased x purchase price

• reissued treasury stock: Dr. Cash for # shares reissued x reissue price Cr. Treasury stock for # shares reissued x par value, Cr. APIC for plug

date of cash dividend declaration

date that dividends have been formally approved for distribution. liability will be recorded for dividends and RE will decrease

cash dividend payment date

date in which the BOD specify dividends that are actually distributed to the shareholders. Dividend payable will decrease. cash outflow on statement of cash flow

property dividend

gain/loss recorded on date of declaration for FMV - NBV. Liability increases and retained earnings decrease.

on payment date, payable decreases, asset decreases if a FA, stock decreases if stock. no impact to statement of cash flows

scrip dividend

like a note payable instead of cash/property with interest. same treatment as cash except interest expense recognized on date of payment

liquidating dividend

when a company is liquidating their assets. same treatment as cash dividend except APIC will be debited for any excess dividend over profits

stock dividend

company issues shares to outstanding shareholders. Based on # shares outstanding on date dividend declared. # shares outstanding x % dividend = additional shares issued

large stock dividend

stock dividend distributed / total stock outstanding > 20-25%. Dr. RE for new shares issued x par value, Cr. Common stock

small stock dividend

stock dividend distributed / total stock outstanding < 20-25%. Dr. RE for new shares issued x FMV of stock, Cr. Common stock for new shares issued x par value, Cr. APIC for difference

stock split

company issues more shares for outstanding shareholders as of declaration date, but decreases par value/ multiply outstanding shares x the first number. (ex. 2-for-1 means multiply shares by two, a $100 par value is now $50). no change to stockholders equity

reverse stock split

company reduces shares outstanding but increases par value. divide outstanding shares by second number. (1-for-5 means divide shares by 5, a $20 par value is now $100). no change to stockholders equity

basic EPS

income available to common shareholders (aka net income - preferred dividends) / weighted average common shares outstanding

weighted average common shares outstanding

• shares outstanding at the beginning of the period + shares sold during the period - shares reacquired - reverse stock splits + stock dividends + stock splits

• all events in the year will be multiplied by the time left in the year after issuance (aka shares repurchased on May 1st will be multiplied by 8/12 months)

• all stock splits and dividends will be applied as if issued on January 1 and applied to all events prior to the split/dividend

diluted EPS

(income available to common shareholders + interest form diluted securities) / weighted average common shares outstanding assuming that all dilutive securities have been converted into common stock

dilutive

basic EPS decreases

antidilutive

basic EPS increases as a result of conversion

convertible preferred stock effect on dilutive EPS

numerator: if preferred dividends were declared but preferred stock will convert to common, preferred dividends will not reduce net income. Increase to income available to common shareholders

denominator: common shares outstanding will increase by the number of preferred stock converted to common

convertible bonds effect on dilutive EPS

numerator: if convertible bonds are converted to common stock, company will save on interest expense no longer paid. add back interest amount to numerator, net of tax. Increase to income available to common shareholders

denominator: common shares outstanding will increase by number of convertible bonds converted to common stock

options/warranties effect on dilutive EPS

if exercise price < market price, exercise the option. if lower, do not exercise

numerator: no effect

denominator: common shares outstanding will increase by number of options/warrants converted to common stock if exercised, decreased if exercise price < market price

operating lease

• capitalized on the balance sheet

• lessor retains control

• lease expense recognized

finance lease

• capitalized on the balance sheet

• lessee obtains control

• interest expense recognized

operating vs finance lease criteria (BONES)

if any of these are met, it is treated as a finance lease:

• written bargain purchase option exists

• ownership transfer occurs

• net present value of lease payments plus any guaranteed residual value by the lessee is greater than 90% of FMV

• lease term is greater than 75% of the leases economic life

• asset is considered specialized with no alternative use to the lessor

lessee accounting for operating lease

1. total lease payment = lease expense

2. total lease payment - lease expense = principal reduction

3. no amortization expense

4. beginning lease liability - principal reduction = ending balance

Initial entry: Dr. ROU asset, Cr. Lease liability

Year-end entry: Dr. Lease expense for total payment, Dr. Lease liability for principal reduction, Cr. Cash for total payment, Cr. Accum amortization for principal reduction

lessee accounting for finance lease

1. beginning ROU asset x implicit interest rate = interest expense

2. total lease payment - interest expense = principal reduction

3. (NPV - lease payments) / lease pay periods = amortization expense

4. beginning lease liability - amortization expense = ending balance

Initial entry: Dr. ROU Asset, Cr. Lease liability

Year-end entry: Dr. Interest expense for beginning NPV x implicit rate, Dr. Lease liability for principal reduction, Cr. Cash, Dr. Amortization expense, Cr. Accum amortization

free lease payments included

1. total lease payment = monthly lease payment amount x total monthly payments

2. monthly lease expense = total lease payment / total months

3. annual lease expense = monthly lease expense x total months in year