AFM101 Chapter Notes - Chapter 12: Authorised Capital, Issued Shares, Retained Earnings

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lilacmouse857

26 Jun 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Donna Psutka

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AFSA Education

Chapter 12 – Reporting and Interpreting Shareholders’ Equity

- Shareholders’ equity includes two primary resources:

o Contributed capital – the amount invested by shareholders

 Amounts initially received from the sale of shares

 Contributed surplus that reflects contributions made by shareholders in excess

of the amounts credited to share capital accounts

o Retained earnings – generated by profit making activities from the company

Ownership of a Corporation

- A corporation is the only business form that the law recognizes as a separate entity

- Each corporation is governed by a board of directors elected by the shareholders

Benefits of Share Ownership

- You become a stockholder or shareholder when you invest in a corporation

- Owners of common shares have the following benefits:

o A voice in management – can vote at the shareholders’ meeting

o Dividends

o Residual claim – may receive a share of remaining assets upon liquidation of the

company

- Shareholders have ultimate authority

- Shareholders Board of DirectorsPresidentVice presidents

Authorized, Issued, and Outstanding Shares

- Authorized number of shares – the maximum number of shares that a corporation can issue, as

specified in the charter

- Issued shares – the number of shares that have been issued

- Outstanding shares – refers to the total number of shares that are owned by shareholders on

any particular date

Common Share Transactions

- Corporations issue two types of shares

o Common shares – basic voting shares issued by a corporation, called residual equity

because they rank after preferred shares for dividend and liquidation distributions

o Dividends don’t have to paid on common shares, but must be paid on preferred shares

No Par Value and Par Value Shares

- Par Value – the nominal value per share specified in the charter; it serves as the basis for legal

capital (no relation to market value per share)

- No Par Value Shares – shares that have no par value specified in the corporate charter

- CBCA prohibit issuance of par value shares in Canada, whereas most U.S corporations issue par

value shares

- Legal capital – the permanent amount of capital defined by law that must remain invested in

the business; it serves as a cushion for creditors

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Document Summary

Chapter 12 reporting and interpreting shareholders" equity. Shareholders" equity includes two primary resources: contributed capital the amount invested by shareholders. Amounts initially received from the sale of shares. Contributed surplus that reflects contributions made by shareholders in excess of the amounts credited to share capital accounts: retained earnings generated by profit making activities from the company. A corporation is the only business form that the law recognizes as a separate entity. Each corporation is governed by a board of directors elected by the shareholders. You become a stockholder or shareholder when you invest in a corporation. Owners of common shares have the following benefits: a voice in management can vote at the shareholders" meeting, dividends, residual claim may receive a share of remaining assets upon liquidation of the company. Authorized number of shares the maximum number of shares that a corporation can issue, as specified in the charter. Issued shares the number of shares that have been issued.

Related Questions

Match the items below by entering the appropriate answer letter choice from the column provided on the right.

	1.Net income retained in the corporation.
	2. Creditors cannot go after stockholderâs personal assets to satisfy their claims.
	3. Retained earnings currently unavailable for dividends.
	4. A corporationâs own stock that has been reacquired by the corporation.
	5. Responsible to stockholders for corporate activity.
	6. The amount assigned to each share of stock in the corporate charter.
.	7. The date the board of directors formally declares the dividend and announces it to stockholders.
	8. A debit balance in retained earnings.
	9. Capital contributed by stockholders.
	10. The death of a stockholder or employee does not affect the going concern of the corporation.
	11. The company determines ownership of the outstanding shares for dividend purposes.
	12. Unit of ownership in a corporation.
-	13. This type of dividend for the stockholder results in more shares of stock, but no change in ownership interest.
	14. The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share. This stock transaction does not require an accounting entry.
	15. The acts of the owners (stockholders) do not bind the corporation.

A.	Par value
B.	Record date
C.	Retained Earnings
D.	Indefinite life
E.	Treasury stock
F.	Stock split
G.	Declaration date
H.	Retained Earnings restrictions
I.	Stock dividend
J.	Capital stock
K.	Deficit
L.	Paid-in capital
M.	Cash dividend
N.	Board of directors
O.	Separate legal entity
P.	Limited liability

lilachorse885

Analyzing and Interpreting Equity Accounts and Comprehensive Income
Following is the shareholdersâ equity section of the 2013 balance sheet for Procter & Gamble Company and its statement of shareholdersâ equity.

June 30 (In millions, except per share amounts)	2013
Shareholders' Equity
Convertible Class A preferred stock, stated value $ 1 per share
(600 shares authorized)	$ 1,137
Non-voting Class B preferred stock, stated value $ 1 per share
(200 shares authorized)	--
Common stock, stated value $ 1 per share
(10,000 shares authorized; shares issued: 2013-4,009.2)	4,009
Additional paid-in capital	63,538
Reserve for ESOP debt retirement	(1,352)
Accumulated other comprehensive income/(loss)	(7,499)
Treasure stock, at cost (shares held: 2013-1,266.9)	(71,966)
Retained earnings	80,197
Noncontrolling interest	645
Total shareholders' equity	$ 68,709

Consolidated Statement of Shareholders' Equity
Dollars in millions; Shares in thousands	Common Shares Outstanding	Common Stock	Preferred Stock	Additional Paid-in Capital	Reserve for ESOP Debt Retirement	Accumulated Other Comprehensive Income (Loss)	Treasury Stock	Retained Earnings	Noncontrolling Interest	Total
Balance June 30, 2012	$ 2,748,033	$ 4,008	$ 1,195	$ 63,181	$ (1,357)	$ (9,333)	$ (69,604)	$ 75,349	$ 596	$ 64,035
Net earnings								11,312	90	11,402
Other comprehensive income						1,834				1,834
Dividends to shareholders:
Common								(6,275)		(6,275)
Preferred, net of tax benefits								(244)		(244)
Treasury purchases	(84,234)						(5,986)			(5,986)
Employee plan issuances	70,923	1		352			3,573			3,926
Preferred stock conversions	7,605		(58)	7			51			â
ESOP debt impacts					5			55		60
Noncontrolling interest, net				(2)					(41)	(43)
Balance June 30, 2013	$ 2,742,327	$ 4,009	$ 1,137	$ 63,538	$ (1,352)	$ (7,499)	$ (71,966)	$ 80,197	$ 645	$ 68,709

(a) What does the term convertible (in reference to the company's Class A preferred stock) mean?

Convertible means the holder of the security has an obligation to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to surrender the security and to receive cash at any time.

Convertible means the holder of the security has an option to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to sell the security at any time.

(b) How many shares of common stock did Procter & Gamble issue when convertible Class A preferred stock was converted during fiscal 2013?

Answer

thousand shares

(c) For "employee plan issuances," at what average price was the common stock issued as of year-end 2013? (Round your answer to two decimal places.)

$Answer

(d) What is the accumulated other comprehensive income account?

The accumulated other comprehensive income account reflects the cumulative profit recognized by the company less the cumulative dividends that have been paid to shareholders.

The accumulated other comprehensive income account reflects the cumulative change in net assets (defined as assets less liabilities) for transactions other than net income transactions and transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative profit on transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative amount by which the company's common stock has increased or decreased since issuance.

(e) What cash dividends did Procter & Gamble pay in 2013 for each class of stock?

Common dividends =Answer

($ millions)
Preferred dividends =Answer($ millions)

redwhale352

Amongst corporations, sole proprietorships and partnerships, approximately what percentage of revenues are generated by corporations?

50%

42%

33%

82%

Question 2

What should be the financial goal of any firm?

attracting and acquiring capital and investing it

maximization of the ownersâ wealth

offering quality products at fair prices

quality customer service

Question 3
4 pts
Which of the following statement(s) is \ are true regarding the corporate management team?

In a corporation, ownership and direct control are typically separate.

Board of Directors is elected by shareholders and has ultimate decision-making authority

The Chief Executive Officer (CEO) â the Board typically delegates day-to-day decision making to the CEO.

All of the above

Question 4
4 pts
When calculating the present value of either a future single sum or a future annuity, it involves a process called discounting. The applicable interest rate to perform the discounting function is usually called the

yield to maturity

compound interest rate

discount rate

none of the above

Question 5
4 pts
_________________ are used to present additional information about items included in the financial statements and to present additional financial information.

stock certificates

Notes to financial statements

Preferred stocks

Convertible securities
Question 6
4 pts
What should be the financial goal of any firm?

maximization of the ownersâ wealth

attracting and acquiring capital and investing it

offering quality products at fair prices

quality customer service

Question 7
4 pts
A competitive market is one in which a _____ numbers of producers compete with each other to satisfy the wants and needs of a _____ number of consumers.

Large, small

Small, small

Large, large

Small, large

Question 8
4 pts
The Valuation Principle is an analysis between the value of the ______ of a financial alternative and the value of its ______.

revenues, income

benefits, costs

expenses, costs

Question 9
4 pts
The Net Present Value rule implies that we should compare a projectâs net present value (NPV) to___________. (zero \ future value \ the past).

Zero

Future Value

The Past

An Estimate

Question 10
4 pts
The internal rate of return (IRR) rule will _______ agree with the Net Present Value rule on a given investment project.

always

never

sometimes

none of the above

Question 11
5 pts
The law of one price exists due to arbitrage opportunities. If the price of a security, commodity or asset is different in two different markets, then an arbitrageur will ______ the asset in the more expensive market and ________ it where prices are lower.

sell, purchase

purchase, sell

purchase, purchase

sell, sell

Question 12
5 pts
Approaching every problem using a timeline is a(n) ________ idea because timelines identify events in a transaction or investment which might otherwise be easily overlooked.

good

bad

indifferent

unrealistic

Question 13
5 pts
The present value (PV) of a stream of cash flows is the _______ the present values of each individual cash flow

difference between

product of

sum of

same as

Question 14
5 pts
As the number of periods increases, present value (increases\decreases\stays the same).

increases

decreases

stays the same

is unrelated

Question 15
5 pts
When a constant cash flow will occur at regular intervals for a finite number of periods of time, it is called a(n) __________.

annuity

perpetuity

interest payment

principle payment

Question 16
5 pts
When a constant cash flow will occur at regular intervals forever, it is called a(n) ___________.

annuity

perpetuity

interest payment

principle payment

Question 17
5 pts
The NPV measures the ______ change in shareholder wealth that arises from undertaking a project.

consistent

dollar

annual

semi-annual

Question 18
5 pts
When calculating the present value of either a future single sum or a future annuity, the applicable interest rate is usually called the _______ rate

compounding

inverted

market

discount

Question 19
5 pts
To endow a perpetuity is the same as calculating the present value (PV) of a perpetuity. Say you want to endow an annual graduation party at your alma mater. You want the event to be a memorable one, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its investments, and if the first party is in one yearâs time, how much will you need to donate to endow the party?
The formula for PV of a perpetuity = C\r; = $30,000 \ 0.08; =

$3,750

$37,500

$375,000

$3,750,000

Question 20
5 pts
With an Ordinary Annuity, payments are required at the ________ of each period. An example of this is bonds which usually pay coupon payments at the end of every six months until the bond's maturity date.

beginning

middle

end

payments are not required

Question 21
5 pts
Sales of securities that the seller does not own is called a:

stop-loss order

short sale

limit order

maintenance margin

Question 22
5 pts
What is the name of the market where money market securities, bonds, and mortgages are originated and traded?

debt securities market

foreign exchange market

derivative securities market

equity securities market

Question 23
5 pts
If an investor feels the price of a stock will decline in the future, which trade should the investor undertake?

market order

buy on margin

limit order

short sale

Question 24
5 pts
For risk averse investors, how much return is expected for taking on more risk?

lower

equal

zero

higher

Question 25
5 pts
A ___________________ is a highly regulated document which details the issuers operations and finances and must be provided to each buyer of a newly issued security.

Prospectus

An underwriting agreement

A best efforts agreement

none of the above

Question 26
5 pts
Which of the following statements about liquidity ratios is true?

The lower the quick ratio relative to the current ratio, the safer a firm is in terms of liquidity.

The higher the current ratio, the more likely a firm is able to pay its short-term obligations.

The quick ratio is always between 0 and 1.

All the above statements are true.

Question 27
5 pts
The ability of a firm to meet its short-term debt obligations as they come due is indicated by which of the following ratios:

liquidity ratios

asset utilization ratios

financial leverage ratios

profitability ratios

Question 28
5 pts
Which one of the following financial statements reports a firmâs assets and the claims on assets?

balance sheet

income statement

statement of changes in financial position

cash flow statement

Question 29
5 pts
The extent to which assets are used to support sales is indicated by which of the following ratios:

liquidity ratios

asset utilization ratios

financial leverage ratios

profitability ratios

Question 30
5 pts
The extent to which assets are financed by borrowed funds and other liabilities is indicated by:

liquidity ratios

asset utilization ratios

financial leverage ratios

profitability ratios

Question 31
5 pts
The basic price that equates the demand for and supply of loanable funds in the financial markets is the __________:

interest rate

yield curve

term structure

cash price

none of the above

Question 32
5 pts
Federal obligations usually issued for maturities of two to ten years are called:

Treasury bonds

Treasury notes

Treasury bills

Agency issues

Question 33
5 pts
An increase in the demand for loan-able funds, holding supply constant, will cause interest rates to:

increase

decrease

stay the same

none of the above

Question 34
5 pts
As interest rates rise, the prices of existing bonds will:

rise

stay the same

fall

either a or b

Question 35
5 pts
In an inflationary period, interest rates have a tendency to:

rise

fall

stay the same

act erratically

salmonhound248

AFM101 Chapter Notes - Chapter 12: Authorised Capital, Issued Shares, Retained Earnings

AFM101 Full Course Notes

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