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Accounting – Equity questions with actual answers.
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Accounting – Equity questions with actual answers.
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Accounting – Equity questions withactual answers.
Equity ANS - ...represents investments by stockholders in the company.
Two Components of Equity on Balance Statement ANS - - Contributed Capital: Direct investments by the
firms' owners. Owners receive stock in exchange for their contributions to the firm.
- Retained Earnings: Indirect investment by the firm's owners. These are earnings that are not
distributed back to the owners and are instead kept in the company.
Contributed Capital: ANS - Direct investments by the firms' owners. Owners receive stock in exchange
for their contributions to the firm.
Retained Earnings: ANS - Indirect investment by the firm's owners. These are earnings that are not
distributed back to the owners and are instead kept in the company.
Paid-in-Capital ANS - Contributed Capital
Types of Contributed Capital ANS - 1) Common Stock
2) Preferred Stock
Common Stock ANS - ...represents ownership in a firm. Common stock-holders have voting rights which
enable them to control the firm.
Common stock also represents the ultimate residual claim in the event of liquidation.
How does Common Stock differ from Preferred Stock? ANS - While common stock stands behind
preferred stock and liabilities as a claim, common stockholders are not restricted as to the dividends
they might receive or the gains they might realize in liquidation.
, Authorized Shares ANS - The number authorized is the number of shares that shareholders have
authorized the firm to issue. Increasing the number of authorized shares later requires shareholder
approval. To avoid the need for shareholder approval every time, firms often authorize more shares
than they would like to issue.
How do firms avoid the need of shareholder approval to authorize more shares of stock? ANS - Firms
often authorize more shares than they would like to issue initially.
Issued Shares ANS - Shares of stock that can potentially be traded among investors.
Shares Outstanding ANS - Held by shareholders.
Repurchased Shares ANS - Treasury stock.
Preferred Stock ANS - ...is an equity security with properties of both an equity and a debt instrument,
and is generally considered a hybrid instrument. Preferreds are senior (i.e. higher ranking) to common
stock, but subordinate to bonds in terms of claim (or rights to their share of the assets of the company).
Par Value ANS - Stated value of a share of stock.
What effect does share issuance have on the Balance Sheet? ANS - Assets increase as cash increases.
Owners' equity increases.
What effect does share issuance have on the Income Statement? ANS - No effect
What effect does share issuance have on the Cash Flow Statement? ANS - An increase in cash flows
from financing.
Average Issue Price (of stock) ANS - = Total raised from issuing / # of Shares issued
= (Par value + APIC) / # of Shares issued
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