Financial Accounting II- Q&A

Define par value stock. What is the significance of a stock's par value from an accounting and analysis perspective? - Answer-An amount specified in the corporate charter for each share of stock and imprinted on the face of each stock certificate often determines legal capital for a corporation. Par value is unrelated to the stock market's value. The excess of the issue price OVER par value is added to the APIC P. 8-5 Stock Transactions and Dividends What are the basic differences between preferred stock and common stock? That is, what are the typical features of preferred stock? - Answer-* The main difference between preferred and common stock is that preferred stock gives no voting rights to shareholders while common stock does. * Preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders. * Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders. What features make preferred stock similar to debt? Similar to common stock? - Answer-Preferred Stock and debt received regular payments in the form of interest and dividends. Both of them can be converted to common stock Preferred stock represents ownership in the company similar to commons stock What is meant by preferred dividends in arrears? If dividends are two years in arrears on $500,000 of 6% preferredstock,and dividends are declared at the end of this year, what amount of total dividends must the company pay to preferred stockholders before paying any dividends to common stockholders? - Answer-Dividends in arrears are the cumulative preferred dividends that have not been paid till date. If a company declares dividend, the unpaid dividends on preferred stocks has to be paid first. Total dividends that the company must pay to the preferred shareholders = 500,000 * 0.06 * 3 Total dividends that the company must pay to the preferred shareholders = $90,000 Distinguish between authorized shares and issued shares. Why might the number of shares issued be more than the number of shares outstanding? - Answer-Authorized stock is higher than issued and outstanding stock because companies need the flexibility of issuing additional shares without having to return to the regulatory authorities for approval Describe the difference between contributed capital and earned capital. Specifically, how can earned capital be considered as an investment by the company's stockholders? - Answer-Contributed capital represents the total investment "contributed" by shareholders when they purchase stock Earned capital represents the cumulative net income that the company has earned How does the account "additional paid-in capital" (APIC) arise? Does the amount of APIC