Exam 11: Reporting and Analyzing Stockholders Equity

Following is the stockholders' equity section of the Amazing Air Lines (AAL) Corporation's 2016 Consolidated Balance Sheet ($ in millions): A. In general, what is meant by "accumulated other comprehensive loss"? B. AAL has 1.5 billion shares of common stock authorized, with 867,866,505 of these shares issued as of the end 2016. Why is there a difference between these two numbers? C. How many common shares did AAL have outstanding at the end of 2016? D. Verify that AAL's common stock balance as of December 31, 2016 is approximately $95,000. E. Calculate the average cost at which AAL repurchased its 18,225,197 million shares of common stock. F. AAL's repurchase of 18,225,197 million shares in 2016 represents approximately 2.1% of the shares that are issued at year end. Give several reasons for this given the current economic conditions.

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Question 1

Correct Answer:

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A. Accumulated other comprehensive loss includes changes to equity (except those resulting from contributions by and distributions to owners) that are not included in income and are, therefore, not reflected in retained earnings. Since the loss amounts exceed the income amounts, the net is a loss.
B. The number of shares authorized is formally set forth in a corporate charter created in conjunction with the establishment of a corporation. It can only be increased or decreased by an affirmative shareholder vote. A firm can issue any number of shares up to the amount formally authorized. The shares issued is the actual number of shares that have been sold to stockholders by the corporation.
C. Common shares outstanding = Common shares issued - treasury shares repurchased 867,866,505 - 18,225,197 = 849,641,308 outstanding
D. 867,866,505 shares issued x $.00011 par value = $95,465.32 or $95,000 (rounded)
E. $468,000,000 / 18,225,197 = $25.68 per share
F. A company typically repurchases stock for two reasons: 1) it feels their stock is undervalued in the marketplace and wishes to send a signal to investors, and 2) to offset the dilutive effects of employee stock option programs. More AAL employees may be cashing in on stock options if they anticipate AAL's market value to do well in the future. In this case, AAL would repurchase shares in an attempt to preserve earnings per share and equalize the number of shares outstanding.

Stone Company reported net income of $2,536 million in 2016. The weighted average number of common shares outstanding during 2016 was 554 million shares. Brook paid $80 million in dividends on preferred stock, which was convertible into 20 million shares of common stock. How much is the diluted earnings per share amount for 2016?

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Question 2

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If a company issues 1,000 shares of $4 par value common stock at a market price of $120 per share, which of the following is the correct balance sheet entry?

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Question 3

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A company's profit declines when dividends are paid because a company must recognize an expense for the amount of the dividend.

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Question 4

The August 1, 2016 balance sheet for Hospitality Company reported 24,000 shares of $40 par value common stock that were issued and outstanding: On August 2, 2016, the company splits its stock 2-for-1. A. How many shares of common stock are issued and outstanding immediately after the stock split? B. What is the dollar balance of common stock immediately after the stock split?

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Question 5

Use the following information to answer questions below On September 1, 2016, Utah Company's balance sheet indicates there are 1,600,000 shares of $60 par value common shares in the Common Stock account and $9,000,000 in the Additional Paid-in Capital account. There are 4,000,000 shares authorized. On September 2, Utah splits its stock 2 for 1. -How many of Utah's shares of common stock are issued and outstanding immediately after the stock split?

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Question 6

Describe the benefits for an individual investor in purchasing convertible preferred stock. What are the effects on the financial statements of conversion?

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Question 7

Which best describes par value for stock?

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Question 8

Runner Company initially has 60,000 shares outstanding of common stockon January 1, 2016. It has the following changes during 2016 in terms of shares. Calculate the number of shares outstanding at the end of 2016 (round down if partial shares).

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Question 9

If French's loses its dominance in the mustard market and eventually goes "belly up", its preferred shareholders carry senior positions as claimants in bankruptcy over the common shareholders.

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Question 10

Paul Merema, a disciplined investor, prefers the stock of a company with a higher ratio of retained earnings against contributed capital, preferably above 2 in his opinion. He finds LMN Company acceptable because the equity breakdown at June 30, its year end, is as follows: On July 1, the day after its year end, LMN announced it will declare a 22% stock dividend. The stock price on this date is $20 per share. With which accounting treatment will Paul be more pleased-a large or a small stock dividend?

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Question 11

On July 1, 2016, Oceanfront, Inc. issues 14,000 shares of $10 par value preferred stock at $100 cash per share and 30,000 shares of $2 par value common stock at $50 cash per share. Indicate the financial statement effects of these two issuances using the following template:

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Question 12

Many companies buy back their outstanding stock on an annual basis. List several reasons a company might want to repurchase shares of its stock, as well as the financial statement effects of this action.

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Question 13

Use the following information to answer questions below On September 1, 2016, Utah Company's balance sheet indicates there are 1,600,000 shares of $60 par value common shares in the Common Stock account and $9,000,000 in the Additional Paid-in Capital account. There are 4,000,000 shares authorized. On September 2, Utah splits its stock 2 for 1. -What is the dollar balance of Utah's common stock account immediately after the stock split?

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Question 14

Colossal Combines has 20,000 shares of convertible preferred stock with a par value of $10. On December 1, the preferred stock was converted into 4,000 shares of common stock with a par value of $20. A. Show the effect on the balance sheet and income statement using the following template. B. What is the effect on income from the conversion?

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Question 15

Callaway Trucking, based in Atlanta, GA, has 250,000 common shares outstanding with a $0.02 par value and $60 current market value. The treasury stock account is reported at $100,000 with an average cost of $5 per share. How much is the total common stock reported on the balance sheet?

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Question 16

Sea Star Company has preferred stock with a par value of $15 that is convertible into common stock at the ratio of 1 to 1. The common stock has a par value of $8. The following table presents the components of stockholders' equity for Sea Star Company: A. How many shares of common stock were sold during the year and at what price? B. How many shares of preferred stock were converted this year? C. Why would a company offer a conversion privilege? D. List two reasons a shareholder might exercise the conversion privilege.

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Question 17

As a preferred stockholder, you are entitled to numerous preferences and privileges over common stockholders. If you are a preferred stockholder of a company that has fallen on economic hardship and is likely to go bankrupt, which preference or privilege of preferred stock is going to be most useful to you?

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Question 18

Assume Company X has been paying out consistent dividends over the past 40 years. This fiscal year, the company reports a sharp decline in the dividend it plans to pay out. The most likely reaction of the market will be:

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Question 19

Following are selected stock transactions and information for Williams Materials, Inc. ●Authorization for initial public offering of 200,000 shares of common stock with par value of $0.02 to be issued at $50 per share ●Authorization for 10,000 shares of preferred stock with par value of $160 and 10%. ●Issued shares equal outstanding at time of offering.

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Question 20

Showing 1 - 20 of 55

If a company issues 1,000 shares of $4 par value common stock at a market price of $120 per share, which of the following is the correct balance sheet entry?

A company's profit declines when dividends are paid because a company must recognize an expense for the amount of the dividend.

Describe the benefits for an individual investor in purchasing convertible preferred stock. What are the effects on the financial statements of conversion?

Which best describes par value for stock?

Runner Company initially has 60,000 shares outstanding of common stockon January 1, 2016. It has the following changes during 2016 in terms of shares. Calculate the number of shares outstanding at the end of 2016 (round down if partial shares).

If French's loses its dominance in the mustard market and eventually goes "belly up", its preferred shareholders carry senior positions as claimants in bankruptcy over the common shareholders.

On July 1, 2016, Oceanfront, Inc. issues 14,000 shares of $10 par value preferred stock at $100 cash per share and 30,000 shares of $2 par value common stock at $50 cash per share. Indicate the financial statement effects of these two issuances using the following template:

Many companies buy back their outstanding stock on an annual basis. List several reasons a company might want to repurchase shares of its stock, as well as the financial statement effects of this action.

Callaway Trucking, based in Atlanta, GA, has 250,000 common shares outstanding with a $0.02 par value and $60 current market value. The treasury stock account is reported at $100,000 with an average cost of $5 per share. How much is the total common stock reported on the balance sheet?

Assume Company X has been paying out consistent dividends over the past 40 years. This fiscal year, the company reports a sharp decline in the dividend it plans to pay out. The most likely reaction of the market will be:

Introducing Financial Accounting

Constructing Financial Statements

Adjusting Accounts for Financial Statements

Reporting and Analyzing Cash Flows

Analyzing and Interpreting Financial Statements

Reporting and Analyzing Revenues and Receivables

Reporting and Analyzing Inventory

Reporting and Analyzing Long-Term Operating Assets

Reporting and Analyzing Liabilities

Reporting and Analyzing Leases, Pensions, and Income Taxes

Reporting and Analyzing Financial Investments

Appendix : Compound Interest and the Time-Value of Money

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