F1 - M3 & M4 - Stockholder's Equity

Question 1

What is appropriated retained earnings?

Answer 1

Appropriated retained earnings is the portion of retained earnings set aside (appropriated) for a specific purpose. It restricts dividends and serves as a disclosure to shareholders that these funds are not available for dividend distribution.

Question 2

What journal entry is made to appropriate retained earnings?

Answer 2

To appropriate retained earnings:

DR Retained Earnings (Unappropriated)
CR Retained Earnings Appropriated for [purpose]

This transfers part of retained earnings to an appropriated category without changing total equity.

Question 3

Can appropriated retained earnings be used to absorb losses or costs?

Answer 3

No. Appropriated retained earnings cannot be used to absorb costs or losses, nor can they be transferred to income. They are only a disclosure mechanism to restrict dividends for specific purposes.

Question 4

What are the two alternative methods of accounting for treasury stock?

Answer 4

Cost method: Treasury stock is debited at the cost of shares repurchased.

Legal (par value) method: Treasury stock is debited at par value of shares repurchased.
No gains/losses are recognized on the income statement; treasury stock is a contra-equity account.

Question 5

How is treasury stock reported on the balance sheet?

Answer 5

Treasury stock is reported as a deduction from total stockholders’ equity because it is a contra-equity account.

Question 6

When treasury stock is reissued above cost under the cost method, what is the journal entry impact?

Answer 6

Debit Cash for the reissue price

Credit Treasury Stock for the cost

Credit Additional Paid-in Capital - Treasury Stock for the excess (gain)

Question 7

Why is common stock not overstated when treasury stock is recorded?

Answer 7

Common stock reflects the total shares originally issued at par and does not change when shares are repurchased. Treasury stock is a separate contra-equity account that reduces total equity, so common stock is not overstated.

Question 8

What is additional paid-in capital (APIC)?

Answer 8

APIC is the amount received from shareholders above the par value of the stock issued.

Question 9

What is the difference between issued shares and outstanding shares?

Answer 9

Issued shares: Total shares the company has ever sold to shareholders.

Outstanding shares: Issued shares minus treasury stock (shares repurchased and held by the company).

Question 10

What are the basic rights of common stockholders?

Answer 10

Voting rights

Dividend rights

Rights to share in distribution of assets upon liquidation after creditors and preferred shareholders are paid

Question 11

What does common stock represent on the balance sheet?

Answer 11

Common stock represents the par value of all shares originally issued by the company. It is part of contributed capital and does not change when shares are repurchased.

Question 12

What is additional paid-in capital (APIC)?

Answer 12

APIC is the amount received from shareholders above the par value of stock issued. It can also increase or decrease due to treasury stock transactions, stock dividends, or conversions.

Question 13

How does retained earnings relate to stockholders’ equity?

Answer 13

Retained earnings represent accumulated net income minus dividends declared over the life of the company. It is part of earned capital within stockholders’ equity.

Question 14

What is treasury stock and how does it affect equity?

Answer 14

Treasury stock is a corporation’s own stock that has been repurchased but not retired. It is a contra-equity account and reduces total stockholders’ equity.

Question 15

How are gains or losses from treasury stock transactions reported?

Answer 15

Gains or losses on treasury stock are recorded as adjustments to additional paid-in capital from treasury stock or, if insufficient, to retained earnings. They do not affect net income.

Question 16

What is accumulated other comprehensive income (AOCI)?

Answer 16

AOCI includes accumulated gains and losses that bypass net income, such as unrealized gains/losses on available-for-sale securities, pension adjustments, and foreign currency translation adjustments. It is part of equity but separate from retained earnings and APIC.

Question 17

Why is common stock not reduced when treasury stock is purchased?

Answer 17

Common stock reflects shares issued at par value and remains unchanged. Treasury stock is recorded separately as a contra-equity account, reducing total equity but not common stock.

Question 17

Can retained earnings include treasury stock or AOCI?

Answer 17

No. Retained earnings exclude treasury stock and accumulated other comprehensive income. Treasury stock is a contra-equity account, and AOCI is a separate equity component.

Question 18

How does the cost method of accounting for treasury stock affect APIC?

Answer 18

Under the cost method, treasury stock is recorded at repurchase cost. When reissued above cost, the excess increases APIC from treasury stock; when reissued below cost, losses reduce APIC or retained earnings.

Question 19

How are dividends declared accounted for in relation to retained earnings?

Answer 19

Dividends declared reduce retained earnings and create a liability (dividends payable). Retained earnings decrease on the declaration date, not the payment date.

Question 20

How are cumulative preferred stock dividends in arrears reported in the financial statements before they are declared?

Answer 20

Not recorded as a liability (not yet declared).
• Disclosed in the notes or parenthetically on the balance sheet.
• Do not affect retained earnings until declared.

Dividends in arrears accumulate internally (not officially in the financial statements) but are only recognized as a liability once declared. For example, if dividends for prior years are unpaid, the total amount in arrears is disclosed but not accrued as a liability.

Question 21

Why can the actual selling price of stock on the date of sale differ from the market price, and how is the selling price allocated and accounted for when multiple classes of stock are issued together?

Answer 21

The actual selling price may differ from the sum of individual market prices because the total proceeds received (selling price) are negotiated and may be less or more than the combined fair values.

When multiple classes of stock (e.g., common and preferred) are issued together for a lump sum, the total proceeds are allocated based on the relative fair market values of each class at the date of sale.

Allocation formula:
Allocated amount = Fair value of class /Total fair value of all classes
×
Total proceeds received

This ensures the proceeds are fairly split between stock accounts (par value and additional paid-in capital) for each class.
Journal entries credit each stock account and APIC based on the allocated amounts, not just par value plus excess cash.

Question 22

How are gains and losses from treasury stock transactions reported in the financial statements?

Answer 22

Gains and losses on treasury stock transactions are never reported on the income statement.

Gains from selling treasury stock above cost are credited to Additional Paid-in Capital—Treasury Stock (APIC-TS) in equity.

Losses from selling treasury stock below cost first reduce any existing APIC-TS balance; if losses exceed APIC-TS, the remainder reduces Retained Earnings.

Treasury stock transactions affect the balance sheet by adjusting equity accounts, not net income.

Example:

Purchased treasury stock at $7/share.

Sold treasury stock at $10/share.

Gain of $3/share × shares sold = credited to APIC-TS.

No gain or loss reported in net income.

Question 23

Issuance of common stock at par for cash

Company issues 1,000 shares of $1 par common stock for $1,000 cash.

Answer 23

Debit: Cash $1,000
Credit: Common Stock $1,000

Question 24

Issuance of common stock above par for cash Company issues 1,000 shares of $1 par common stock for $5,000 cash.

Answer 24

Debit: Cash $5,000 Credit: Common Stock $1,000 Credit: Additional Paid-in Capital $4,000

Question 25

Declaration of a cash dividend Company declares a $0.50 per share cash dividend on 1,000 shares outstanding.

Answer 25

Debit: Retained Earnings $500 Credit: Dividends Payable $500

Question 26

Purchase of treasury stock at cost Company buys back 100 shares of its $1 par stock at $10 per share using the cost method.

Answer 26

Debit: Treasury Stock $1,000 Credit: Cash $1,000

Question 27

Sale of treasury stock above cost Company sells 50 treasury shares originally purchased at $10 for $12 per share.

Answer 27

Debit: Cash $600 (50 × $12) Credit: Treasury Stock $500 (50 × $10) Credit: Additional Paid-in Capital - Treasury Stock $100

Question 28

Sale of treasury stock below cost but within APIC balance Company sells 50 treasury shares originally purchased at $10 for $8 per share; $200 APIC-T/S balance exists.

Answer 28

Debit: Cash $400 (50 × $8) Debit: Additional Paid-in Capital - Treasury Stock $100 Credit: Treasury Stock $500 (50 × $10)

Question 29

Sale of treasury stock below cost and APIC-T/S insufficient Company sells 50 treasury shares originally purchased at $10 for $6 per share; $50 APIC-T/S balance exists.

Answer 29

Debit: Cash $300 (50 × $6) Debit: Additional Paid-in Capital - Treasury Stock $50 Debit: Retained Earnings $150 (plug) Credit: Treasury Stock $500 (50 × $10)

Question 30

Declaration of a stock dividend (small, fair value method) Company declares a 10% stock dividend on 1,000 shares outstanding; stock fair value is $5, par $1.

Answer 30

Debit: Retained Earnings $500 (100 shares × $5) Credit: Common Stock $100 (100 shares × $1 par) Credit: Additional Paid-in Capital $400

Question 31

Declaration of a stock dividend (large, par value method) Company declares a 30% stock dividend on 1,000 shares outstanding; par value $1, market price $10.

Answer 31

Debit: Retained Earnings $300 (300 shares × $1 par) Credit: Common Stock $300

Question 32

Declaration of a cash dividend excluding treasury stock Company has 1,000 shares issued, 200 treasury shares, declares 5% cash dividend at $10 par.

Answer 32

Debit: Retained Earnings $40 (800 shares × $10 × 5%) Credit: Dividends Payable $40

Question 33

Issuance of common stock for cash with par and APIC Company issues 2,000 shares of $5 par common stock for $12 per share cash. Answer:

Answer 33

Debit: Cash $24,000 (2,000 × $12) Credit: Common Stock $10,000 (2,000 × $5) Credit: Additional Paid-in Capital $14,000

Question 34

Declaration of cash dividend Company declares a $1 per share cash dividend on 5,000 shares outstanding. Answer:

Answer 34

Debit: Retained Earnings $5,000 Credit: Dividends Payable $5,000

Question 35

Payment of cash dividend declared earlier Company pays the $5,000 dividends declared previously.

Answer 35

Debit: Dividends Payable $5,000 Credit: Cash $5,000

Question 36

Purchase of treasury stock at cost Company buys back 300 shares at $15 per share using the cost method.

Answer 36

Debit: Treasury Stock $4,500 Credit: Cash $4,500

Question 37

Reissue treasury stock above cost Company reissues 100 treasury shares originally purchased at $15 for $18 per

Answer 37

Debit: Cash $1,800 Credit: Treasury Stock $1,500 Credit: Additional Paid-in Capital - Treasury Stock $300

Question 38

Reissue treasury stock below cost but within APIC-T/S balance Company reissues 100 treasury shares originally purchased at $15 for $13 per share; $400 APIC-T/S balance exists.

Answer 38

Debit: Cash $1,300 Debit: Additional Paid-in Capital - Treasury Stock $200 Credit: Treasury Stock $1,500

Question 39

Reissue treasury stock below cost and APIC-T/S insufficient Company reissues 100 treasury shares originally purchased at $15 for $10 per share; $200 APIC-T/S balance exists.

Answer 39

Debit: Cash $1,000 Debit: Additional Paid-in Capital - Treasury Stock $200 Debit: Retained Earnings $300 (plug) Credit: Treasury Stock $1,500

Question 40

Small stock dividend declared (fair value method) Company declares a 5% stock dividend on 10,000 shares outstanding; stock fair value is $20, par $5.

Answer 40

Debit: Retained Earnings $10,000 (500 shares × $20) Credit: Common Stock $2,500 (500 shares × $5) Credit: Additional Paid-in Capital $7,500

Question 41

Large stock dividend declared (par value method) Company declares a 30% stock dividend on 10,000 shares outstanding; par value $5, market price $20.

Answer 41

Debit: Retained Earnings $15,000 (3,000 shares × $5) Credit: Common Stock $15,000

Question 42

Accumulated other comprehensive income (AOCI) increase from unrealized gain on AFS securities Company records an unrealized gain of $8,000 on available-for-sale securities.

Answer 42

Debit: Other Comprehensive Income (OCI) $8,000 Credit: Accumulated Other Comprehensive Income (Equity) $8,000

Question 43

How are losses on treasury stock reissuance accounted for under the cost method when APIC-Treasury Stock is zero or insufficient?

Answer 43

Debit APIC - Treasury Stock for the loss amount up to its balance. Debit retained earnings for any remaining loss beyond APIC. No impact on the income statement; the loss reduces stockholders' equity directly.

Question 44

Reissue 100 shares of treasury stock at $12 per share; cost was $16 per share; no APIC-T/S balance. What is the journal entry?

Answer 44

Debit: Cash $1,200 Debit: Retained Earnings $400 Credit: Treasury Stock $1,600 Loss of $4 per share × 100 shares = $400. No APIC-T/S to absorb loss, so retained earnings is debited.

Question 45

Reissue 200 shares of treasury stock at $7 per share; cost was $10 per share; APIC-T/S balance is $300. What is the journal entry?

Answer 45

Debit: Cash $1,400 Debit: APIC - Treasury Stock $300 Debit: Retained Earnings $300 Credit: Treasury Stock $2,000 Loss = $3 × 200 = $600. APIC-T/S absorbs $300; remaining $300 loss reduces retained earnings.

Question 46

Difference in Recording Gains on Treasury Stock: Cost Method vs. Par Value Method Explain how gains from the sale of treasury stock are recorded under each method.

Answer 46

Cost Method: Treasury stock recorded at cost when repurchased. Gains or losses calculated when treasury stock is reissued (sold). Gain = Reissue price – Repurchase cost Gains are credited to Additional Paid-In Capital—Treasury Stock (APIC—T/S) (an equity account). Gains do NOT go on the income statement. Example: Buy back 100 shares at $20 each → Debit Treasury Stock $2,000 Resell 100 shares at $22 each → Debit Cash $2,200 Credit Treasury Stock $2,000 Credit APIC—T/S $200 (gain) Par Value Method: Treasury stock recorded at par value when repurchased. Gains or losses calculated immediately upon repurchase (not on resale). Gain = Original selling price – Repurchase price Gains credited to Additional Paid-In Capital—Common Stock (APIC—C/S) (not APIC—T/S). Gains do NOT go on the income statement. Example: Originally sold 100 shares at $25 (par $10) Buy back 100 shares at $20 → Debit Treasury Stock $1,000 (100 × $10 par) Debit APIC—C/S $1,500 (100 × $15 original excess over par) Credit Cash $2,000 Credit APIC—T/S $500 (gain = $25 - $20 × 100 shares)

Question 47

Journal entry to record repurchase of treasury stock above original issue price (par value method).

Answer 47

Debit Treasury Stock (shares × par value) Debit Additional Paid-in Capital – C/S (shares × original APIC per share) Debit Retained Earnings (plug for excess repurchase cost) Credit Cash (shares × repurchase price) Explanation: Record treasury stock at par, reduce original APIC, and reduce retained earnings if repurchase price exceeds original issue price.

Question 48

Journal entry to record reissuance of treasury stock above par value (par value method).

Answer 48

Debit Cash (shares × reissue price) Credit Treasury Stock (shares × par value) Credit Additional Paid-in Capital – C/S (plug for excess over par) Explanation: Reissue treasury stock at par, with excess proceeds credited to additional paid-in capital.

Question 49

What would the Cost Method transactions below look like if the Par Value Method was used? Shares issued: 1,000 shares Par value: $10 per share Issue price: $15 per share Treasury stock repurchased: 100 shares at $20 per share Treasury stock reissued: 50 shares at $25 per share Initial Issuance Debit: Cash $15,000 (1,000 × $15) Credit: Common Stock $10,000 (1,000 × $10 par) Credit: Additional Paid-In Capital – C/S $5,000 Repurchase of Treasury Stock Debit: Treasury Stock $2,000 (100 × $20 cost) Credit: Cash $2,000 Reissue of Treasury Stock Debit: Cash $1,250 (50 × $25) Credit: Treasury Stock $1,000 (50 × $20 cost) Credit: Additional Paid-In Capital – Treasury Stock $250 (excess over cost)

Answer 49

Par Value Method Initial Issuance Debit: Cash $15,000 (1,000 × $15) Credit: Common Stock $10,000 (1,000 × $10 par) Credit: Additional Paid-In Capital – C/S $5,000 Repurchase of Treasury Stock Debit: Treasury Stock $1,000 (100 × $10 par) Debit: Additional Paid-In Capital – C/S $500 (100 × $5 original excess over par) Debit: Retained Earnings $500 (loss: $20 repurchase – $15 original issue × 100 shares) Credit: Cash $2,000 (100 × $20 repurchase price) Reissue of Treasury Stock Debit: Cash $1,250 (50 × $25) Credit: Treasury Stock $500 (50 × $10 par) Credit: Additional Paid-In Capital – C/S $750 (excess over par) Key Differences: Cost Method records treasury stock at repurchase cost; gains/losses recognized on reissue via APIC – Treasury Stock; retained earnings affected only if losses exceed APIC – T/S. Par Value Method records treasury stock at par; repurchase immediately recognizes gain/loss by adjusting APIC – C/S and retained earnings; reissue credits APIC – C/S for excess over par.

Question 50

What would the Par Value Method transactions look like if the Cost Method was used? Shares issued: 1,000 shares Par value: $10 per share Issue price: $15 per share Treasury stock repurchased: 100 shares at $20 per share Treasury stock reissued: 50 shares at $25 per share Initial Issuance Debit: Cash $15,000 (1,000 × $15) Credit: Common Stock $10,000 (1,000 × $10 par) Credit: Additional Paid-In Capital – C/S $5,000 Repurchase of Treasury Stock Debit: Treasury Stock $1,000 (100 × $10 par) Debit: Additional Paid-In Capital – C/S $500 (100 × $5 original excess over par) Debit: Retained Earnings $500 (loss: $20 repurchase – $15 original issue × 100 shares) Credit: Cash $2,000 (100 × $20 repurchase price) Reissue of Treasury Stock Debit: Cash $1,250 (50 × $25) Credit: Treasury Stock $500 (50 × $10 par) Credit: Additional Paid-In Capital – C/S $750 (excess over par)

Answer 50

Cost Method Initial Issuance Debit: Cash $15,000 (1,000 × $15) Credit: Common Stock $10,000 (1,000 × $10 par) Credit: Additional Paid-In Capital – C/S $5,000 Repurchase of Treasury Stock Debit: Treasury Stock $2,000 (100 × $20 cost) Credit: Cash $2,000 Reissue of Treasury Stock Debit: Cash $1,250 (50 × $25) Credit: Treasury Stock $1,000 (50 × $20 cost) Credit: Additional Paid-In Capital – Treasury Stock $250 (excess over cost) Cost Method records treasury stock at repurchase cost; gains/losses recognized on reissue via APIC – Treasury Stock; retained earnings affected only if losses exceed APIC – T/S. Par Value Method records treasury stock at par; repurchase immediately recognizes gain/loss by adjusting APIC – C/S and retained earnings; reissue credits APIC – C/S for excess over par.

Question 51

What is a marketable security?

Answer 51

Marketable securities are investments in debt or equity instruments that are actively traded and can be quickly converted to cash at a known market price such as stocks and bonds.

Question 52

A company declared a property dividend of marketable securities with a carrying amount of $60,000 and a fair value of $78,000. What is the effect on retained earnings after all nominal accounts are closed?

Answer 52

Retained earnings decrease by $60,000 Recognize a gain on marketable securities: 78,000 − 60,000 = 18,000 increase Property dividend recorded at fair value: 78,000 decrease Net effect on retained earnings: 18,000 − 78,000 = −60,000 (a decrease)

Question 53

What do you do when common stock is issued with no par value?

Answer 53

Common stock has no par value, so no par amount is recorded. Instead, use the stated value if provided to record the common stock account. If no stated value, credit the entire proceeds to common stock. Any amount received above stated value is credited to Additional Paid-In Capital (APIC). The board of directors usually sets the stated value for no-par stock to establish legal capital.

Question 54

What is a liquidating dividend?

Answer 54

A dividend paid that is more than the retained earnings — meaning the company is returning some of the original investment back to shareholders, not just profits.

Question 55

What is a property dividend?

Answer 55

A dividend paid to shareholders in the form of noncash assets instead of cash. These assets can be anything the company owns, such as inventory, investment securities, or even physical property like equipment or a building. So, it’s not just stock that can be distributed as a property dividend. Actual property (like a building or other fixed assets) can be distributed to shareholders as a dividend. Key points: The property dividend is recorded at the fair market value of the asset on the declaration date. Any gain or loss from adjusting the asset’s book value to fair value is recognized in income. Retained earnings is reduced by the fair value of the property distributed. The company removes the asset from its books once the dividend is declared. Example: Machinery original cost = $70,000 Accumulated depreciation = $40,000 Book value = $30,000 Fair market value = $50,000 Journal Entry on Declaration Date: Debit Retained Earnings: $50,000 (reduce equity by FMV of machinery) Debit Accumulated Depreciation: $40,000 (remove accumulated depreciation) Credit Machinery (Asset): $70,000 (remove machinery at original cost) Credit Gain on Disposal (Income Statement): $20,000 (recognize gain = FMV - book value) Credit Property Dividends Payable (Liability): $50,000 (record dividend payable at FMV)

Question 56

What is the impact of a stock dividend on Total Equity?

Answer 56

There is no impact on total stockholders' equity when a stock dividend is distributed. Here's why: When a stock dividend is declared, retained earnings are decreased by the fair value of the shares issued. At the same time, common stock and additional paid-in capital increase by the same total amount (common stock at par value, and the excess to additional paid-in capital).

Question 56

What is the impact of a cash dividend on Total Equity?

Answer 56

A cash dividend does reduce total stockholders' equity because it is a distribution of earnings to shareholders. On the date of declaration, retained earnings is debited (reduced), and dividends payable (a liability) is credited. On the date of payment, cash (an asset) is credited (reduced), and dividends payable is debited (liability removed). Total equity decreases by the amount of the dividend when declared because retained earnings go down. Assets decrease when the dividend is paid out (cash outflow).

Question 57

What is the difference between issued, outstanding, and treasury stock?

Answer 57

Issued Stock: This is the total number of shares that a company has actually sold or distributed to shareholders. It includes all shares that have been issued since the company was formed (and have not been retired), regardless of whether they are currently held by investors or the company itself. This includes stock that has been declared but not yet sold. Treasury Stock: These are shares that were once issued and outstanding but have been repurchased by the company. Treasury shares are held by the company and are not considered when calculating dividends or voting rights. They reduce total stockholders' equity because they are a contra-equity account. Outstanding Stock: This is the number of shares currently held by shareholders, excluding treasury stock. It equals issued shares minus treasury shares. Outstanding shares have voting rights and are entitled to dividends. Issued Stock = Outstanding Stock + Treasury Stock

Question 57

What are authorized shares of stock?

Answer 57

Authorized stock is the maximum number of shares a company is legally allowed to issue, as specified in its corporate charter. These shares may or may not ever be issued.

Question 58

How are dividends treated with respect to treasury stock?

Answer 58

Dividends are paid only on outstanding shares (issued shares minus treasury stock). Treasury stock shares are not entitled to dividends. When calculating dividends, subtract treasury shares from issued shares to find the dividend-eligible shares.

Question 59

What happens when a company declares a property dividend and there is a difference between the book value and market value of the property?

Answer 59

When a company gives a property dividend, it must recognize a gain or loss based on the difference between the book value and the market value of the property given.

Question 60

When calculating total outstanding common shares, how do treasury shares impact the calculation?

Answer 60

Treasury shares reduce outstanding common shares because they are issued but reacquired by the company and not considered outstanding. Treasury shares are essentially contra-common shares. Outstanding shares = Issued shares − Treasury shares

Question 61

when calculating total outstanding common shares, how do preferred shares impact the calculation?

Answer 61

Preferred shares are not included in the count of outstanding common shares because they represent a different class of stock with separate rights. Only common shares (issued minus treasury) count toward outstanding common shares.

Question 62

When a stock split happens mid-year, how are other common stock issuances calculated for the purpose of determining weighted average outstanding shares?

Answer 62

When a stock split happens mid-year, you treat it as if it occurred at the very beginning of the year for EPS calculations. This means: - The shares outstanding before the split are retroactively adjusted (multiplied by the split factor) for the entire year. - Any new shares issued after the split date are also adjusted by the split factor. - Treasury stock shares are adjusted similarly if they are held for stock option commitments or similar reasons. So, all common stock increases after the split are multiplied by the split factor to reflect the split retroactively in the weighted average shares outstanding.

Question 63

How is the book value per share of common stock calculated?

Answer 63

Book value per share of common stock means: How much of the company's equity is left for common shareholders after paying what is owed to preferred shareholders, divided by the number of common shares. Steps to solve: 1. Add up all stockholders' equity: Preferred stock + Common stock + Additional paid-in capital + Retained earnings = Total equity 2. Subtract the preferred stock's liquidation value (because preferred shareholders get paid this first if the company liquidates). If none is listed, this will be the par value. 3. Subtract any dividends in arrears on preferred stock 4. The remainder is the equity available to common shareholders. 5. Divide that remainder by the number of common shares outstanding to get book value per common share. This tells you how much each common share is "worth" based on the company's equity after preferred shareholders' claims are accounted for.

Question 64

What is a preferred stock's liquidation value?

Answer 64

A preferred stock's liquidation value is the amount preferred shareholders are entitled to receive before common shareholders if the company is liquidated. It often includes the par value plus any premium specified in the terms of the preferred stock.

Question 65

What is the difference between basic EPS and the book value per share of common stock?

Answer 65

Basic EPS measures earnings available to common shareholders divided by weighted average common shares outstanding. Book value per share measures the equity value available to common shareholders divided by the number of common shares outstanding.