Libby/Hodge Financial Accounting//Chapter 11 - Libby, Libby & Short - Financial Accounting
What is the term for shares of stock currently owned by investors? - CORRECT ANSW-Shares currently owned by investors are called outstanding shares. It is important to know the number of outstanding shares since these are the shares that are entitled to receive dividends, the shares that can vote, and the shares used in the calculation of earnings per share (EPS).
What is the term for the maximum shares of stock that can be issued by a company? - CORRECT ANSW-The maximum shares that a company can issue or sell to investors is called authorized shares. Number of shares authorized are identified in the corporation's charter issued by the state in which the company is domiciled.
What is the term for the shares of stock that have been repurchased and are held by the company? - CORRECT ANSW-Shares that have been repurchased and held by the company are called treasury shares. Treasury shares are still issued but they are not outstanding;
therefore, treasury shares have no rights and cannot receive a dividend or vote. Treasury shares are excluded in the calculation of earnings per share.
During 2016, Thomas Corporation repurchased some shares of its own common stock. What effect did this transaction have on 2016's total stockholders' equity and earnings per share. - CORRECT ANSW-Repurchase of treasury shares reduces total stockholders' equity as a contra account called treasury stock is debited and its total is deducted from total stockholders' equity. Repurchase of treasury shares will increase earnings per share because they are no longer outstanding so the denominator will decrease driving the ratio up.
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