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level: Level 1

Questions and Answers List

level questions: Level 1

Question	Answer
cumulative amount that reflects share repurchases minus any subsequent resale of its shares	Treasury stock
Issued shares - treasury shares	Outstanding shares
Issued shares - outstanding shares	Treasury shares
market value per share/book value per share	Price to book ratio
stockholders' equity - preferred stock/ # of shares outstanding	Book value per share
- May offer the greatest potential return to shareholders (more than expansion or acquisition) - Sends a strong signal that shares are undervalued - causes value to increase faster - Gives the company cash later on to grow their operations	Pros of share buybacks
- stocks can still go down after buy backs (no guarantees) - Lose cash - Stock repurchasing can weaken a company's ability to weather an economic crisis - Boosts earnings per share temporarily, but doesn't increase fundamental value - To benefit executives - can offset when stock options are exercised (short term solution and then company typically sells shares later on) - Buybacks that use borrowed money are risky (companies tend to always believe their shares are undervalued)	Disadvantages of share buybacks
- do not affect net income - bypass income statement and immediately reduce retained earnings - Reduce cash	Dividend payments...
- when shares of stock are distributed to shareholders instead of cash - All stockholders retain the same percentage of ownership, but now have additional shares - company reduces retained earnings and increases contributed capital account (just reclassifying amounts between two accounts) - no change in total stockholders equity and par value per share does not change, but increases shares outstanding (decreases EPS)	Stock dividend
- company issues additional common shares to existing stockholders (ex. 2 for 1 - when everyone is given an extra share for every share they own - immediately reduces price) - Done when the share price has gotten too high and is no longer comparable to competitors --> helps make it look more affordable - Underlying value of company has not changed - Usually initially boosts demand and drives up prices - NO financial statement effects (just an increase in # of shares outstanding/decreases EPS + reduction in par value of stock on 10k) -	Stock split
- a company repurchases its common shares from its existing stockholders - Primary motive is to repurchase shares when they appear undervalued - Decreases total equity, decreases shares outstanding (increases EPS) and increases return on equity (b/c total equity decreases)	Share repurchases
- little to no influence (own less than 20%) - just used for capital gains + dividends	Passive investments
- 20-50% ownership, have a seat at the table - equity method	Significant influence
- owns 50% or more, have control of the company	Control
- Used with passive investments (little to no influence) - Records shares acquired at fair value (purchase price) - When sold - any gains or losses are = to difference between $ received for sale and book value - - impairment loss gets recorded right away ( - When there is a readily determined change in fair value - you record it each period (part of net earnings and increase investment asset account)	Fair value method
- Used when own 20-50% -Reports investment on balance sheet at an amount equal to the percentage of investee's equity owned - NOT impacted by changes in fair value price - Investments recorded at purchase price - Dividends are recorded as return on investment and decrease investment price (NOT as income) - Income is reported is = to percentage of income relative to their share in the company - Investment is increased/decreased by the income	Equity method
tax expense / pre-tax income	Effective tax rate (what a firm actually pays in taxes)
-amount payable now	Current tax expense
- effect on tax expense from deferred tax liabilities and deferred tax assets - accounts for differences in IRS (income tax returns, looks fast cash specifically) vs. GAAP (10K, looks at earnings vs. expenses)	Deferred tax expense
- when cash payment to IRS is GREATER than tax expense for GAAP/financial reporting purposes - Create future tax deductions that reduce taxes payable (ex. pre-paid assets)	Deferred tax assets
- when cash payment to IRS is LESS than tax expense for GAAP/financial reporting purposes - Create future tax income that increases taxes payable (ex. depreciation expense - can accelerate depreciation on IRS reporting)	Deferred tax liabilities
- acquisition and disposal of PPE and intangible assets - purchase and sale of stocks, bonds, securities (that are not cash equivalents) - the lending and subsequent collection of money (when YOU lend the money)	Investing activities
- when it obtains resources from owners, returns resources to owners, borrows resources from creditors and repays amount borrowed - when you are BORROWING the money	Financing activities
Subtract from net income	Current assets increase
add to net income	Current assets decrease
add to net income	Current liabilities increase
subtract from net income	Current liabilities decrease
cash flow from operating activities / annual capital expenditures - (higher this is, less debt is needed to operate)	Cash flow ratio analysis