Treasury Stock and Stock Dividends: CPA FAR Mastery
Welcome to this module on Treasury Stock and Stock Dividends, a crucial area for the CPA exam's Financial Accounting and Reporting (FAR) section. Understanding these concepts is vital for accurately presenting a company's equity and for analyzing its financial health.
Treasury Stock: Understanding Repurchased Shares
Treasury stock refers to shares of a company's own stock that it has repurchased from the open market. Companies buy back their own stock for various strategic reasons, such as to increase earnings per share (EPS), to have shares available for employee stock options, or to signal that management believes the stock is undervalued.
It reduces total stockholders' equity.
Stock Dividends: Distributing Additional Shares
A stock dividend is a distribution of additional shares of a company's own stock to its existing shareholders. Unlike cash dividends, stock dividends do not distribute company assets. Instead, they represent a reclassification of retained earnings into paid-in capital.
| Feature | Small Stock Dividend (< 20-25%) | Large Stock Dividend (> 20-25%) |
|---|---|---|
| Accounting Treatment | Debit Retained Earnings for the fair market value of the shares issued. | Debit Retained Earnings for the par or stated value of the shares issued. |
| Impact on Equity | Increases Paid-in Capital (Common Stock and APIC), decreases Retained Earnings. | Increases Common Stock (at par/stated value), no impact on APIC unless par value is changed. |
| Impact on Shareholder | Increases number of shares, decreases per-share market price, total value remains theoretically the same. |
The distinction between small and large stock dividends is crucial for accounting treatment. Small stock dividends are recorded at market value because they are assumed to have a negligible effect on the market price of the stock. Large stock dividends, on the other hand, are recorded at par or stated value because they are expected to significantly reduce the market price per share, making market value less reliable.
Key takeaway: Stock dividends reclassify equity, moving amounts from Retained Earnings to Paid-in Capital accounts, without affecting total equity or company assets.
Stock Splits vs. Stock Dividends
It's important to differentiate stock dividends from stock splits. While both increase the number of shares outstanding, a stock split involves a reduction in the par or stated value per share, with no change in the total dollar amount of common stock or paid-in capital. A stock dividend, as discussed, involves a reclassification of retained earnings.
Visualizing the accounting entries for treasury stock and stock dividends helps solidify understanding. For treasury stock (cost method), the repurchase is a debit to Treasury Stock (a contra-equity account) and a credit to Cash. For a small stock dividend, it's a debit to Retained Earnings and credits to Common Stock (at par) and Additional Paid-in Capital (for the excess over par). For a large stock dividend, it's a debit to Retained Earnings and a credit to Common Stock (at par).
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Small stock dividends are recorded at market value, while large stock dividends are recorded at par or stated value.
CPA Exam Considerations
On the CPA exam, expect questions that test your ability to:
- Calculate the impact of treasury stock transactions on EPS and equity.
- Journalize the issuance of treasury stock and stock dividends under different scenarios.
- Differentiate between stock dividends and stock splits.
- Analyze financial statements to identify the effects of these transactions.
Learning Resources
The official source for U.S. GAAP, providing authoritative guidance on treasury stock and stock dividends. Essential for understanding the underlying principles.
Provides the official outline of topics covered on the FAR section of the CPA exam, including specific areas related to equity transactions.
A clear and concise explanation of treasury stock, including its accounting treatment and impact on financial statements.
Breaks down the concepts of stock dividends and stock splits, highlighting their differences and accounting implications.
A video tutorial that visually explains the accounting for treasury stock and stock dividends, often featuring example problems.
An accessible overview of treasury stock, its purpose, and its financial implications for investors and companies.
Explains stock dividends from both a corporate finance and accounting perspective, including journal entries.
A detailed video lecture focusing on the CPA FAR exam perspective of treasury stock and stock dividends, with practice examples.
Provides a broad overview of treasury stock, its history, and its various accounting treatments and implications.
Explains the concept of stock dividends, including their purpose, types, and accounting treatment.