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Intermediate Accounting

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13 Equity Financing Overview After discussing debt financing in Chapter 12, we now turn to the other kind of financing available to businesses—equity financing. Like debt financing, equity financing, once you delve below the surface of what you probably covered in your introductory accounting course, can be quite complex. It isn’t as simple as selling shares of stock for which you debit Cash and credit Common Stock. One of the complexities involves various kinds of stock. There is not only the common, voting stock. There are also a wide variety of preferred stock possibilities. Preferred stock doesn’t mean that it is “better” stock. For instance, as far as voting goes, preferred shares are usually inferior to common shares. When a company performs really well, or the prospects for performance are favorable, common shares tend to appreciate in value (sometimes substantially). Preferred shares, on the other hand, tend to produce only minor fluctuations in price. Preferred share pricing is tied much more to changes in interest rates and company credit ratings than to company performance. This example shows how preferred shares usually act more like debt than equity. The bonds discussed in the prior chapter also change in value based on changes in interest rates and company credit ratings. Some preferred shares (mandatorily redeemable preferred shares) are so similar to debt that they are actually classified as liabilities on the balance sheet. Some of the other complexities discussed in this chapter include stock that isn’t quite stock yet like rights, warrants, and options. Options, in particular, are common in U.S. corporations and, hence, the new accounting treatment for them is important to understand well. Finally, financing cuts both ways. The chapter discusses not only the obtaining of cash and issuing of stock and other equity instruments, but also the repurchase of stock (treasury stock) and the payment of dividends. The payment of dividends (usually) is one of several means by which the Retained Earnings account is adjusted.
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13-2 Chapter 13 Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered. If after reading this section of the chapter you still don’t feel comfortable with all of the Learning Objectives covered, you will need to spend additional time and effort reviewing those concepts that you are struggling with. The following “Tips, Hints, and Things to Remember” are organized according to the Learning Objectives (LOs) in the chapter and should be gone over after reading each of the LOs in the textbook.
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