On October 31, the stockholders' equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.
Prepare a tabular summary of the effects of the alternative actions on the components of stockholders' equity, outstanding shares, and book value per share. Use the following column headings: Before Action, After Stock Dividend, and After Stock Split.
The impact on stockholder's equity for Omar Company is considered.
Solvency, Depreciation, Capitalization/Expensing
1. How is the ratio of liabilities to stockholder's equity related to solvency?
2. What is the purpose of depreciation and why are there so many methods?
3. What is the principle defining whether you capitalize or expense an acquisition?
4. Given this distinction, how do capitalized items become appropriately expensed?
5. Why does a current, more than adequate cash flow assure that you are not insolvent?
6. How would the growth in the dollar value of accounts receivable impact the cash flow for any given level of income?
7. How does a firm's equity investment in other firms impact the cash flow of the firm?
8. Why is it critical to separate operating and non-operating income?
9. How would the relationship of revenues and accounts receivables and cash flow differ as a result of credit and collections policy?