Section 2: 30–40%2I

Equity

Exam insight

Equity questions cluster around preferred-stock dividends and treasury stock. The highest-yield trap is cumulative preferred stock: unpaid dividends accumulate as dividends in arrears (disclosed, not accrued as a liability) and must be satisfied, current year plus all arrears, before common shareholders receive anything, which also feeds the EPS numerator. Treasury stock under the cost method is the other reliable tested point: it reduces total equity and never produces a gain or loss on the income statement.

What AICPA wants you to know

1Identify the five components of stockholders' equity and their normal balances
2Distinguish cumulative from noncumulative preferred stock and compute dividends in arrears
3Apply the cost method for treasury stock purchases and reissuances
4Compute basic and diluted EPS using the weighted-average shares method
5Record stock dividends (large vs. small) and stock splits

Patterns in this topic

The exam re-skins the same archetypes. Recognize these here, then drill them in the Pattern Lab.

The EPS EngineBasic is income minus preferred dividends over weighted shares; diluted adds each security only if it dilutes, most dilutive first.Probable and EstimableProbable and estimable means accrue, reasonably possible means disclose, remote means silence, and gains never accrue.

Exam tip

Study smarter: before you expand each card, cover the screen and try to recall what the concept means from its title alone. Retrieving it from memory builds the recall the exam actually tests, and it beats re-reading.