Question

Contrast common stock, preferred stock, and bonds payable. What are the similarities? What are the differences? Are bonds and mandatorily redeemable stock reported any difference in the financial statement? Why?

Answer 1

Q1) SIMILARITIES BETWEEN COMMON STOCK & PREFERRED STOCK :-

1) both are High return investments. Both kinds of stock may pay regular dividend.

2) Both are dangerous investment. you could lose all the money you have invested if company goes under. High return means high risk.

3) Both the stocks are also ownership in a company. The one who buy these stocks also get the ownership in the company.

SIMILARITIES BETWEEN BONDS & PREFERRED STOCK :-

1) Bonds offer investors regular interest payments while preferred stock pay dividends.

2) Both are sensitive to interest rates, increases when they fall and vice versa.

3) Bond holder's are paid first, ahead of preferred stockholders at the time of it's winding up or liquidation.

SIMILARITIES BETWEEN BONDS & COMMON STOCK :-

1) The main similarity between a stock and a bond is that both are classified as securities.

2) Both the bond and stock market are regulated by the US Securities and Exchange Commission.

Q2) DIFFERENCES :-
1)COMMON STOCK- _common stock is a risky type of investment as these shareholders get paid at the last after paying to other holders, any they are paid only if there's anything left.
- common stock gives highest return as compared to other investment.
- It also give voting rights to shareholders.
2) PREFERRED STOCK :-
- These stockholders are paid after the bond holder but before common stock holders.
- Holding a preferred stock is a partial risk, as the payout for this is second to that of the bond.
- preferred stockholders don't have voting rights.
3) BONDS :-
- This is a fixed income investment. Investor's that buy corporate bonds get the fixed interest the bonds pay.
- Bonds holders get paid off first at the time of liquidation.
- Bond holders have no voting power over the company.

Q3)-Yes, bonds and mandatorily redeemable stock report difference in the financial statement.

Mandatorily redeemable stock are those stocks that have to be reclaimed by the issuer at a pre-determined time or upon a specific event.

International Financial Reporting Standards (IFRSs) and US-GAAP now require companies to report mandatorily redeemable preferred stock as liability rather than equity.

the act of issuing the bond creates a liability. Thus, bonds payable appear on the liability side of the company’s balance sheet.