acc exam 6 Flashcards
What is a major advantage of the corporate form of business?
Ease of raising capital from both large and small investors.
What are some characteristics of a corporation as a separate legal entity?
Can own assets, incur liabilities, sue and be sued, and enter into contracts.
What is an advantage of equity financing?
Equity does not require repayment, and dividends are optional.
What is an advantage of debt financing?
Interest on debt is tax-deductible, and debt does not dilute stockholder control.
What is stock authorization?
The maximum number of shares a corporation can issue.
What happens when a company issues stock to the public?
It is typically a cash transaction and does not affect transactions between investors.
How are employees compensated with stock?
Through stock options, allowing them to buy stock later at a predetermined price.
Why do companies repurchase their stock (treasury stock)?
To signal stock value, reissue shares for employee plans, or reduce outstanding shares to increase per-share earnings.
What are the three key dates for cash dividends?
Declaration date, date of record, and payment date.
Why do companies issue stock dividends?
To lower the market price per share, conserve cash, and signal expected strong performance.
What happens in a stock split?
The number of shares increases, and the par value per share decreases, without affecting retained earnings.
What is the main advantage of preferred stock over common stock?
Priority in dividend payments, often at a fixed rate.
What is the difference between current and cumulative dividend preference?
Current: Preferred dividends must be paid first in the current year.
Cumulative: Unpaid dividends from previous years (dividends in arrears) must be paid before common stock dividends.
What are retained earnings?
Cumulative net income minus losses and dividends since the company started operating.
What is an accumulated deficit?
When retained earnings have a negative balance due to net losses.
What is the purpose of the Statement of Cash Flows?
To track cash flows from operating, investing, and financing activities and show changes in cash over time.
What are the three main categories of cash flows?
Operating activities, investing activities, and financing activities.
What does the net cash flow reconcile?
The beginning and ending cash balances.
What are operating activities?
Day-to-day business operations like cash received from customers or paid to suppliers.
Which method is commonly used to report operating activities?
The indirect method, which adjusts net income for non-cash transactions.
What are investing activities?
Cash transactions involving buying and selling long-term assets or investments.
Give an example of an investing activity.
Purchasing equipment or selling investments.
What are financing activities?
Transactions with lenders and stockholders, such as issuing stock or repaying loans.
Give an example of a financing activity.
Borrowing money through loans or repurchasing company stock.
What is the difference between the direct and indirect methods?
Direct Method: Lists actual cash receipts and payments.
Indirect Method: Adjusts net income for non-cash items.
Which method focuses on adjusting net income for non-cash transactions?
indirect method
