Accounting 201Chapter 10 Power Point

Question 1

What is the accounting equation for Stockholders’ Equity?

Answer 1

Stockholders’ Equity = Assets - Liabilities

Question 2

What are the three Primary Sections of Stockholders’ Equity and their meanings?

Answer 2

1) Paid-in capital = Amount stockholders have invested in the corporation.2) Retained Earnings = Amount of earnings the corporation has retained.3) Treasury Stock = Corporation’s own stock that it has reacquired.

Question 3

Articles of incorporation (or corporate charter) describe?

Answer 3

a) the nature of the firm’s business activitiesb) the shares to be issuedc) the initial board of directors

Question 4

With corporation’s stockholders control the corporation how?

Answer 4

By voting their shares, they determine the makeup of the board of directors - which in turn appoints the management to run the corporation.

Question 5

Corporations may be either public or private describe how a public corporation operates:

Answer 5

1) Stocks trade on a stock exchanges such as NYSE, AMEX, NASDAQ; or by over-the-counter (OTC) trading.2) Regulated by the Securities and ExchangeCommission (SEC) I.E. Wal-Mart, Microsoft, Intel.

Question 6

Corporations may be either public or private describe how a private corporation operates:

Answer 6

1)Does not allow investment by the general public and has fewer stockholders.2) Not regulated by the Securities and ExchangeCommission (SEC) and do not need to file financialstatements with it. I.E. Cargill (agricultural commodities), Koch Industries (oil andgas), Chrysler (cars).

Question 7

What are the advantages of a Corporation?

Answer 7

1) Limited liability2) Ability to raise capital3) Lack of mutual agency

Question 8

What are the dis-advantages of a Corporation?

Answer 8

1) Additional taxes2) More paperwork

Question 9

If a corporation has only one kind of stock, itusually is labeled as common stock. What are the three types of Common Stock and what defines them?

Answer 9

1) Authorized Shares = available to sell(issued and unissued).2) Issued Shares = actually sold (includes treasury stock).3) Outstanding Shares = held by investors(excludes treasury stock).

Question 10

If a corporation has only one kind of stock, itusually is labeled as common stock. There are three types of Common Stock: Authorized Shares, Issued Shares, Outstanding Shares. What are the two accounting equations?

Answer 10

1) Authorized – Unissued = Issued2) Issued – Treasury Stock = Outstanding

Question 11

What two main reasons make preferred stock better than common stock?

Answer 11

1) Usually have first rights to a specified amount of Dividends.2) Receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved.

Question 12

Comparison of common stock, preferred stock, and bonds: Voting rights?

Answer 12

Common = YesPreferred = Usually NoBonds = No

Question 13

Comparison of common stock, preferred stock, and bonds: Risk to the investor?

Answer 13

Common = HighestPreferred = MiddleBonds = Lowest

Question 14

Comparison of common stock, preferred stock, and bonds: Expected return to the investor?

Answer 14

Common = HighestPreferred = MiddleBonds = Lowest

Question 15

Comparison of common stock, preferred stock, and bonds: Risk of contract violations?

Answer 15

Common = LowestPreferred = MiddleBonds = Highest

Question 16

Comparison of common stock, preferred stock, and bonds: Preference for payments?

Answer 16

Common = LowestPreferred = MiddleBonds = Highest

Question 17

Comparison of common stock, preferred stock, and bonds: Tax deductibility of payments?

Answer 17

Common = NoPreferred = UsuallyBonds = Yes

Question 18

What are the Features of Preferred Stock and what defines them?

Answer 18

1) Convertible = Shares can be exchanged for common stock.2) Redeemable = Shares can be returned to the corporation at a fixed price.3) Cumulative = Shares receive priority for future dividends, if dividends are not paid in a given year.

Question 19

What is Treasury Stock?

Answer 19

A corporation’s own stock that it has reacquired

Question 20

Why corporations repurchase their stock?

Answer 20

• To boost under-priced stock.- To distribute surplus cash without paying dividends.- To boost earnings per share.- To offset issuance of shares under stock-based compensation plans.

Question 21

Define Retained Earnings and Dividends:

Answer 21

• Represents the earnings retained in the corporation – earnings not paid out as dividends to stockholders.- Equals all net income, less all dividends, since the corporation began.- Has a normal credit balance consistent with other stockholders’ equity accounts.- If losses exceed income since the corporation began, retained earnings will have a debit balance and is called an accumulated deficit.

Question 22

Sometimes, corporations distribute to shareholders additional shares of the companies’ own stock rather than cash. Theseare known as _____________or __________ depending on the size of the stock distribution.

Answer 22

stock dividends or stock splits