CH 10 Flashcards
Define paid in capital
a. The amount stockholders have invested in the company
Define three primary classification of stockholders equity
a. Paid in capital
b. Retained earnings
c. Treasury stock
Define retained earnings
a. Represents all net income less all dividends since the company began
Define treasury stock
a. A corporation’s own stock that it has reacquired
How is stockholders equity increase on a balance sheet?
a. Paid in capital and retained earnings
How is stockholders equity decrease on a balance sheet?
a. Treasury stock
Define invested capital
a. Amount of money paid into a company by its owners
Define incorporated
a. Take in or contain as part of a whole
Define model business corporation act
a. Serves as a guide to states in the development of their corporate statutes
Define articles of incorporation
a. Describes the nature of the firm’s business activities, the shares to be issued, and the composition of the initial board of directors.
Define organization chart
a. Traces the line of authority for a typical corporation
Define stages of equity financing
a. Investment by the founders of the business
b. Investment by friends and family of the founders
c. Outside investment by angel investors and venture capital firms
d. Initial public offering( IPO)
1Define angel investors
a. Wealthy individuals in the business community willing to risk investment funds on a promising business venture
Venture capital firms
a. Provide additional financing, often in the millions for a percentage ownership in the company.
Define initial public offering (IPO)
a. The first time a corporation issues stock to the public
Define publicly held corporation
a. Allows investment by the general public and is regulated by the securities and exchange commission
Define privately held corporation
a. Does not allow investment by the general public and normally has fewer stockholders
What are stockholders’ rights
a. Right to vote
b. Right receive dividends
c. Right to share in the distribution of assets
d. Preemptive right
What are advantages of a corporation
a. Limited liability
b. Ability to raise capital
c. Lack of mutual agency
Define mutual agency
a. Individual partners each have power to bind the partnership to a contract
Define S corporation
a. Allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership.
Define authorized stock
a. The total number of shares available to sell, stated in the company’s articles of incorporation.
b. Is not required to be recorded
Define issued stock
a. The number of shares sold to investors; includes treasury shares
Define outstanding stocks
a. The number of shares held by investors excludes treasury shares
How do you determine issued stock?
a. Authorized minus unissued equals issued
How do you determine outstanding stock?
a. Issued minus treasury stock equals outstanding
Define Par value
a. The legal capital assigned per share of stock
Does par value have a relationship with the market value of the common stock?
a. No, it does not have any relationship with market value of common stock
Define no par value stock
a. Common stock that has not been assigned a par value
Define stated value
a. The legal capital assigned per share to no par stock
Define additional paid in capital
a. The portion of the cash proceeds above par value
How do you journalize par value stock
a. (DR)Cash
b. (CR) common stock
c. (CR) additional paid in capital
d. ( issue common stock above par )
Define Preferred stock
a. Stock with preference over common stock in the payment of dividends and the distribution of assets
What are features of preferred stock
a. Convertible( can be exchanged for common stock)
b. Redeemable( shares can be returned to corporation at a fixed price)
c. Cumulative( priority for future dividends)
Define dividends in arrears
a. Unpaid dividends on cumulative preferred stock
How do you record preferred stock?
a. (DR) Cash ( shares times stock price per share)
b. (CR) preferred stock ( shares times par value)
c. (CR) additional paid in capital ( difference)
d. (Issue preferred stock above par)
Define treasury stock
a. Corporation’s own stock
Why do corporation repurchase their stock
a. To boost underpriced stock
b. To distribute surplus cash without paying dividends
c. To boost earnings per share
d. To satisfy employee stock ownership plans
Is treasury stock a contra account?
yes
How do you journalize treasury stock
a. (DR) treasury stock
b. (CR) cash
c. (repurchases treasury stock)
How do you record after purchase of treasury stock
a. (DR) cash( share times reissue price)
b. (CR) Treasury stock( share times original price of share)
c. (CR) additional paid in capital ( share times [ difference] gain of share)
d. ( reissue treasury stock above cost
How do you journalize stock of sale of treasury stock
a. (DR) Cash( share times price of treasury stock)
b. (DR) additional paid in capital ( share times [ difference between original cost with reselling cost] of cost of treasury stock)
c. (CR) treasury stock ( share time original price of treasury stock)
d. ( reissues treasury stock below cost)
Define accumulated deficit
a. A debit balance in retrained earnings
When stockholder reinvest their dividends does it increase investment over time
yes
Define declaration date
a. The day on which the board of directors declares the cash dividend to be paid
You do you journalize cash dividends
a. (DR) dividends
b. (CR) dividends payable
c. (declare cash dividends)
How do you journalize a payment of cash dividends
a. (DR) dividends payable
b. (CR) Cash
c. (pay cash dividends)
Define stock dividends
a. Additional shares of a company’s own stock given to stockholders
Does stockholder’s equity change from stock dividend?
no
Do you record a split stock when a company declares?
no
When do you lower trading prices?
a. A company declares 2 for 1 stock split
How do you journalize stock dividend payment at 10%?
a. (DR) stock dividends( from the common stock’s market value)
b. (CR) common stock ( from par value of common stock)
c. (CR) additional paid in capital ( difference between stock div and C/S)
d. ( pay 10% stock dividend)
Define return on the market value of equity
a. NI divided by the market value of equity
b. Measures earnings performance
Why doesn’t stockholders’ equity equal the market value of equity
a. Asset’s value can increase over time
Define earnings per share
a. Measures the net income earned per share of common stock
b. Earnings per share is useful in comparing earning performance for the same company over time.
Price earnings ratio
a. The stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis
b. It indicates how the stock is trading in relationship to current earnings.
Define growth stocks
a. Stocks that tend to have higher price earnings ratios and are expected to have higher future earnings.
Define value stocks
a. Stocks that end to have lower price earnings ratios and are priced low in relation to current earnings
b. Lower the price, a company will predict poor outcomes.
