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Financial Accounting > Ch. 10 Stockholders' Equity > Flashcards

Ch. 10 Stockholders' Equity Flashcards

1
Q

Paid-in capital

A

The amount stockholders have invested in the company.

-(Invested Capital)

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2
Q

Retained earnings

A

Represents all net income, less all dividends, since the company began.
-(Earned Capital)

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3
Q

Treasury stock

A

A corporation’s own stock that it has reacquired.

  • buying those shares back decreases stockholders’ equity.
  • Contra account (Stockholders’ Equity)
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4
Q

Model Business Corporation Act

A

Serves as a guide to states in the development of their corporate statutes.

  • State incorporation laws
  • ABC company is based in Pennsylvania but incorporated in the state of Delaware
  • Many corporations chose to incorporate in Delaware due to the favorable incorporation laws found there.
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5
Q

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.
-Sometimes called the corporate charter.

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6
Q

Organization chart

A

Traces the line of authority for a typical corporation.

  • Stockholders
  • Board of Directors
  • Chief Executive Officer (CEO)
  • VP Management, VP Marketing, CFO, Legal Counsel, VP HR
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7
Q

Angel investors

A

Wealthy individuals in the business community willing to risk investment funds on a promising business venture.

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8
Q

Venture capital firms

A

Provide additional financing, often in the millions, for a percentage ownership in the company.
-Most corporations do not consider issuing stock to the general public (“going public”) until their equity financing needs exceed $20 million.

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9
Q

Initial public offering (IPO)

A

The first time a corporation issues stock to the public.

-Future stock issues by the company are called seasoned equity offerings (SEOs).

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10
Q

Publicly held corporation

A

Allows investment by the general public and is regulated by the Securities and Exchange Commission.
-Trades on the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotations (NASDAQ), or by over-the-counter (OTC) trading.

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11
Q

Privately held corporation

A

Does not allow investment by the general public and normally has fewer stockholders.
-Corporations whose stock is privately held do not need to file financial statements with the SEC.

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12
Q

Limited liability

A

Stockholders in a corporation can lose no more than the amount they invested in the company.

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13
Q

Mutual agency

A

Individual partners each have power to bind the partnership to a contract.

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14
Q

Double taxation

A

A corporation pays income taxes on its earnings, and when dividends are distributed to stockholders, the stockholders pay taxes a second time on the corporate dividends they receive.
-Corporate income is taxed once on earnings at the corporate level and again on dividends at the individual level.

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15
Q

S corporation

A

Allows a company to enjoy limited liability as a corporation but tax treatment as a partnership.

  • One of the major restrictions is that the S corporation cannot have more than 100 stockholders, so S corporations appeal more to smaller, less widely held businesses.
  • -Two additional business forms
  • limited liability companies (LLCs)
  • limited liability partnerships (LLPs)
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16
Q

Authorized stock

A

The total number of shares available to sell, stated in the company’s articles of incorporation.
-Not recorded in the accounting records. However, the corporation is required to disclose the number of shares authorized.

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17
Q

Issued stock

A

The number of shares sold to investors; includes treasury shares.
-A company usually does not issue all its authorized stock.

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18
Q

Outstanding stock

A

The number of shares held by investors; excludes treasury shares.

19
Q

Par value

A

The legal capital assigned per share of stock.

-Today, par value has no relationship to the market value of the common stock.

20
Q

No-par value stock

A

Common stock that has not been assigned a par value.

-Laws in some states permit corporations to issue no-par stock.

21
Q

Stated value

A

The legal capital assigned per share to no-par stock.

-Treated and recorded in the same manner as par value shares.

22
Q

Additional paid-in capital

A

The portion of the cash proceeds above par value.

23
Q

Preferred stock

A

Stock with preference over common stock in the payment of dividends and the distribution of assets.

  • most do not have voting rights
  • Have characteristics of both common stock and bonds payable
24
Q

Convertible

A

Shares can be exchanged for common stock.

25
Q

Redeemable

A

Shares can be returned to the corporation at a fixed price.

26
Q

Cumulative

A

Shares receive priority for future dividends, if dividends are not paid in a given year.
-If, the preferred stock is noncumulative, any dividends in arrears are lost.

27
Q

Dividends in arrears

A

Unpaid dividends on cumulative preferred stock.
-Because dividends are not an actual liability until they are declared by the board of directors, dividends in arrears are not reported as a liability in the B/S. However, info. regarding any dividends in arrears is disclosed in the notes to the financial statements.

28
Q

Accumulated deficit

A

A debit balance in Retained Earnings.

  • If losses exceed income since the company began, Retained Earnings will have a debit balance.
  • We subtract accumulated deficit from total paid-in capital in the balance sheet to arrive at total stockholders’ equity.
29
Q

Dividends

A

Distributions by a corporation to its stockholders.

  • Companies tend to increase dividends when the company is doing well and future prospects look bright.
  • Many investors choose to automatically reinvest their dividends. This works similar to compound interest in a savings account. The investor does not receive dividends directly as cash; instead, his or her dividends are directly reinvested into more shares of the company.
  • It is the board of directors that declares the cash dividends to be paid.
30
Q

Declaration date

A

The day on which the board of directors declares the cash dividend to be paid.

  • The declaration of a cash dividend creates a binding legal obligation for the company declaring the dividend.
  • On this date, we:
    (a) increase Dividends, a temporary account that is closed into Retained Earnings at the end of each period.
    (b) increase the liability account, Dividends Payable.
31
Q

Record date

A

A specific date on which the company will determine the registered owners of stock and , therefore, who will receive the dividend.
-Investors who own stock on the date of record are entitled to receive the dividend.

32
Q

Payment date

A

The date of the actual cash distribution of dividends.

33
Q

Stock dividends

A

Additional shares of a company’s own stock given to stockholders.

  • Total assets, total liabilities, and total stockholders’ equity do not change as a result of a stock dividend
  • Large stock dividends
  • Small stock dividends (less than 25%)
34
Q

Stock splits

A

A large stock dividend that includes a reduction in the par or stated value per share.

  • When a company declares a stock split, we do not record a transaction.
  • Equivalent to a 100% large stock dividend
35
Q

Statement of stockholders’ equity

A

Summarizes the changes in the balance in each stockholders’ equity account over a period of time.

36
Q

Return on equity

A

Net income divided by average stockholders’ equity; measures the income generated per dollar of equity.

37
Q

Return on the market value of equity

A

Net income divided by the market value of equity.

38
Q

Earnings per share (EPS)

A

Measures the net income earned per share of common stock.

39
Q

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.

40
Q

Growth stocks

A

Stocks that tend to have higher price-earnings ratios and are expected to have higher future earnings.

41
Q

Value stocks

A

Stocks that tend to have lower price-earnings ratios and are priced low in relation to current earnings.

42
Q

Stockholders’ equity consists of 3 primary classifications

A
  • Paid-in capital
  • Retained Earnings
  • Treasury Stock
43
Q

Advantages/Disadvantages of a Corporation

A 
Advantage:
-Limited Liability
-Ability to raise capital
-Lack of mutual agency
Disadvantage:
-Additional taxes (double taxation)
-More paperwork

Financial Accounting (12 decks)

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