Ch. 10 Stockholders' Equity Flashcards
Paid-in capital
The amount stockholders have invested in the company.
-(Invested Capital)
Retained earnings
Represents all net income, less all dividends, since the company began.
-(Earned Capital)
Treasury stock
A corporation’s own stock that it has reacquired.
- buying those shares back decreases stockholders’ equity.
- Contra account (Stockholders’ Equity)
Model Business Corporation Act
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.
Articles of incorporation
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.
Organization chart
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
Angel investors
Wealthy individuals in the business community willing to risk investment funds on a promising business venture.
Venture capital firms
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.
Initial public offering (IPO)
The first time a corporation issues stock to the public.
-Future stock issues by the company are called seasoned equity offerings (SEOs).
Publicly held corporation
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.
Privately held corporation
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.
Limited liability
Stockholders in a corporation can lose no more than the amount they invested in the company.
Mutual agency
Individual partners each have power to bind the partnership to a contract.
Double taxation
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.
S corporation
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)
Authorized stock
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.
Issued stock
The number of shares sold to investors; includes treasury shares.
-A company usually does not issue all its authorized stock.
Outstanding stock
The number of shares held by investors; excludes treasury shares.
Par value
The legal capital assigned per share of stock.
-Today, par value has no relationship to the market value of the common stock.
No-par value stock
Common stock that has not been assigned a par value.
-Laws in some states permit corporations to issue no-par stock.
Stated value
The legal capital assigned per share to no-par stock.
-Treated and recorded in the same manner as par value shares.
Additional paid-in capital
The portion of the cash proceeds above par value.
Preferred stock
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
Convertible
Shares can be exchanged for common stock.
Redeemable
Shares can be returned to the corporation at a fixed price.
Cumulative
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.
Dividends in arrears
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.
Accumulated deficit
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.
Dividends
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.
Declaration date
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.
Record date
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.
Payment date
The date of the actual cash distribution of dividends.
Stock dividends
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%)
Stock splits
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
Statement of stockholders’ equity
Summarizes the changes in the balance in each stockholders’ equity account over a period of time.
Return on equity
Net income divided by average stockholders’ equity; measures the income generated per dollar of equity.
Return on the market value of equity
Net income divided by the market value of equity.
Earnings per share (EPS)
Measures the net income earned per share of common stock.
Price-earnings ratio
The stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis.
Growth stocks
Stocks that tend to have higher price-earnings ratios and are expected to have higher future earnings.
Value stocks
Stocks that tend to have lower price-earnings ratios and are priced low in relation to current earnings.
Stockholders’ equity consists of 3 primary classifications
- Paid-in capital
- Retained Earnings
- Treasury Stock
Advantages/Disadvantages of a Corporation
Advantage: -Limited Liability -Ability to raise capital -Lack of mutual agency Disadvantage: -Additional taxes (double taxation) -More paperwork
