Ch 11 Flashcards
3 disadvantages of financing with stock?
Control- issuing stock gives dilutes voting rights
Financial ratios- diluted earnings per share when more stock issued
Tax consequences- interest on debt is tax deductible, interest on dividends isn’t
3 Advantages of financing with stock?
Flexibility- dividends can be changed depending profitability
Exchanges facilitate trading
Return on investment- generally higher than bonds
Stockholders equity, define and total equation?
Shareholders claim to assets after liabilities
Total stockholders equity= contributed capital + retained earnings
Authorized shares
Maximum number shares a corporation may
Issue as indicated in the corporate charter
Issued shares
Number of shares sold or distributed to stockholders
Outstanding shares
Number of shares issued less number of shares
Held as treasury stock
Par value
Arbitrary amount that represents legal capital of the firm
Additional paid in capital AKA Paid in capital in excess of par
Amount received for issuance of stock
in excess of par value of stock
Retained earnings AKA Retained income
Net income that’s been made by corporation
But not paid out as dividends
Convertible feature
Allows preferred stock to be exchanged for common stock
Redeemable feature
Allows stockholders to sell stock back to company
Callable feature
Allows firm to eliminate class of stock by paying stockholders specified amount
Cumulative feature
Right to dividends in arrears,
before current year dividend is distributed
Participating feature
Allows preferred stockholders to share on percentage basis
On distribution of abnormally large dividend
Recording journal entry for cash issued 1000 shares
Of $10 common stock at $15/share?
Cash. 15000
Common stock. 10000
Additional paid in capital common. 5000
Journal entry where 500 shares of stock is issued at $10
Par preferred stock and the building is appraised at $12000?
Building. 12000
Preferred stock. 5000
Additional paid in capital preferred. 7000
Treasury stock
Stock issued by the firm, then repurchased but
Not retired
How is treasury stock accounted for?
It’s a contra-equity account
Retirement of stock
When stock is repurchased with no intention of reissuing
At a later date
Dividend payout ratio
Annual dividend amount divided by annual net income
Journal entry for a dividend of $7000 declared on July 1st and paid September 1st?
July 1. Retained Earnings. 7000
Cash Dividend Payable. 7000
Stock dividend
Issuance of additional shares of stock to existing stock holders
Doesn’t decrease stockholders equity
