ch 11: corporate reporting and analysis

Question 1

a corporation is:

Answer 1

a legal entity, separate from its owners, can be heal publicly or privately

Question 2

advantages of corporations:

Answer 2

• separate legal entity
• limited liability
• transferable ownership rights
• continuous life
• no mutual agency for stockholders
• easier capital accumulation

Question 3

disadvantages of corporations:

Answer 3

• government regulations
• corporate taxation

Question 4

Separate legal entity:

Answer 4

A corporation operates with the same rights, duties, and responsibilities of a person. It takes actions through its agents, who are its officers and managers.

Question 5

Limited liability:

Answer 5

Stockholders are not liable for corporate acts or debt.

Question 6

Transferable ownership rights:

Answer 6

The transfer of shares from one stockholder to another usually has no direct effect on operations except when this causes a change in the directors who control or manage the corporation

Question 7

Continuous life:

Answer 7

A corporation’s life is indefinite because it is not tied to the physical lives of its owners.

Question 8

No mutual agency for stockholders:

Answer 8

Stockholders, who are not its officers and managers, do not have the power to bind the corporation to contracts—referred to as lack of mutual agency.

Question 9

Easier capital accumulation:

Answer 9

Buying stock is attractive to investors because of the above advantages, which helps corporations to accumulate large amounts of money.

Question 10

Government regulation:

Answer 10

A corporation must meet requirements of a state’s incorporation laws. Proprietorships and partnerships avoid many of these.

Question 11

Corporate taxation:

Answer 11

Corporations are subject to the same property and payroll taxes as proprietorships and partnerships plus additional taxes. The most burdensome are federal and state income taxes that together can take 21% or more of pretax income. Moreover, corporate income is usually taxed a second time as part of stockholders’ personal income when they receive cash dividends. This is called double taxation.

Question 12

corporate organization and management:

Answer 12

stockholders > board of directors > president, vice president, and other officers > employees

Question 13

rights of stockholders

Answer 13

1. vote at stockholder’s meetings
2. sell or dispose stocks
3. purchase proportional additional shares of stocks
4. receive dividends (if any)
5. share any assets remaining after creditors are paid in a liquidation

Question 14

Paid-in (contributed) capital:

Answer 14

total amount of cash and other assets corporation receives from its stockholders in exchange for its stock

Question 15

Retained earnings:

Answer 15

cumulative net income (and loss) not distributed as dividends to its stockholders.

Question 16

retained earnings:

Answer 16

normal credit balance

Question 17

paid-in capital in excess of par:

Answer 17

normal credit balance

Question 18

common stock:

Answer 18

normal credit balance

Question 19

par value:

Answer 19

is an arbitrary amount assigned to each share of stock when it is authorized

Question 20

market price:

Answer 20

is the amount that each share of stock will sell for in the market.

Question 21

cash dividends:

Question 22

cash dividends important dates:

Answer 22

1. date of declaration - record liability for dividend
2. date of record - no entry required
3. date of payment - record payment of cash to stockholders

Question 23

stock splits:

Answer 23

a distribution of additional shares of stock to stockholders according to the percent ownership

Question 24

treasury stock normal balance:

Answer 24

up by debits, down by credits

Question 25

treasury stock:

Answer 25

represents shares of a company’s own stock that has been acquired

Question 26

a corporation might acquire its own stock because:

Answer 26

1. use shares to buy other companies
2. Avoid a takeover of the company.
3. Reissue to employees as compensation.
4. Maintain a strong market.

Question 27

Reasons for Issuing Preferred Stock:

Answer 27

1. To raise money without sacrificing control
2. To boost the return earned by common stockholders through financial leverage
3. To appeal to investors who may believe the common stock is too risky or that the expected return on common stock is too low

Question 28

how is treasury stock shown on the balance sheet:

Answer 28

a reduction in total stockholders’ equity