Chapter 10 Flashcards
What is the amount stockholders have invested in the corporation?
Paid-in Capital
What is the amount of earnings the corporation has retained?
Retained Earnings
What is the corporation’s own stock that it has reacquired?
Treasury Stock
What is the formula to find retained earnings?
Revenues - Expenses - Dividends
In a corporation who controls the company?
Stockholders
In a corporation who appoints the CEO?
The Board of Directors
In a corporation who runs the company?
The CEO
What does CEO stand for?
Chief Executive Officer
List the 3 things companies seek investments from in order to grow?
- Angel investors
- Venture capital firms
- Initial public offering (IPO)
Who are wealthy investors that are similar to those featured on Shark Tank?
Angel investors
Who provide additional funding and business expertise?
Venture capital firms
What is the first time a corporation issues stock to the general public called?
Initial public offering (IPO)
Are private corporations regulated by the SEC?
No
List the 3 rights that Stockholders have
- Right to vote
- Right to receive dividends
- Right to share in the distribution of assets
What are the 2 advantages of a corporation?
- Limited Liability
2. Ability to raise capital and transfer ownership
What are the 2 disadvantages of a corporation?
- Double taxation
2. More paperwork
Which of the following is a primary advantage of forming a corporation?
a. Reduced taxes
b. Increased personal liability of the owners
c. Increased ability to raise capital and transfer ownership
d. Fewer state and federal reporting requirements
c. Increased ability to raise capital and transfer ownership
What are shares that are available to sell called?
Authorized Stock
What does authorized stock include?
Issued and unissued stock
What are shares that are actually sold called?
Issued Stock
Does issued stock include treasury stock?
Yes
What are shares that are held by investors called?
Outstanding Shares
Does outstanding shares include treasury stock?
No
What is the formula to find authorized stock?
Issued Stock + Unissued Stock
What is the formula to find issued stock?
Outstanding Shares + Treasury Stock
What is the legal capital per share of stock that’s assigned when the corporation is first established?
Par Value
Does par value have any relationship to the market value of the common stock?
No
Make a journal entry:
Assume Canadian Falcon issues 1,000 shares of no-par common stock at $30 per share.
Cash 30,000
Common Stock 30,000
Make a journal entry:
Assume Canadian Falcon issues 1,000 shares of $0.01 par value common stock at $30 per share.
1,000 x 30 = 30,000
1,000 x .01 = 10
30,000 - 10 = 29,990
(D) Cash 30,000
(C) Common Stock 10
(C) Additional Paid-in Capital 29,990
When do you put APIC in the debit?
When credit > debit
When do you put APIC in the credit?
When credit < debit
Company A issues 20,000 shares of $5 par common stock at $12.50 per share. The entry to record the issuance would include which of the following?
a. Debit to cash of $100,000
b. Credit to Common Stock of $250,000
c. Credit to Additional Paid-in Capital of $150,000
d. Credit to Additional Paid-in Capital of $250,000
Cash = 20,000 x 12.50 = 250,000 CS = 20,000 x 5 = 100,000 APIC = 250,000 - 100,000
c. Credit to Additional Paid-in Capital of $150,000
What is the formula to find additional paid-in capital?
Total debit - total credit
What does it mean when shares can be exchanged for common stock?
They are Convertible
What does it mean when shares can be returned to the corporation at a fixed price?
They are Redeemable
What does it mean when shares receive priority for future dividends if dividends are not paid in a given year?
They are Cumulative
Which of the following is a primary advantage of owning preferred stock?
a. Preferential voting rights in most cases
b. Tax deductibility of payments
c. Preference over common stockholders in the distribution of assets in the event of dissolution
d. Higher risk to investors than owning common stock
c. Preference over common stockholders in the distribution of assets in the event of dissolution
What is a corporation’s own stock that it has reacquired?
Treasury Stock
Make a journal entry:
Canadian Falcon repurchases 100 shares of its own $0.01 par value common stock at $30 per share
Treasury Stock 3,000
Cash 3,000
On the statement of stockholders equity is treasury stock a positive or a negative?
A negative
List the order of accounts on the statement of stockholders equity?
Preferred Stock Common Stock Additional Pain-in Capital Total Paid-in Capital (PS + CS + APIC) Retained Earnings Treasury Stock Total Stockholders Equity (TPIC + RE - TS)
How do you find retained earnings on the statement of stockholders equity?
Total Net Income - Total Dividends
Make a journal entry:
Canadian Falcon reissues the 100 shares of treasury stock for $35. Recall that these shares originally were purchased for $30 per share
(D) Cash 3,500
(C) Treasury Stock 3,000
(C) APIC 500
Make a journal entry:
Assume Canadian Falcon reissues the 100 shares of treasury stock for only $25 rather than $35. Recall that these shares originally were purchased for $30 per share.
(D) Cash 2,500
(D) APIC 500
(C) Treasury Stock 3,000
Treasury Stock:
a. Has a normal credit balance
b. Decreases stockholders’ equity
c. Is recorded as an investment
d. Increases stockholders’ equity
b. Decreases stockholders’ equity
What is a debit balance in retained earnings?
Accumulated deficit
What are distributions by a corporation to its stockholders?
Cash Dividends
What is the date on which board of directors declares the cash dividend to be paid?
Declaration date
What is the specific date on which the company will determine who will receive the dividend?
Record date
What is the date of the actual cash distribution?
Payment date
Do you have to make a journal entry for the declaration date?
Yes
Do you have to make a journal entry for the record date?
No
Do you have to make a journal entry for the payment date?
Yes
Make a journal entry:
On March 15 Canadian Falcon declares a $0.25 per share dividend on its 2,000 outstanding shares.
Dividends 500
Dividends Payable 500
Make a journal entry:
The dividend declared by Canadian Falcon, $0.25 per share dividend on its 2,000 outstanding shares, is paid on April 15.
Dividends Payable 500
Cash 500
Does a declaration of cash dividends increase or decrease retained earnings?
Decrease
On which date would a company record a debit to Dividends and a credit to Dividends Payable?
a. Date of declaration
b. Date of record
c. Date of payment
d. Settlement date
a. Date of declaration
What are additional shares of a company’s own stock given to stockholders as dividends?
Stock Dividends
What is a large stock dividend that includes a reduction in the par or stated value per share?
Stock Split
When you have a 10% stock dividend what do you debit and credit?
You debit stock dividends and credit common stock and additional paid in capital
When you have a 100% stock dividend what do you debit and credit?
You debit stock dividend and credit common stock
Do you have to make a journal entry for a 2-in-1 stock split?
No
When you have a stock dividend how do you find the stock dividend amount that you debit?
Market price x ( # of stock dividends declared x % of stock dividend)
When you have a stock dividend how do you find the common stock amount that you credit?
of stock dividends declared x % of stock dividend
A company has 1,000 shares of $20 par stock outstanding and issues a 2-for-1 split. How many shares are outstanding after the split?
a. 1,000
b. 2,000
c. 3,000
d. 500
b. 2,000
What presents the balance of each equity account at a point in time?
The Stockholders’ equity in the balance sheet
What summarizes the changes in the balance in each stockholders’ equity account over a period of time?
The statement of stockholders equity
How does the stockholders’ equity section of the balance sheet differ from the statement of stockholders’ equity?
a. The stockholders’ equity section shows the balances at a point in time and the statement of stockholders’ equity shows activity over time.
b. The stockholders’ equity section shows the activity over time and the statement of stockholders’ equity shows the balances at a point in time.
c. There are no differences.
d. The stockholders’ equity section is more detailed.
a. The stockholders’ equity section shows the balances at a point in time and the statement of stockholders’ equity shows activity over time.
What measures the ability of company management to generate earnings from the resources that owners provide?
Return on Equity
What is the formula to find return on equity?
Net Income / Average Stockholders’ Equity
What measures how much a company pays out in dividends relative to its share price?
Dividend Yield
What is the formula to find dividend yield?
Dividend per share / stock price
Do you want a higher or lower return of equity?
A higher
Do you want a higher or lower dividend yield?
A higher
What measures net income earned per share of common stock?
Earnings per Share
What is the formula to find earnings per share?
(Net income - dividends) / average share of common stock outstanding
What indicates how the stock is trading relative to current earnings?
Price-Earnings Ratio
What is the formula to find price-earnings ratio?
Stock price / earnings per share
Do you want a higher or lower price-earnings ratio?
A higher
The PE ratio:
a. Typically is more than 100
b. Equals the stock price divided by net income
c. Typically is less than 1
d. Indicates how a stock is trading relative to its current earnings
d. Indicates how a stock is trading relative to its current earnings
Who has stock traded on a stock exchange such as the New York Stock Exchange (NYSE)?
Publicly held corporation
What traces the line of authority within the corporation?
An organization chart
What describes the nature of the firm’s business activities, the shares to be issued, and the composition of the initial board of directors?
Articles of incorporation
What do shareholders have when they can lose no more than the amount they invest in the company?
Limited liability
What type of corporation allows for legal treatment as a corporation, but tax treatment as a partnership?
S Corporation
What is like an S corporation, but there are no limitations on the number of owners as in an S corporation?
Limited liability company
Summit Apparel has the following accounts at December 31: Common Stock, $1 par value, 2,000,000 shares issued; Paid-in Capital, $18 million; Retained Earnings, $11 million; and Treasury Stock, 60,000 shares, $1.32 million. Prepare the stockholders’ equity section of the balance sheet.
Common Stock 2 mil APIC 18 mil Total paid-in capital 20 mil (2 +18) R/E 11 mil Treasury Stock (1.32 mil) Total Stockholders Equity 29.68 mil
What is the formula to find total paid-in capital on the statement of stockholders’ equity?
Preferred stock + common stock + additional paid-in capital
