Chapter 10: Stockholders' Equity Flashcards
Ownership of a corporation is divided into a large number of equal parts or ______.
shares
Most large businesses are organized as corporations because incorporation increases the companies ability to _____ _____ (or capital) by easing the transfer of ownership and limiting the liability of owners.
raise cash
the owners of a corporation who own its shares in varying numbers.
stockholders/shareholders
the owners’ claims against the assets of a corporation after all liabilities have been deducted
stockholders’ equity (or owners’ equity)
Stockholders’ Equity is comprised of what 3 things?
- Capital stock, split between (1) preferred and common stock and (2) the associated additional paid-in capital.
- Retained earnings or deficit
- Treasury stock
Corporations are authorized, or chartered, by _____ laws.
state (Laws vary from state to state)
What is the name of the charter that includes information about the company?
A corporate charter, also called the articles of incorporation
T or F: A company can be chartered in another state from where its headquarters are.
True
All states require persons who wish to form a corporation to apply to a _______ _____ _____ for the issuance of a charter.
prescribed state official
What are the 3 things the corporate charter includes?
- Name and purpose of corporation
- Names of the incorporators
- Authorized Shares
the maximum number of shares that may be issued in each class of stock.
authorized shares
the number of shares actually sold to stockholders/investors (either sold or distributed through stock dividends or stock splits)
issued shares
T or F: A corporation rarely issues all of its authorized shares.
True
The typical corporate charter contains provisions that describe how stock may be issued by the corporation. What are these three provisions?
- First, authorizes the corporation to issue stock in a limited number of classes.
- Second, it sets an upper limit on the number of shares the corporation may issue in each class
- Third, it sets a lower limit on the amount for which each share must be sold.
Shares of stock are sold, or issued, when a corporation is _______. _______ _______ may be issued later.
formed; additional shares
the number of issued shares actually in the hands of stockholders/investors
outstanding shares
How do you calculate the number of outstanding shares?
Outstanding Shares - Shares Reacquired by the Corporation
When firms reacquire their own stock, the reacquired shares (are/ are not) considered to be outstanding.
are not
Stocks are either categorized as ______ or _______. These have different financial benefits and provide different rights regarding the governance of the corporation.
common; preferred
What are the 4 primary rights for owners of common stock?
- To vote for members of the board of directors
- To share in the profits and dividends of the company
- To keep the same percentage of shares of ownership if new shares are issued (preemptive rights)
- To a residual claim in the assets of the company should it be liquidated.
Common stockholders are only paid after the _______ and ________ _______ are paid in full (residual claim). This also means that common stockholders get _________ that is left over after those people are paid in full.
creditors; preferred stockholders; everything
Common stockholders receive the bulk of the financial gain from a profitable company through _____ _____ _______ and __________.
stock price appreciation; dividends
the value of the stock increases above the price initially paid (of course, it is also possible that the stock’s value decreases if the company is unprofitable– this is a risk of owning stock).
stock price appreciation
amounts paid periodically by a corporation to its stockholders as a return of their invested capital
dividends
Dividends represent a distribution of ________ ________, not an _______.
retained earnings; expense
T or F: Many companies do not pay dividends to common stockholders.
If true, why?
True; if the company has growth opportunities, they may elect to keep (or retain) earnings to fund these investment options rather than pay dividends.
Dividend payments are usually in the form of ______, but ______ _____ and _____ can also be given as dividends.
cash; noncash assets; stock
a class of stock that generally does not give voting rights, but grants specific guarantees and dividend preferences.
preferred stock
Preferred stock is similar to _____, as it pays a regular dividend.
debt
The value of preferred stock, like the value of debt, is most closely tied to ______ ____ _____ and the company’s overall ____________.
interest rate levels; creditworthiness
The value of common stock is most closely tied to the ___________ of the company.
performance
T or F: preferred stock is a more risky investment than common stock.
false; it is less risky
Preferred stockholders receive ________ over common stockholders in the payment of dividends and the distribution of assets in the event of liquidation.
priority
Preferred shareholders are paid dividends (before/after) common shareholders, and their dividends can be ________ and ________.
before; cumulative; participating
T or F: Preferred stock can be converted to common stock if the preferred stockholder elects to do so and certain conditions are satisfied.
True
Claims of preferred shareholders are satisfied (before/after) common shareholders in the event a company _________ its assets.
before; liquidates
Preferred stock can be _________ at a particular call price.
redeemable
the amount to be paid to the preferred stockholders
call price
The corporate charter may authorize or even require the corporation to repurchase (or redeem) any preferred shares that are _____. In such cases, the charter usually fixes the ____ _____ and specifies a _____ on or after which the shares may or must be repurchased.
This is similar to the repaying of the principal on a loan at the maturity date—particularly when the charter requires redemption at a specific date.
sold; call price; date;
T or F: Preferred shareholders can vote at stockholders’ meetings.
False; cannot vote
Because of the relative advantages of different forms of stock, corporations are typically authorized by their charters to issue _____ classes of preferred stock and _______ classes of common stock, each with a different set of terms and provisions.
several; several
Cash or other assets (capital) contributed by stockholders is usually divided between two accounts, on the basis of the _____ ______ of the stock.
par value
an arbitrary amount assigned to a stock to establish a minimum monetary value upon issuance, but does not determine its market value.
par value
T or F: par value determines a stocks market value
False; it does NOT
When a stock sells ABOVE its par value, the excess amount is called:
additional paid-in capital
T or F: stock rarely sells for exactly its par value
True
What formula do you use to calculate the amount that is recorded in the account that describes the type of stock (ex: common or preferred stock)?
Par value x the number of shares sold
the portion of a corporation’s stockholders’ equity contributed by investors (owners) in exchange for shares of stock.
capital stock
The common stock and preferred stock accounts, along with their additional paid-in capital are listed in the _______ section of the stockholders’ equity section of the balance sheet and taken together are known as _____ _______.
first; capital stock
the amount of capital that, under law, cannot be returned to the corporation’s owners unless the corporation is liquidated.
stated (or legal) capital
