Chapter 11 Flashcards
Major Advantage of the Corporate form of Business:
Ease of raising capital as both large and small investors can participate in corporate ownership.
Other advantages of the corporate from of business:
(1) Simple to become an owner
(2) Easy to transfer ownership
(3) Provides limited liability
Corporations can….
(1) Own assets
(2) Incur liabilities
(3) Sue and be sued
(4) Enter into contracts
Stockholder Rights:
(1) Voting rights
(2) Dividends
(3) Residual Claims
(4) Preemptive Rights
Ultimate control of a corporation rests with the ____________.
Stockholders
Reports the amount of capital the company received from
investors’ contributions, in exchange for the company’s stock
Contributed Capital
Reports the cumulative amount of net income earned by the
company less the cumulative amount of dividends declared since the corporation
was first organized.
Retained Earnings
Reports shares that were previously owned by stockholders but
have been reacquired and are now held by the corporation
Treasury Stock
Reports unrealized gains and losses,
which are temporary changes in the value of certain assets and liabilities the
company holds.
Accumulated Other Comprehensive Income
The maximum number of shares of stock that can be issued to the public.
Authorized Shares
True or False: The number of authorized shares is identified in the corporate charter of the corporation that is issued by the state.
True
Authorized shares can be classified as either:
(1) Issued
(2) Unissued
Authorized shares of stock that have been distributed to stockholders.
Issued Shares
Authorized shares of stock that have never been issued to stockholders.
Unissued Shares
Issued shares can be classified as either:
(1) Outstanding Shares
(2) Treasury Shares
Shares that are currently owned by stockholders.
Outstanding Shares
Shares that were once owned by stockholders but the corporation repurchased the shares in the stock market.
Treasury Shares
Common stock normally has a par value which is usually a very _____ amount, such as _____ per share.
(1) Small
(2) One cent
________ is an arbitrary amount assigned to each share of stock in the corporate charter.
Par Value
True or False: Par value does NOT equal market price.
True
______ is the amount that each share of stock will sell for in the market.
Market Price
The first time a corporation issues stock to the public.
Initial Public Offering (IPO)
Subsequent issues of new stock to the public.
Seasoned New Issue
Transactions between two investors ________ the corporation’s accounting records.
Do not affect
Corporations often buy their own stock back in the market. A corporation repurchases its stock to:
(1) Distribute excess cash to stockholders
(2) Send a signal that the company believes its stock is worth acquiring
(3) Obtain shares to reissue for the purchase of other companies
(4) Obtain shares to reissue to employees as part of stock option plans.
_____ can be used as a way to compensate employees and to encourage employees to work hard for a corporation
Stock
______ are not paid on treasury stock, and a corporation holding its own stock cannot vote using these shares at the annual meeting.
Dividends
______ is not an asset. It is reported in the Stockholders’ Equity portion of the balance sheet as a reduction from total equity.
Treasury Stock
True or False: No profit or loss is recognized on treasury stock transactions.
True
(1) Declared by board of directors
(2) Not legally required
(3) Creates liability at declaration
(4) Requires sufficient retained earnings and cash.
Dividends on Common Stock
Loan agreements can include restrictions on paying ____ below a certain amount of _________.
(1) Dividends
(2) Retained Earnings
Three important aspects of dividends:
(1) Declaration date
(2) Date of record
(3) Date of payment
The date the directors declare the dividend. At this time a liability is created and must be recorded.
Date of Declaration
The date when the corporation determines the owners of record who will receive the dividend. No entry is required in the accounting records on this date.
Date of Record
The date the corporation pays the dividend to the stockholders who owned the stock on the record date
Date of Payment
(1) There is no change in total stockholders’ equity.
(2) Par value per share does not change.
(3) All stockholders retain the same percentage ownership.
Stock Dividends
(1) All dividends are distributions of retained earnings
(2) Stock dividends transfer an amount from retained earnings to contributed capital
(3) No cash is involved
(4) A rearrangement of the components of stockholders equity
(5) The $ amount transferred depends on the size of the stock dividend
Stock Dividends
A ______ stock dividend is a distribution of stock that is less than 20 - 25 percent of the outstanding shares.
Small
______ stock dividends are recorded at the market value of the stock.
Small
A ______ stock dividend is a distribution of stock that is greater than 20 - 25 percent of the outstanding shares.
Large
______ stock dividends are recorded at the par value of the stock.
Large
A _______ is the distribution of additional shares of stock to stockholders according to their percent ownership.
Stock Split
In the process of a stock split, the _____ of the stock changes.
Par Value
True of False: No journal entry is required for a stock split.
True
(1) Different voting rights
(2) Usually has a fixed dividend rate
(3) Priority over a common stock
Preferred Stock
Journal Entry for issuing shares of preferred stock:
dr. Cash
cr. Preferred Stock
cr. Additional paid in capital
Journal Entry for redeeming shares of preferred stock:
dr. Preferred Stock
dr. Additional paid in capital
cr. Cash
(Dividend Rate) x (Total par Value of Preferred Stock) =
Amount of Preferred Dividend
Must be paid to preferred stockholders before any dividends are paid to common stockholders.
Current Dividend Preference
Has the right to be paid both the current and all prior periods’ unpaid dividends before any dividends are paid to common stockholders.
Cumulative Dividend Preference
_______ has no rights to prior periods’ dividends if they were not declared in those prior periods.
Noncumulative preferred stock
(Cumulative amount of reported net income) - (Net losses + dividends) =
Retained Earnings
Represents a corporation’s total earnings that have been retained in the business (rather than being distributed to stockholders).
Retained Earnings
_____ is one of the most widely used ratios.
Earnings per share
(Net Income - Preferred Dividends) / (Average Number of Common Shares Outstanding) =
Earnings per share (EPS)
Tells us the amount earned for each dollar invested by common stockholders.
Return on Equity (ROE)
(Net Income - Preferred Dividends) / (Average Common Stockholders Equity) =
Return on Equity (ROE)
A measure of the value that investors place on a company’s common stock.
Price/Earnings (P/E) Ratio
(Current Stock Price) / (Earnings Per Share)
Price/Earnings (P/E) Ratio
