chapter 11 Flashcards
is a corporation a separate legal entity?
yes it is distinct and separate from its owners and has most of the rights and privileges of a person
can a corporation be public or private?
yes it can be public or private
what is a public corporation?
a corporation that has many shareholders and shares are publicly traded
what is a private corporation?
a corporations that has few shareholders and shares are closely held and not traded
what are the 8 characteristics?
separate legal existence
limited liability of shareholders
transferable ownership rights
ability to acquire capital easily
continuous life
corporation management
government regulations
income tax
what are the 7 advantages of a corporation?
separate legal entity
limited liability of shareholders
ease of transferring ownership rights (shares)
ability to acquire capital by issuing shares
continuous life
separation of management and ownership
potential for reduced income tax
what are the 2 disadvantages of a corporation?
increased cost and complexity to follow government regulations
increased reporting and discourse requirements
why do corporations issue shares?
to raise capital they sell ownership rights in the form of shares
what are the 2 kinds of shares?
common (ordinary) shares
preferred shares
what are the 3 benefits of owning shares?
rights in voting (varies depending on the share)
dividends (preferred shares have priority)
liquidation (preferred shares have priority over common)
what is authorized shares?
maximum amount of shares corporations are allowed to sell, this could be limited to a number or could have unlimited authorized shares
are authorized shares recorded?
no, they are only disclosed
what are issued shares?
number of shares sold
how are issued shares disclosed on financial statements?
on the statement of financial position as SHE, they are recorded as the dollar amount the company received when they sell at IPO
are issued shares recorded at market value?
no they are recorded at amount they sold for at IPO
what is share capital?
money that has been acquired through issuing shares
can share capital be distributed to share holders through dividends?
no, only retained earnings can be used to distribute dividends
what is the initial issue of shares called?
an initial public offering (IPO)
what price are shares sold at when a company IPOs?
at the share price set by there company
once shares are issued, where are shares traded?
on organized exchanges at prices established between buyers and sellers for the fair value of shares (market price)
what is share capital?
the amount that shareholders have paid to the corporation for their shares
what does the journal entry look like for shares issued for cash?
dn cash
cr common shares
can shares be used as a form of payment?
yes they can be used in exchange for services or non cash assets
how does IFRS record using shares as a form of payment?
they are recorded at cash equivalent of price ideally the fair value of consideration
how does ASPE record using shares as a form of payment?
fair value of shares given up or fair value of consideration received (whatever is most reliable)
what are the 5 reasons to repurchase common shares?
distribute cash to shareholders
increasing trading on securities market
reduce number of shares issued (increase earnings per share and return on common shareholders equity)
buyout hostile shareholders
have shares available for compensation or other users
what are repurchased shares?
shares that a corporation owns that had been previously issued and later reacquired by the corporation
once repurchased shares are retired or cancelled by the corporation, how does that impact their share capital account?
it will be removed from the share capital account
what are the 3 steps in the repurchase of common shares?
remove cost of shares from share capital account
record the cash paid
record the gain or loss on repurchase
what are the 4 preferential features of preferred shares?
specified dividend rate
dividend preference over common share holders
liquidation preference
other preferences
what are 3 other preferences of preferred shares?
conversion privilege
redeemable/ callable
retractable
what are dividends?
an equal distribution of a portion of a corporations retained earnings to its shareholders
what are the 2 kinds of dividends?
cash dividends
stock dividends
what is the most common dividend type?
cash dividends
what are the 2 things that must happen for a cash dividend to occur?
a corporation must meet a two-part solvency test
a corporation must effect a formal declaration of dividends by board directors
once dividends are declared, what kind of account are they?
a liability
what are the 3 important dates in connection with dividends?
declaration date
record date
payment date
what is the declaration date?
date obligation of cash dividend is recognized and the board of directors formally authorizes the cash divided and commits the corporation to a binding legal obligation
would would the journal entry look like on declaration date?
dn dividends declared
cr dividends payable
how is the record date journalized?
it is not
what is the journal entry like on the payment date of dividends?
dn dividends payable
cr cash
what is a stock dividend?
when the dividends are paid in shares
how would the share price be determined for stock dividends?
the stocks are are valued at then fair value at the declaration date
how do stock dividends impact assets liabilities or SHE?
it does not change change assets, liabilities or SHE
what is the purpose of stock dividends?
to satisfy shareholders dividend expectation without spending cash
increase marketability of the shares by decreasing the market price per share
reinvest and restrict a portion of shareholders equity
what is a stock split?
when the issue of additional shares to shareholders according to their percentage ownership, the shareholders get their shares doubled but the price falls in half
what is the primary purpose of a stock split?
to increase marketability of shares by lowering the share price
how does a stock split impact total share capital, retained earnings and total shareholders equity?
it does not impact any of those
how is a stock split journalized?
no they are not
what are the 2 dividend record performance ratios?
payout ratio
dividend ratio
what are the 2 earnings performance ratios for measuring corporate performance?
basic earnings per share
return on common shareholders equity
what does the payout ratio measure?
measures the percentage of profit distributed in the form of cash dividends to common shareholders
what is the payout ratio formula?
payout ratio= cash dividends declared/ net income
what is good for the payout ratio?
higher is better if an investor is looking for short term income
lower is better if investors are looking for long term share price increases
what does dividend yield measure?
measures the profit generated by each share based on the market price of the shares
what is the dividend yield formula?
dividend yield= dividend declared per share/ market price per share
what is good for dividend yield ratio?
higher is better if investor is looking for short term income
lower is better if investor is looking for the price of the shares to increase
what does basic earnings per share measure?
the income earned by each common share
what is the basic earnings per share ratio formula?
basic EPS= income available to common share holders/ weighted average of # of common shares
how do you find the net income available to common shareholders?
net income- less preferred dividends
can the basic EPS be used to compare 2 companies?
no it can only be used to compare year after year for the same company
what is weighted average of number of common shares?
shares issued during the year X the faction of the year they are outstanding (example on slide 43 ppt11)
what does return on common shareholders equity measure?
the companies profitability form the shareholders viewpoint (how many dollars were earned for each dollar invested by common shareholders)
what is the formula for return on common shareholders equity?
return on common SHE= income available to common SHE/ common shareholder equity
how do you fund common share holder equity?
total shareholder equity - legal capital of preferred shares
