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accounting > Chapter 11 > Flashcards

Chapter 11 Flashcards

1
Q

A corporation has most of the ____________________

A

rights and privileges of a person

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2
Q

Corporation

A

A company organized as a seperate legal entity, with most of the rights and privileges of a person

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3
Q

Two common classifications of corporations include:

A

By purpose

By ownership

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4
Q

Publicly held corporation

A

A corporation that may have thousands of stockholders and whose stock is traded on a national securities market

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5
Q

Privately held corporation

A

A corporation that has only a few stockholders and whose stock is not available for sale to the general public

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6
Q

Seperate Legal Existence

A

Corporate owners (stockholders) do not bind the corporation unless such owners are agents of the corporation

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7
Q

Controller

A

Chief accounting officer

Responsibilities:

  1. Maintain the accounting records
  2. Maintain an adequate system of internal control
  3. Prepare financial statements, tax returns, and internal reports
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8
Q

Treasurer

A

Has custody of the corporation’s funds and is responsible for maintaining the company’s cash position

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9
Q

Managers who are not owners

A

Often compensated based on the performance of the company

May be tempted to exaggerate company performance by inflating income figures

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10
Q

Taxed twice (double taxation)

A

Corporate income is taxed once at the corporate level and again at the individual level

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11
Q

Advantages of a Corporation compared to a sole proprietorship and partnership

A

Seperate legal existence

Limited liability of stockholders

Transferable ownership rights

Ability to acquire capital

Continous life

Corporation management - professional managers

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12
Q

Disadvantages of a corporation compared to a sole proprietorship and partnership

A

Corporation management - seperation of ownership and management

Government regulations

Additional taxes

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13
Q

S corporation

A

Legal treatment as a corporation but tax treatment as a partnership

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14
Q

Charter

A

A document that describes a corporatio’s name and purpose, types of stock and number of shares authorized, names of individuals involved in the formation, and number of shares each individual has agreed to purchase

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15
Q

By-laws

A

Establish the internal rules and procedures for conducting the affairs of the corporation

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16
Q

Corporatioins engaged in interstate commerce

A

Must obtain a liscence

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17
Q

Common stock

A

When a corporation has only one class of stock, it is identified as common stock

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18
Q

Stock certificate

A

Proof of stock ownership is evidenced by a printed or engraved from

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19
Q

Preemptive right

A

Stockholders right to keep the same percentage ownership when new shares of stock are issued

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20
Q

Residual claim

A

Stockholders right to share in assets upon liquidation in proportion to their holdings

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21
Q

Authorized stock

A

The amount of stock that a corporation is authorized to sell as indicated in its charter

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22
Q

Authorization of stock does not ______________________

A

result in a formal accounting entry

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23
Q

U.S and U.K corporations

A

financed through shareholders and bondholders

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24
Q

Germany, France, and Japan corporations

A

Acquire financing mostly from large banks or other financial institutions

Shareholders less important

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25
Issue stock directly
issued directly to investors
26
Issue stock indirectly
issue stock to an investment banking firm that specializes in bringing securities to the attention of prospective investors
27
Par value stock
Capital stock that has been assigned a value per share in the corporate charter
28
Legal capital
The amount of capital that must be retained in the business for the protection of corporate creditors
29
No-par value stock
Capital stock that has not been assigned a value in the corporate charter
30
Stated value
The amount per share assigned by the board of directors to no-par stock
31
Paid-in capital
The amount stockholders paid to the corporation in exchange for shares of ownership
32
The stockholders' equity section of a corporation's balance sheet includes:
1. Paid-in (contributed) capital 2. Retained earings (earned capital)
33
Journal entry for issuance of 1,000 shares of $1 par value common stock at par for cash
Cash 1,000 Common stock 1,000
34
Treasury Stock
A corporation's own stock that has been reacquired by the corporation and is being held for future use
35
Reasons to acquire Treasury stock
1. To have additonal shares available for use in acquiring other companies 2. To reduce the number of shares outstanding and thereby increase earnings per share p. 580
36
The purchase of treasury stock is generally accounted for by the \_\_\_\_\_\_\_\_\_\_\_
cost method
37
Mead corporations purchases 4,000 shares of its stock at $8 per share Journal entry
Dr. Treasury Stock 32,000 Cr. Cash 32,000
38
Outstanding stock
The number of shares of issued stock that are being held by stockholders
39
Treasury Stock is what?
A contra stockholders' equity account
40
Preferred stock
Capital stock that has contractual preferences over common stock in certain areas
41
Preferred stockholders have what right?
The right to share in the distribution of corporate income before common stockholders \*receive dividends first
42
Cumulative dividend
A feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends
43
Dividends in arrears
Preferred dividends that were supposed to be declared but were not declared during a given period
44
Dividend
A distribution by a corporation to its stockholders on a pro rata (proportional to ownership) basis
45
Dividends are generally reported \_\_\_\_\_\_\_\_\_\_\_\_\_\_
quarterly as a dollar amount per share
46
Cash dividend
A pro rata (proportional to ownership) distribution of cash to stockholders
47
Declaration date
The date the board of directors formally authorizes the dividend and announces it to the public
48
Journal entry on declaration date
Dr. Cash Dividends XXX Cr. Dividends Payable XXX
49
Record date
Company determines ownership of the outstanding shares for dividend purposes \*No entry required for the record date\*
50
Payment date
The date cash dividend payments are made to stockholders
51
Journal entry on payment date
Dr. Dividends Payable XXX Cr. Cash XXX
52
Cumulative effect of the declaration and payment on a cash dividend:
Decrease Stockholder's equity Decrease Total Assets
53
stock dividend
A pro rata (proportional to ownership) distribution of the corporation's own stock to stockholders
54
A stock dividend results in \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
a decrease in retained earnings and an increase in paid-in capital \*DOES NOT DECREASE STOCKHOLDERS EQUITY OF TOTAL ASSETS\*
55
small stock dividend
less than 20-25% of the corporation's issued stock use fair value per share - becayse ut wukk gave kuttke effect on the market price of the shares previously outstanding
56
large stock dividend
greater than 20-25% of the corporations stock use par or stated value per share
57
Another name for stock dividend
capitalizing retained earnings
58
Stock dividends effect on stockholder's equity
They change the composition of stockholder's equity because they transfer a portion of retained earnings to paid-in capital TOTAL STOCKHOLDERS EQUITY REMAINS THE SAME Number of shares outstanding increases though
59
Stock split
The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share
60
Stock split effect on balances in stockholder's equity
No effect
61
Total paid-in capital effects
Stock dividend = increase Stock split = no change
62
Total retained earnings effects
Stock dividend = decrease stock split = no change
63
Total par value (common stock) effects
Stock dividend = increase stock split = no change
64
Par value per share effects
Stock dividend = no change stock split = decrease
65
Retained earnings
Net income that a company retains in the business
66
Deficit
A debit balance in retained earnings
67
Retained earnings restrictions
Circumstances that make a portion of retained earnings currently unavailable for dividends Three causes: 1. Legal 2. Contractual 3. Voluntary
68
Capital stock includes:
Preferred stock & Common Stock
69
Additional paid-in capital includes
The excess of amounts paidin over par or stated value
70
Payout Ratio =
_Cash Dividends Declared on Common Stock_ Net Income \*Measures the percentage of earnings a company distributes in the form of cash dividends to common stockholders\*
71
Low payout ratios
Companies that have high growth rates because they reinvest most of their net income in the business instead of paying high dividends payout ratio isnt necessarily bad news \*However, low dividend payments or a cut in dividend payments, might signal that a company has liquidity or solvency problems and is trying to conserve cash \*INVESTIGATE REASON OF LOW DIVIDEND PAYMENTS
72
Return on common stockholders' equity
_Net income - Preferred Stock Dividends_ Average Common Stockholders' Equity \*Profitability measure \*\*shows how many dollars of net income a company earned for each dollar of common stockholders' equity \*\*\*from common stockholders' viewpoint
73
Bond advantages relative to common stock
1. Stockholder control is not affected - bondholders do not have voting rights, so stockholders (current owners) retain full control of company 2. Tax xavings result - bond interest is deductible for tax purposes; dividneds on stock are not 3. Return on common stockholders' equity may be higher - although bond interest expense reduces net income, return on common stockholders' equity is often higher under bond financing because no additional shares of common stock are issued
74
If a company wants to increase its return on common stockholders' equity, \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
It can either increase its return on assets or increase its reliance on debt financing
75
In general, as long as the return on assets rate exceeds the rate paid on debt, \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
a company will increase the return on common stockholders' equity by the use of debt
76
Major disadvantage of debt
debt reduces solvency
77
Journal entry for stock dividend on declaration date
Dr. Stock Dividends XXX Cr. Common Stock Dividends Distributable XXX Cr. Paid-in Capital in Excess of Par Value XXX
78
Journal entry when issue stock dividend
Dr. Common Stock Dividends Distributable XXX Cr. Common Stock XXX
79
When issuing bonds instead of stock:
Income before taxes: lower Income tax expense: lower Net income: lower Common Stockholders' Equity: lower Return on common stockholders' equity: higher
80

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