Chapter 11 Flashcards
corporation
an entity separate and distinct from its owners
entities are classified by purpose:
profit or not for profit
entities are classified by ownership
publicly held or privately held
advantages of entities
separate legal existence limited liability of stockholders transferable ownership rights ability to acquire capital continuous life
disadvantages of entities
corporate management
government regulations
additional taxes
stockholders’ rights
1) vote
2) share corp earning thru receipt of dividends
3) keep the same % of ownership when new shares of stock are issued
4) share in assets upon liquidation in proportion to holdings (residual claim)
authorized stock
charter indicates the amount of stock that a corp is authorized to sell
(# is often reported in S.H.E. section)
par value stock
capital stock that has been assigned a value per share
no-par value stock
capital stock that has not been assigned a value per share
which type of capital stock is more common today?
no par value stock
2 primary sources of equity
1) paid in capital
2) retained earnings
paid in capital
the total amount of cash/other assets paid in to the corp by stockholders in exchange for capital stock
retained earnings
net income that a corp retains for future use
journal entry: issuing stock at par value
dr. cash
cr. common stock
journal entry: issuing stock - excess of par
dr cash (for the amt issued @)
cr. common stock (for the par value amt)
cr. paid-in capital in excess of par (dif)
treasury stock
corp’s own stock that it has reacquired from shareholders but not retired
why purchase outstanding stock?
1) to reissue shares to officers and employees under bonus and stock compensation plans
2) to increase trading of the co’s stock in the securities market
3) to have additional shares available for use in acquiring other co.s
4) to increase earnings per share
purchase of treasury stock is generally accounted for by the _____ method
cost
journal entry: treasury stock
dr treasury stock
cr. cash
treasury stock is a ____-_____ _____ acct, not an _____. Purchase of treasury stock ______ stockholders’ equity
contra-stockholders’ equity; asset; reduces
preferred stock
preference as to dividends
preference as to assets in liquidation
non voting
preference as to dividends
1) receive before common stockholders
2) per share dividend amt: % of the pref. stock’s par value
3) cumulative dividend: must be paid dividends and dividends in arrears before common stockholders
journal entry: preferred stock excess par
dr. cash (total amt)
cr. preferred stock (par value amt)
cr. paid-in capital excess of par-pref. stock (dif)
preference as to assets in liquidation
1) preference on corp assets if corp fails
2) preference may be for par value of shares or specified liquidating value
dividends in arrears
preferred dividends that were supposed to be declared but were not declared during a given period
types of dividends
1) cash dividends
2) stock dividends
3) stock splits
for a corp to pay a cash dividend it must have:
1) RE-payment from RE is legal
2) adequate cash
3) declaration by the board of directors
3 dates important to dividends
1) declaration date
2) record date
3) payment date
journal entry: declaration date (cash dividends)
dr. cash dividends
cr. dividends payable
journal entry: record date (cash dividends)
no entry-registered shareholders are eligible for the dividend
journal entry: payment date (cash dividends)
dr. dividends payable
cr. cash
stock dividends
pro rata distribution of a cos own stock
why issue stock dividends?
1) satisfy stockholder’s dividend expectations w/o spending cash
2) increase market ability of the corp’s stock
3) emphasize that a portion of S.H.E. has been permanently reinvested in the business
effects of issuing stock dividends
1) changes composition of SHE but total SHE remains the same
2) no effect on par or stated value per share
3) increases # of shares outstanding
journal entry: stock dividend paid in excess (declaration date)
dr. stock dividends ( % declared x # shares x fair market value)
cr. common stock dividends distributable (% declared x # shares x par value)
cr. paid-in capital excess par (dif)
journal entry when stock dividend shares are issued
dr. common stock dividends distributable
cr. common stock
stock splits
reduces the mkt value of shares
journal entry: stock split
no entry
stock splits ___ par value and ____ # of shares
decrease; increase
stock splits _____ par value per share but _______ balances in SHE
changes; does not affect
total paid in capital changes
stock dividend (+) stock split (no change)
total RE change
stock dividend (-) stock split (no change)
total par value (common stock) change
stock dividend (+) stock split (no change)
par value per share change
stock dividend (no change) stock split (-)
shares outstanding change
stock dividend (+) stock split (+)
total SHE change
stock dividend (no change) stock split (no change)
payout ration
cash dividends distributed on CS/net income
return on CSHE ratio
(net income- preferred stock dividends)/average common SHE
