chapter 11 concepts

Question 1

Publicly held corporation

Answer 1

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

Question 2

Privately held corporation

Answer 2

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

Question 3

Characteristics of a corporation

Answer 3

Advantages:
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Disadvantages:
Corporation Management
Government Regulations
Additional Taxes

Question 4

What is the controller and what does he do?

Answer 4

The chief accounting officer is the controller. The controller (1) maintains the accounting records, (2) ensures an adequate system of internal control, and (3) prepares financial statements, tax returns, and internal reports.

Question 5

What is the treasurer?

Answer 5

The treasurer has custody of the corporation’s funds and oversees the company’s cash position.

Question 6

S corporation

Answer 6

allows for legal treatment as a corporation but tax treatment as a partnership—that is, no double taxation.
One of the primary criteria is that the company cannot have more than 100 shareholders.

Question 7

Charter

Answer 7

A document that describes a corporation’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.

Question 8

by-laws.

Answer 8

The by-laws establish the internal rules and procedures for conducting the affairs of the corporation.

Question 9

Common stock

Answer 9

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

Question 10

Authorized stock

Answer 10

The amount of stock that a corporation is authorized to sell as indicated in its charter. The authorization of common stock does not result in a formal accounting entry.

Question 11

Par value stock

Answer 11

Capital stock that has been assigned a value per share in the corporate charter.

Question 12

Legal capital

Answer 12

The amount of capital that must be retained in the business for the protection of corporate creditors.

Question 13

No-par value stock

Answer 13

Capital stock that has not been assigned a value in the corporate charter.

Question 14

Stated value

Answer 14

The amount per share assigned by the board of directors to no-par stock.

Question 15

Paid-in capital

Answer 15

The amount stockholders paid in to the corporation in exchange for shares of ownership.

Question 16

Retained earnings

Answer 16

Net income that a company retains in the business.

Question 17

Preferred stock

Answer 17

Capital stock that has contractual preferences over common stock in certain areas.

Question 18

Treasury stock

Answer 18

A corporation’s own stock that has been reacquired by the corporation and is being held for future use.

Question 19

Outstanding stock

Answer 19

Capital stock that has been issued and is being held by stockholders.

Question 20

Treasury Stock is a contra account to

Answer 20

stockholders’ equity

Question 21

Dividend

Answer 21

A distribution by a corporation to its stockholders on a pro rata (proportional to ownership) basis.

Question 22

Cash dividend

Answer 22

A pro rata (proportional to ownership) distribution of cash to stockholders.

Question 23

Declaration date

Answer 23

The date the board of directors formally authorizes the dividend and announces it to stockholders.

Question 24

Record date

Answer 24

The date when the company determines ownership of outstanding shares for dividend purposes.

Question 25

Payment date

Answer 25

The date cash dividend payments are made to stockholders.

Question 26

Cumulative dividend

Answer 26

A feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends.

Question 27

Dividends in arrears

Answer 27

Preferred dividends that were supposed to be declared but were not declared during a given period.

Question 28

Stock dividend

Answer 28

A pro rata (proportional to ownership) distribution of the corporation’s own stock to stockholders.

Question 29

Stock split

Answer 29

The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share.

Question 30

Deficit

Answer 30

A debit balance in Retained Earnings.

Question 31

Retained earnings restrictions

Answer 31

Circumstances that make a portion of retained earnings currently unavailable for dividends.

Question 32

Accumulated Other Comprehensive Income

Answer 32

This account includes the cumulative amount of all previous items reported as other comprehensive income.

Question 33

Payout ratio

Answer 33

A measure of the percentage of earnings a company distributes in the form of cash dividends to common stockholders. It is computed by dividing total cash dividends declared to common shareholders by net income.

Question 34

Return on common stockholders’ equity (ROE)

Answer 34

A measure of profitability from the stockholders’ point of view; computed by dividing net income minus preferred dividends by average common stockholders’ equity.