Chapter 11 Equity Flashcards
What is common stock?
Contributed capital
What are revenues, expenses, and dividends considered?
Retained Earnings
What are corporations?
-separate legal entities from their owner
-owners are shareholders or stockholders
-private and public
What is a public corporation?
-shares are open for anyone to buy
(trade on the open market)
-could have hundreds or thousands of owners
What is a private corporation?
-public cannot buy shares
“Closely held co.”
-Have usually a few owners
What are the advantages of corporations?
-limited liability
-transferrable ownership
-continuous life
-easier to accumulate capital ($$$)
What are the disadvantages of corporations?
-Corporations are subject to “double taxation”
-Taxed at both corp. level and shareholder level
-Subject to various government regulations
What is corporation structure (governance)?
-corp. charter- lays out structure, bylaws, stock, etc
-structure (shareholders>BOD>executives>management>employees)
What is capital stock?
-shares issued to obtain financing (authorized stock and outstanding stock)
-shares are issued at market price (how much they are actually sold for)
-all shares also have a par value-set price on charter
What is authorized stock?
how much stock the charter says they have in total to sell
What is outstanding stock?
how much stock has actually been soldand is currently held by investors
What are the 3 ways stock can be issued?
- at par
- below par (discount)
- above par (premium)
What is the account Discount on Common Stock?
-NB: Debit
-Contraequity
What is the account Paid in Capital in Excess of Par Value?
-equity
-NB: credit
Whare are common stock rights?
-Right to vote
-1 share = 1 vote
-if a common shareholder cannot attend the meeting they can appoint a proxy (an agent who works on their behalf)
-Pre-emptive rights
What are pre-emptive rights?
-right to purchase newly-issued shares before the public up to their current ownership % (keeps ownership % the same)
-right to receive dividends
-right to share in any remaining assets upon liquidation of the company
What is issuing stock for noncash assets?
-a corporation could receive property or stock in exchange for common or preferred sotck
-non cash asset received is recorded at FMV (fair market value)
What is preferred stock?
-usually cannot vote
-issued dividends before common stockholders
-cumulative preferred stock-gives owners the rights to be paid current year and prior year (“in arrears”) dividends before anyone else
-noncumulative preferred stock-gives owners the rights to current year dividends before common shareholders (rights to assets at liquidation)
What is the account Preferred Stock?
-Equity
-NB: Credit
Journal entries are identical to common stock entries
What are the 3 important dates for dividends?
- Date of declaration- date the BOD votes to declare and pay a dividend (Record JE: DR Retained Earnings CR Common/Preferred Dividend Payable)
- Date of Record- date for identifying which stockholders are currently on record to receive a dividend (No JE)
- Date of Payment- date dividend is actually paid (Record JE: DR Common/Preferred Dividend Payable CR Cash
What is Treasury Stock?
“T Stock”
-When a company buys back its own stock
What is the account Treasury Stock?
-Contraequity
-NB: Debit
Why do companies buy back its own stock?
-trying to control who can vote
-trying to avoid a (hostile) takeover of the company
-want to give to employees as compensation
-buying back to show confidence in the market value of their shares
What is EPS- Earnings Per Share?
-Represents how much income the co. earns per share outstanding
What is the equation for EPS?
EPS = (Net income-Preferred Dividends)/Weighted Average Common shares outstanding
