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Chapter 11 Powerpoint Flashcards

1
Q

Classified by Purpose

A

Not-for-Profit

For Profit

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2
Q

Classified by Ownership

A

Publicly held

Privately held

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3
Q

Advantages of a Corporation

A

Seperate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Continuous Life

Corporate Management

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4
Q

Disadvantages of a Corporation

A

Corporate Management

Government Regulations

Additional Taxes

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5
Q

Seperate Legal Existence

A

Corporation acts under its own name rather than in the name of its stockholders

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6
Q

Limited Liability of Stockholders

A

Limited to their investment

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7
Q

Transferable Ownership Rights

A

Shareholders may sell their stock

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8
Q

Ability to Acquire Capital

A

Corporation can obtain capital through the issuance of stock

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9
Q

Continuous Life

A

Continuance as a going convern is not affected by the withdrawl, death, or incapacity of a stockholder, employee, or officier

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10
Q

Disadvnatage: Corporate Management

A

Seperation of ownership and management prevents owners from having an activite role in managing the company

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11
Q

Government Regulations

A

State laws

SEC laws

Stock exchange requirements

Federal regulations

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12
Q

Additional Taxes

A

Corporations pay income taxes as:

  • a sperate legal entity

Stockholders pay taxes on cash dividends

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13
Q

Stockholders Rights

A
  1. Vote in election of board of directors and on actions that require stockholder approval
  2. Share the corporate earnings through receipt of dividends
  3. Keep the same percentage of ownership when new shares of stock are issued (preemptive right)
  4. Share in assets upon liquidation in proportion to their holdings (residual claim)
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14
Q

Authorized Stock

A

Charter indicates the amount of stock that a corporation is authorized to sell

Number of authorized shares is often reported in the stockholders’ equity section

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15
Q

How can a corporation issue common stock?

A

Directly to investors

Indirectly thorugh an investment banking firm

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16
Q

U.S. securities exchanges

A

New York Stock Exchange

American Stock Exchange

13 regional exchanges

NASDAQ national market

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17
Q

Years ago, par value determined the legal capital per share that a company must _________________________

A

retain in the business for the protection of corporate creditors

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18
Q

Today many states ______________ a par value

A

do not require

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19
Q

_______________ is quite common today

A

No-par value stock

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20
Q

In many states the board of directors assigns a _________________

A

stated value to no-par shares

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21
Q

Par value stocks

A

Capital stock that has been assigned a value per share

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22
Q

Two Primary Sources of Equity

A

Paid-in Capital

Retained Earnings

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23
Q

Paid-in capital

A

The total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock

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24
Q

Retained Earnings

A

Net income that a corporation retains for future use

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25
Primary objectives of accounting for Common Stock
1. Identify the specific sources of paid-in capital 2. Maintain the distinction between paid-in capital and retained earnings
26
Other than consideration received, the issuance of common stock affects only \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
paid-in capital accounts
27
Journal entry for issuing stock of $1,000
Dr. Cash 1,000 Cr. Common Stock 1,000
28
Journal entry: issue 1,000 shares of $1 par value stock for cash at $5 per share
Dr. Cash 5,000 Cr. Common Stock 1,000 Cr. Paid-in capital in excess of par value 4,000
29
Treasury stock
Corporation's own stock that it has reacquired from shareholders, but not retired
30
Reasons corporations purchase their outstanding stock:
1. To reissue shares to officers and employees under bonus and stock compensation plans 2. To increase trading of the company's stock in the securities market 3. To have additional shares available for use in acquiring other companies 4. To increase earnings per share \*to eliminate hostile shareholders sometimes
31
Purchase of Treasury Stock
Generally accounted for by the cost method Debit Treasury Stock for the price paid Treasury stock is a contra stockholders' equity account, not an asset Purchase of treasury stock reduces stockholders' equity
32
Journal entry: X company acquires 4,000 shares of its stock at $8 per share
Dr. Treasury stock 32,000 Cr. Cash 32,000
33
Features often associated with preferred stock
Preference as to dividends Preference as to assets in liquidation Nonvoting
34
Paid in capital account with preffered stock
Paid-in Capital in Excess of Par Value--Preferred Stock
35
Paid in capital account with common stock
Paid-in Capital in Excess of Par Value--Common Stock
36
Preferred Stock Dividend Preferences
Rights to receive dividends before common stockholders Per share dividend amount is stated as a percentage of the preferred stock's par value or as a specified amount Cumulative dividend
37
Cumulative dividend
Holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends
38
Preferred Stock Liquidation Preference
Preference on corporate assets if the corporation fails Preferences may be: for the par value of the shares or for a specified liquidating value
39
Dividends distribution to stockholders
Distribution to stockholders on a pro rata (proportional to ownership) basis
40
Types of Dividends
1. Cash dividends 2. Property dividends 3. Stock dividends 4. Scrip (promissory note)
41
How are Dividends expressed?
1. As a percentage of the par or stated value 2. AS a dollar amount per share
42
For a corporation to pay a cash dividend, it must have:
1. Retained earnings - payments of cash dividends from retained earnings is legal in all states 2. Adequate cash 3. Declaration by the Board of Directors
43
Journal entry: declaration date of dividend
Dr. Cash dividends XXX Cr. Dividends payable XXX
44
Journal entry on payment date of dividend
Dr. Dividends payable XXX Cr. Cash XXX
45
Entries for cash dividends are required on the:
Declaration date and the payment date
46
What does the distribution of stock dividends result in?
Results in decrease in retained earnings Increase in paid-in capital
47
Reasons corporations issue stock dividends
1. Satisfy stockholders' dividend expectations without spending cash 2. Increase the marketability of the corporation's stock 3. Emphasize that a portion of stockholders' equity has been permanently reinvested in the business
48
Retained earnings
Net income that a company retains for use in the business
49
Net income __________ Retained Earnings
increases
50
Net loss _________ Retained Earnings
decreases
51
Retained earnings is part of the ___________________ on the total assets of the corporation
stockholders' claim
52
A debit balance in Retained Earnings is identified as a \_\_\_\_\_\_\_\_\_\_\_\_\_
deficit
53
Retained Earnigns Restrictions
1. Legal restrictions 2. Contractual restrictions 3. Voluntary restrictions
54
Two classifications of paid-in capital
1. Capital stock 2. Additional paid-in capital
55
Payout ratio
_Cash Dividends Declared on Common Stock_ Net Income \*Measures the percentage of earnigns a company distributes in the form of cash dividends
56
Return on Common Stockholders' Equity Ratio =
_Net income - Preferred Stock Dividends_ Average Common Stockholders' Equity \*shows how many dollars of net income a company earned for each dollar of common stockholders' equity
57
Advantages of Bond financing
1. Stockholder control is not affected - bondholders do not have voting rights so current owners (stockholders) retain full control of the company 2. Tax savings result - Bond interest is deductible for tax purposes; dividends on stocks are not 3. Return on common stockholders' equity may be higher - although bond interest expense reduces net income, no additonal shares of common stock are issued
58
Why Corporations Invest
1. Corporation may have excess cash 2. To generate earnings from investment income 3. For strateigc reasons
59
Recording Acquisiton of Bonds
Costs includes all expenditures necessary to acquire investments, such as price paid plus brokerage fees
60
Journal entry: X company acquires bonds for $54,000
Dr. Debt Investments 54,000 Cr. Cash 54,000
61
Journal entry for receipt of interest without previous accrual
Dr. Cash XXX Cr. Interest Revenue XXX
62
Journal entry accruing interest
Dr. Interest Receivable XXX Cr. Interest Revenue XXX
63
Jouranl entry for receipt of interest after it has been accrued
Dr. Cash XXX Cr. Interest Receivable XXX
64
Net proceeds
Sales price less brokerage fees
65
Gain on sale of a bond account
Gain on Sale of Investments
66
The accounting depends on the extent of the ______________ over the operating and financial affairs of the issuing corporation
investor's influence
67
0-20% method
Cost method No significant influence usually exists
68
20-50% method
Equity method Significant influence usually exists
69
50-100%
Investment Valued on Parent's Books using Cost method or Equity Method (Investment eliminated in Consolidation)
70
Journal entry for acquiring stock (\<20%)
Dr. Stock Investments XXX Cr. Cash XXX
71
Journal entry for receiving cash dividends (\<20%)
Dr. Cash XXX Cr. Dividend Revenue XXX
72
Adjust each period for (equity method)
The investor's proportionate share of the earnings (losses) The dividends received by the investor
73
Journal entry: X corporation acquires common stock for 120,000 dollars
Dr. Stock Investments XXX Cr. Cash XXX
74
Controlling Interest
When one corporation acquires a voting interest of more than 50 percent in another corporation Investor = parent Investee = subsidiary Investment in the subsidiary is reported on the parent's books as a **long-term investment** Parent generally prepares **consolidated financial statements**
75
3 Categories of Securities
Trading Securities Available-for-Sale Securities Held-to-Maturity Securities
76
Trading Securities
Companies hold trading securities with the intention of selling them in a short period **Trading** means frequent buying and selling Companies report trading securities at fair value, and report changes from cost as part of net income
77
Available-for-Sale Securities
Companies hold securities with the intent of selling these investments sometime in the future Can be current assets or long-term assets depending on intent of the management Reported at fair value, and report changes from cost as a component of the stockholders' equity section
78
Journal entry for adjusting entry of a trading security
Dr. Market Adjustment--Trading XXX Cr. Unrealized Gain--Income XXX
79
An unrealized loss on equity is reported where?
Deducted from the stockholders' equity section
80
Other Revenue and Gains
Interest Revenue Dividend Revenue Gain on Sale of Investments Unrealized Gain-Income
81
Other Expenses and Losses
Loss on Sale of Investments Unrealized Loss--Income
82
Show a balance sheet presentation of trading securities fair value of 48,000
Balance Sheet Current Assets Short-term investments, at fair value 48,000
83

accounting (31 decks)

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