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accounting > Chapter 11 Powerpoint > Flashcards

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
Q

Primary objectives of accounting for Common Stock

A
  1. Identify the specific sources of paid-in capital
  2. Maintain the distinction between paid-in capital and retained earnings
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26
Q

Other than consideration received, the issuance of common stock affects only __________________

A

paid-in capital accounts

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27
Q

Journal entry for issuing stock of $1,000

A

Dr. Cash 1,000

  Cr. Common Stock 1,000
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28
Q

Journal entry: issue 1,000 shares of $1 par value stock for cash at $5 per share

A

Dr. Cash 5,000

Cr. Common Stock 1,000

Cr. Paid-in capital in excess of par value 4,000

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29
Q

Treasury stock

A

Corporation’s own stock that it has reacquired from shareholders, but not retired

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30
Q

Reasons corporations purchase their outstanding stock:

A
  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

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31
Q

Purchase of Treasury Stock

A

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

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32
Q

Journal entry: X company acquires 4,000 shares of its stock at $8 per share

A

Dr. Treasury stock 32,000

Cr. Cash 32,000

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33
Q

Features often associated with preferred stock

A

Preference as to dividends

Preference as to assets in liquidation

Nonvoting

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34
Q

Paid in capital account with preffered stock

A

Paid-in Capital in Excess of Par Value–Preferred Stock

35
Q

Paid in capital account with common stock

A

Paid-in Capital in Excess of Par Value–Common Stock

36
Q

Preferred Stock Dividend Preferences

A

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
Q

Cumulative dividend

A

Holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends

38
Q

Preferred Stock Liquidation Preference

A

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
Q

Dividends distribution to stockholders

A

Distribution to stockholders on a pro rata (proportional to ownership) basis

40
Q

Types of Dividends

A
  1. Cash dividends
  2. Property dividends
  3. Stock dividends
  4. Scrip (promissory note)
41
Q

How are Dividends expressed?

A
  1. As a percentage of the par or stated value
  2. AS a dollar amount per share
42
Q

For a corporation to pay a cash dividend, it must have:

A
  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
Q

Journal entry: declaration date of dividend

A

Dr. Cash dividends XXX

Cr. Dividends payable XXX

44
Q

Journal entry on payment date of dividend

A

Dr. Dividends payable XXX

Cr. Cash XXX

45
Q

Entries for cash dividends are required on the:

A

Declaration date and the payment date

46
Q

What does the distribution of stock dividends result in?

A

Results in decrease in retained earnings

Increase in paid-in capital

47
Q

Reasons corporations issue stock dividends

A
  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
Q

Retained earnings

A

Net income that a company retains for use in the business

49
Q

Net income __________ Retained Earnings

A

increases

50
Q

Net loss _________ Retained Earnings

A

decreases

51
Q

Retained earnings is part of the ___________________ on the total assets of the corporation

A

stockholders’ claim

52
Q

A debit balance in Retained Earnings is identified as a _____________

A

deficit

53
Q

Retained Earnigns Restrictions

A
  1. Legal restrictions
  2. Contractual restrictions
  3. Voluntary restrictions
54
Q

Two classifications of paid-in capital

A
  1. Capital stock
  2. Additional paid-in capital
55
Q

Payout ratio

A

Cash Dividends Declared on Common Stock

Net Income

*Measures the percentage of earnigns a company distributes in the form of cash dividends

56
Q

Return on Common Stockholders’ Equity Ratio =

A

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
Q

Advantages of Bond financing

A
  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
Q

Why Corporations Invest

A
  1. Corporation may have excess cash
  2. To generate earnings from investment income
  3. For strateigc reasons
59
Q

Recording Acquisiton of Bonds

A

Costs includes all expenditures necessary to acquire investments, such as price paid plus brokerage fees

60
Q

Journal entry: X company acquires bonds for $54,000

A

Dr. Debt Investments 54,000

Cr. Cash 54,000

61
Q

Journal entry for receipt of interest without previous accrual

A

Dr. Cash XXX

Cr. Interest Revenue XXX

62
Q

Journal entry accruing interest

A

Dr. Interest Receivable XXX

Cr. Interest Revenue XXX

63
Q

Jouranl entry for receipt of interest after it has been accrued

A

Dr. Cash XXX

Cr. Interest Receivable XXX

64
Q

Net proceeds

A

Sales price less brokerage fees

65
Q

Gain on sale of a bond account

A

Gain on Sale of Investments

66
Q

The accounting depends on the extent of the ______________ over the operating and financial affairs of the issuing corporation

A

investor’s influence

67
Q

0-20% method

A

Cost method

No significant influence usually exists

68
Q

20-50% method

A

Equity method

Significant influence usually exists

69
Q

50-100%

A

Investment Valued on Parent’s Books using Cost method or Equity Method

(Investment eliminated in Consolidation)

70
Q

Journal entry for acquiring stock (<20%)

A

Dr. Stock Investments XXX

Cr. Cash XXX

71
Q

Journal entry for receiving cash dividends (<20%)

A

Dr. Cash XXX

Cr. Dividend Revenue XXX

72
Q

Adjust each period for (equity method)

A

The investor’s proportionate share of the earnings (losses)

The dividends received by the investor

73
Q

Journal entry: X corporation acquires common stock for 120,000 dollars

A

Dr. Stock Investments XXX

Cr. Cash XXX

74
Q

Controlling Interest

A

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
Q

3 Categories of Securities

A

Trading Securities

Available-for-Sale Securities

Held-to-Maturity Securities

76
Q

Trading Securities

A

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
Q

Available-for-Sale Securities

A

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
Q

Journal entry for adjusting entry of a trading security

A

Dr. Market Adjustment–Trading XXX

Cr. Unrealized Gain–Income XXX

79
Q

An unrealized loss on equity is reported where?

A

Deducted from the stockholders’ equity section

80
Q

Other Revenue and Gains

A

Interest Revenue

Dividend Revenue

Gain on Sale of Investments

Unrealized Gain-Income

81
Q

Other Expenses and Losses

A

Loss on Sale of Investments

Unrealized Loss–Income

82
Q

Show a balance sheet presentation of trading securities fair value of 48,000

A

Balance Sheet

Current Assets

                Short-term investments, at fair value 48,000
83
Q
A

accounting (31 decks)

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