Chapter 11 Powerpoint Flashcards
Classified by Purpose
Not-for-Profit
For Profit
Classified by Ownership
Publicly held
Privately held
Advantages of a Corporation
Seperate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Disadvantages of a Corporation
Corporate Management
Government Regulations
Additional Taxes
Seperate Legal Existence
Corporation acts under its own name rather than in the name of its stockholders
Limited Liability of Stockholders
Limited to their investment
Transferable Ownership Rights
Shareholders may sell their stock
Ability to Acquire Capital
Corporation can obtain capital through the issuance of stock
Continuous Life
Continuance as a going convern is not affected by the withdrawl, death, or incapacity of a stockholder, employee, or officier
Disadvnatage: Corporate Management
Seperation of ownership and management prevents owners from having an activite role in managing the company
Government Regulations
State laws
SEC laws
Stock exchange requirements
Federal regulations
Additional Taxes
Corporations pay income taxes as:
- a sperate legal entity
Stockholders pay taxes on cash dividends
Stockholders Rights
- Vote in election of board of directors and on actions that require stockholder approval
- Share the corporate earnings through receipt of dividends
- Keep the same percentage of ownership when new shares of stock are issued (preemptive right)
- Share in assets upon liquidation in proportion to their holdings (residual claim)
Authorized Stock
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
How can a corporation issue common stock?
Directly to investors
Indirectly thorugh an investment banking firm
U.S. securities exchanges
New York Stock Exchange
American Stock Exchange
13 regional exchanges
NASDAQ national market
Years ago, par value determined the legal capital per share that a company must _________________________
retain in the business for the protection of corporate creditors
Today many states ______________ a par value
do not require
_______________ is quite common today
No-par value stock
In many states the board of directors assigns a _________________
stated value to no-par shares
Par value stocks
Capital stock that has been assigned a value per share
Two Primary Sources of Equity
Paid-in Capital
Retained Earnings
Paid-in capital
The total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock
Retained Earnings
Net income that a corporation retains for future use
Primary objectives of accounting for Common Stock
- Identify the specific sources of paid-in capital
- Maintain the distinction between paid-in capital and retained earnings
Other than consideration received, the issuance of common stock affects only __________________
paid-in capital accounts
Journal entry for issuing stock of $1,000
Dr. Cash 1,000
Cr. Common Stock 1,000
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
Treasury stock
Corporation’s own stock that it has reacquired from shareholders, but not retired
Reasons corporations purchase their outstanding stock:
- To reissue shares to officers and employees under bonus and stock compensation plans
- To increase trading of the company’s stock in the securities market
- To have additional shares available for use in acquiring other companies
- To increase earnings per share
*to eliminate hostile shareholders sometimes
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
Journal entry: X company acquires 4,000 shares of its stock at $8 per share
Dr. Treasury stock 32,000
Cr. Cash 32,000
Features often associated with preferred stock
Preference as to dividends
Preference as to assets in liquidation
Nonvoting