Chapter 15 Flashcards
1
Q
The special characteristics of the corporate form that affect accounting include
A
- Influence of state corporate law
- Use of capital stock or share system
- Development of a variety of ownership interests
2
Q
Anyone who wishes to establish a corporation must submit what?
A
Articles of incorporation to the state in which incorporation is desired
3
Q
A state issued a corporate charter after requirements are fulfilled, then the company is
A
A legal entity that is subject to state law
4
Q
In absence of restrictive provisions each share carries the following rights
A
- To share proportionately in profits and losses
- To share proportionately in management (right to vote for directors)
- To share proportionately in corporate assets upon liquidation
- To share proportionately in any new issues of stock of the same class called pre-emptive right
5
Q
The last right ( pre emptive right) is used to protect what?
A
Each stockholder proportional interest in the company
6
Q
The preemptive right protects an existing stockholder from ?
A
Involuntary dilution of ownership interest
7
Q
Many corporations have eliminated preemptive right because
A
It makes it inconvenient for corporations to issue large amounts of additional stock as they frequently do in acquiring other companies
8
Q
Share system easily allows what?
A
One individual to transfer interest in an company to another investor
9
Q
Corporations often use registrars and transfer agents for what?
A
Who special in providing services for recording and transferring stock
10
Q
Common stock
A
Is the residual corporate interest that beats the ultimate risk of loss and recieves benefits of success
11
Q
Common stock holders are not gurenteed what?
A
Dividends or assets upon dissolution.
12
Q
Common stock holders generally control what?
A
Management of corporation and ten to profit most of the company is successful
13
Q
Stockholder may sacrifice certain of these rights in return for other special right and privileges which are usually called
A
Preferred stock
14
Q
Preferred stockholder always sacrificed some of inherent rights of common stock ownership
A
True
15
Q
A common type of preference is to give preferred shareholders a priority to what?
A
Claim on earnings
Corporation assures a dividend usually at a stated rate before they distribute any to common stockholders
16
Q
Capital stock and additional paid in capital constitute?
A
Contributed paid in capital a
17
Q
Retained earnings
A
Represent earned capital of company
18
Q
Contributed paid in capital
A
Total amount paid in on capital stock the amount provided by stockholders to the corporation for use in business
19
Q
Contributed capital includes what items?
A
Par value of all outstanding stock and premiums less discount on issuance
20
Q
Earned capital
A
Is the capital that develops from profitable operations.
It consists of all undistributed income that remains invested in company
21
Q
Stockholders owner equity
A
Is the cumulative net contributions by stockholders plus retained earnings
22
Q
Stockholder equity is not a claim to specific assets but a claim against what?
A
Portion of total assets
23
Q
Par value has no relationship to what?
A
Fair value
24
Q
Preferred or common stock reflect The
A
Par value of corporation issued shares.
/amounts are credited when it originally issued the shares
25
Paid in capital excess of par (also known as APIC)
Amount indicates any excess over par value paid in by stockholders in return for shares issued to them.
26
No par stock
With out par value
27
What are the reasons for issuing at no par value
Issuance of no par stock avoids contingent liability that might occur if corporation issued par value stock at discount
Some confusion exists over relationship between par value and fair value
28
What is a major disadvantage of no par value stock
Some states levy a high tax on these issues
29
True no par stock should be carried in accounts at issue price without
Any APIC OR DISCOUNT REPORTED
30
Stated value
Is a minimum value below which a company cannot issue it.
31
Instead of being no par stock, stated value stock becomes a stock with
Very low par value
32
Corporations generally sell classes of stock
Separately to track proceeds relative to each class
33
The accounting problem in lump sum sales is how to
Allocate proceeds among several classes of securities
34
Two methods are used to allocate proceeds among several classes of securities
Proportional method
Incremental method
35
Proportional method (p. 781)
If fair value or other sound basis for determining relationship value is available for each class of security, the company allocates the lump sum received among classes of securities on a proportional basis
36
Incremental method (p. 781)
Where a company cannot determine fair value of all classes securities, incremental method is used.
It uses fair value of securities as a basis for those classes it knows and allocates remainder of lump sum to the class for which it does not know fair value
37
If company cannot determine fair value for any of the classes of stock involved in lump sum exchange, other approaches must be used
True
38
Accounting for issuance of shares of stock for property or services involves an issue of valuation. The rule for this is?
Companies should record stock issued for services or property other than cash at either fair value of stock issued or the fair value of the non cash consideration recieved, whichever is more clearly determinable
39
If company can determine both and the transaction results from arm length exchange, there will be
A little difference in fair value .
40
Issuance of stock for property or services has resulted in cases of?
Overstated corporate capital through intentional overvaluation of property or services received.
41
The overvaluation of stockholder equity resulting from inflated asset value creates what type of stock?
Watered stock
42
How do corporations eliminate "water" stock?
Write down the overvalued assets
43
When a corporation undervalues recorded assets, what is created?
Secret reserves
44
An understated corporate structure (secrets reserve) can result from ?
Excessive depreciation or amortization charges, expensing capital expenditures, excessive write downs of inventories or receivables or any other understatement of assets or overstatement of liabilities
45
An example of ovetstament of liabilities is an excessive provision for estimated product warranties that ultimately results in
Understatement of owner equity thereby creating a secrete reserve
46
Preferred stock features
1. Preference as to dividends
2. Preference as to assets in event of liquidations
3. Convertible to common stock
4. Callable at the option of corporation
5. No voting
47
Companies usually issue preferred stock with a par value, expressing dividend preference as what?
A percentage of par value
48
A preference as to dividends does not assure payment of dividends but it assures that the corporation must:
Pay stated dividend rate or amount applicable to preferred stock before paying any dividends on common stock
49
Company often issues preferred stock instead of debt because
Of a high debt to equity ratio
50
Cumulative preferred stock
Requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to common stockholders
51
Dividend in arrears
Any passed dividend on cumulative preferred stock
If a director fails to declare a dividend at the normal date for dividend action, the dividend is said to have been passed
52
No liability exists until board of directors declares
A dividend, a corp does not record a dividend in arrears as a liability but discloses in notes of financial statements
53
Participating preferred stock
Holders share ratably with common stockholders in any profit distributions beyond prescribed rate
54
Convertible preferred stock
Allows stockholders at their option to exchange preferred shares for common stock at a predetermined ratio
55
Callable preferred stock
Permits the corporation at its option to call or redeem the outstanding preferred shares at a specified future dates and at stipulated prices
56
Many type of preferred issues are what?
Callable
57
The call or redemption price is slightly above original issuance price
True
58
When a preferred stock is redeemed, what must be paid?
Any dividends in arrears
59
Redeemable preferred stock
Has a mandatory redemption period or a redemption feature that the issuer cannot control
60
FASB requires debt like securities such as redeemable preferred stock to be classified as ?
Liabilities and be measured and accounted for similar to liabilities
61
Convertible bonds are recorded as
Liability on date of issue
62
Preferred stock generally has no what?
Maturity date
63
Preferred stock is recorded at
Par value as part of stockholder equity section
64
Dividends on preferred stock are considered a
Distribution of income not an expense
65
Corporations purchase their outstanding stock for several reasons
1. To provide tax efficient distributions of excess cash to shareholders
2. Increase earnings per share and return on equity
3. To provide stock for employee stock compensation contracts or to meet potential so merger needs
4. To thwart takeover attempts or to reduce # of stockholder
5. To make a market in the stock
66
Many public held corporations have gone private because
They want to eliminate public outside ownership by entirely purchasing all of outstanding stock
67
They accomplish this by doing a leverage buyout which is
The company borrows money to finance stock repurchases
68
After reacquiring shares, what can the company do with them?
1. Retire
| 2. Or hold them in the treasury for reissue
69
Treasury stock
If not retired such shares are referred as treasury stock
Is a corporations own stock reacquired after having being issued and fully paid
70
TREASURY STOCK IS NOT A WHAT?
Asset
71
When treasury stock is purchased, what is reduced?
Assets and stockholders equity
72
Possession of treasury stock does not give corporation THE right to what?
vote, exercise preemptive rights as stockholder, to receive cash dividends or to receive asets upon corporate liquidation.
73
Treasury stock is the same as?
Unissued capital stock
74
What two methods are used when handling treasury stock?
Cost method
And
Par (stated) value method
75
Cost method results in
Debiting treasuring stock for reacquisition and reporting this account as deduction from total paid in capital and retained earnings on balance sheet
76
Par value stated method
Records all transactions in treasury shares at their par value and reports the treasury stock as a deduction from capital stock ONLY
77
Which method is generally used to account for treasury stock?
Cost method
78
Outstanding stock
Means the number of shares of issued stock that stockholders own
79
If selling price of treasury stock equal its cost, what would the company record?l
Debit cash and credit treasury stock
80
When selling price of shares of treasury stock exceed its cost, what happens?
A company credits the difference to paid in capital from treasury stock
81
When a treasury stock is sold below its cost
Debits the excess of cost over selling price to paid in capital from treasury stock
82
The accounting effects are similar to sale of treasury stock except that corporations debit what
Paid in capital accounts applicable to retired shares instead of cash
83
Companies paying dividends are extremely reluctant to reduce or eliminate their dividend because they fear
That the securities market might negatively view this action
84
Very few companies pay dividends in amounts equal to their legally available retained earnings. The major reasons are as follows
P. 791
85
Before declaring a dividend, what must management do?
Must consider the availability of funds to pay dividends
86
SEC encourages companies to disclose their dividend policy in annual report because
1. Especially those that have earnings but fail to pay dividends
2. Do not expect to pay dividends in foreseeable future
87
ALL dividends reduce total stockholder equity in the corporation except for what?
Stock dividends
88
When declaring a stock dividend, the corporation does not pay out assets or incur a liability, it issued
Additional shares of stock to each stockholder and nothing more
89
Cash dividend
Board of directors voted on declaration of cash dividends
90
A declared cash dividend is a
Liability because payment is generally required very soon, it is usually a current liability
91
A company must declare dividends as either a
Certain % of par or as an amount per share
92
Companies do not declare or pay cash dividends on treasury stock
True
93
Property dividends
Dividends payable in assets of corporation other than cash
94
When declaring property a dividend
The corporation should restate at fair value the property will distribute, recognizing any gain or loss as the diff between property fair value and carrying value at date of declaration
95
Liquidating dividends
Dividend based on other than retained earnings are sometimes called liquidating dividends
96
Any dividend not based on earnings reduces corporate paid in capital and to that extent it is a what type of dividend?
Liquidating
97
If management wishes to "capitalize" part of earnings and this retain earnings in business on a permanent basis it may issue what type of dividend?
Stock dividend
98
Stock dividend
Is the issuance by a corporation of its own stock to its stockholders on a pro rata basis without receiving any consideration
99
Small ordinary stock dividends
Less than 20-25 %
| At the time of dividend declaration, company must transfer fair value of stock issued from retained earnings
100
To reduce market price of shares, a common device is used called
Stock split
101
Stock split require no
Entry
102
Stock split does what?
Increases # of shares outstanding
Decrease par or stated value per share
103
Stock dividend does what
Increase # of shares outstanding
Does not decrease par value, it increase total par value of outstanding shares
104
Why would someone issue a stock dividend?
- can be a public gesture
- may want to retain profit in business by capitalizing retained earnings
( in such situation, it makes s transfer on declaration of stock dividend from earned capital to contributed capital)
- to increase profitability of stock, even though it's a secondary consideration
105
When corporation issue additional shares for the purpose of reducing unit market price, the distribution more closely resembles a stock split than a stock dividend, this results only if
of shares issued is more than 20-25 percent of the number of shares previously outstanding g
106
Large stock dividend
A stock dividend of more than 20-25 % of number of shares previously outstanding
107
Statement of stockholder equity is presented in following basis format
1 balance at beg of period
2. Additions
3. Deductions
4. Balance at end of period
108
Return on common stockholder equity
Measures profitability from common stockholder viewpoint
Shows how many dollars of net income the company earned for each dollar invested by owners
109
Trading on equity
Describes the practice of using borrowed money or issuing preferred stock in hopes of obtaining a higher rate of return of money used
110
Book value per share
Of stock is the amount each share would receive if the company were liquidated on the basis of amounts reported on balance sheet
