Chapter 9 Financial Accounting Flashcards
What are the 6 things incorporations have to do when organizing a corporation?
Organize the corporation Pay Fees Sign Charter File Documents with the state Agree to bylaws Need to tell the state the maximum amount of shares I am going to sell
What are the 4 rights shareholders get?
Vote at stockholder meetings
Receive Dividends
Receive share if corporation liquidates
Maintain proportionate ownership
Preemptive Right
You have the right to buy more shares to maintain your ownership if you have cash to do so
What do shareholders have the right to receive but are NOT required to get?
Dividends
What are the 2 parts of Stockholders Equity?
Paid-in Capital
Retained Earnings
Paid in Capital includes what 2 things?
Represents amounts contributed by stockholders
Include Stock Accounts
Retained Earnings
Amount earned and kept by the corporation
What are 4 characteristics of Common Stock?
Basic form of common stock
Have rights of ownership
Benefit most if company succeeds
Risk most if company does not succeed
What are the 3 characteristics of Preferred Stock?
Have Preference in receiving dividends and assets in case of liquidation
Hybrid between common stock and debt
Rare for corporations to issue
What are the 2 characteristics of par value stock?
Arbitrary amount assigned to share of stock
In most states, represents minimum price for shares
What are 3 characteristics of No-Par Stock?
Does not have a par value
May have a stated value
Non Par Company can sell stock for any price
What is another name for Paid in Capital in excess of par?
Additional Paid In Capital
In terms of journal entries what 2 things happen with Preferred Stock?
Preferred stock is credited for the shares Issued multiplied by the par value
- A separate paid in capital account is used if stock is issued above par
Common and Preferred Stock both follow the same…
Pattern in terms of journal entries
Authorized ( In terms of stock)
Maximum number of shares company can issue as indicated on charter
Issued ( In Terms of Stock)
Number of shares company has sold to shareholders
Outstanding (In terms of Stock)
Number of shares currently in shareholders possession
In stock terms if there is any difference between issue and outstanding that is due to what?
Treasury Stock
Treasury Stock
Company owns stock that it has issued and later reacquired
What are 3 reasons why company has Treasury Stock?
All authorized shares have been issued and shares are needed for employee stock purchase plans
- Company wants to purchase its shares at a low price and then re-issue them at a higher price
- Management wants to avoid a takeover
What are 4 accounting rules of Treasury Stock?
Recorded at cost (not par value)
Contra-equity account (debit balance)
Reduces stockholders equity and assets
-If sold, paid in capital from treasury stock transactions is credited
Retained Earnings Balance Equation
Balance = Net income - net losses - dividends declared
Debit Balance =
Deficit
Debit Balance = Deficit means…
Losses and dividends exceed equations
Dividends
Are distributions of retained earnings
What are retained earnings NOT equal to?
CASH
What are 3 forms of Dividends?
Cash
Stock
Noncash assets
With Cash Dividends what 2 things must a company have?
Enough Retained Earnings to declare the dividend
Enough Cash to pay the dividend
What are 3 important Dividend Dates?
Date of Declaration
Date of Record
Date of Payment
What are 2 important characteristics of Date of Declaration?
Board of Directors announces dividends
Corporation is now obligated to pay
Date of Record
Stockholders who own shares on this date will receive dividend
Date of Payment
Payment sent to shareholders on record
When accounting for dividends, what happens to the accounting equation in the big picture?
Owners Equity ⬇️
Assets ⬇️
If retained earnings increase what happens to net income and dividends?
Dividends ⬆️
Net Income⬇️
If retained earnings decrease what happens to net income and dividends?
Net Income⬇️
Dividends ⬇️
What is the order that dividends get paid? (4 groups)
Dividends in arrears
Cumulative Preferred Shareholders
Preferred Shareholders
Common Stock Shareholders
Who receives dividends FIRST: preferred or common shareholders?
Preferred Shareholders
Dividends in arrears
Cumulative preferred shareholders that have not been paid yet
What are the 2 reasons corporations distribute stock dividends?
Provide dividend, yet conserve cash
Reduce market price of shares
What are 2 characteristics of Small Stock Dividends?
Less than 25% of outstanding shares
Recorded at market value
What are 2 characteristics of Large Stock Dividends?
Greater than 25% of outstanding shares
Recorded at par value
What 2 things have no effect on the Accounting equation?
Stock Dividend
Stock Split
What happens to the accounting equation when paying cash dividends?
Assets ⬇️
Liabilities ⬇️
Owners Equity unchanged
What happens to the accounting equation when declaring cash dividends?
Assets no effect
Liabilities ⬆️
Owners Equity⬇️
What happens to the accounting equation when selling treasury stock?
Assets ⬆️
Liabilities no effect
Owners Equity⬆️
What happens to the accounting equation when purchasing treasury stock?
Assets ⬇️
Liabilities no effect
Owners Equity ⬇️
What happens to the accounting equation when issuing stock?
Assets ⬆️
Liabilities no effect
Owners Equity ⬆️
