chapter eleven notes Flashcards
separate legal entity (corporations)
own assets, incur liabilities, enter into contracts, sue and be sued
governance (corporations)
stockholders (owners of voting shares) elect Board of Directors; Board appoints Presidents (CEO), CFO, etc.
stockholders have the right to…
vote and receive dividends (dependent on the type of stock they own)
how can you finance a company?
borrowing money
selling ownership
what are the advantages of issuing equity?
- ease of raising capital
- dividend flexibility
- return on investment
ease of raising capital
ready capital markets to buy/sell; great number of potential investors
dividend flexibility
dividends are NOT liabilities until declared by the Board
return on investment
ROI is usually higher on stocks than bonds (more attractive to investors)
what are the disadvantages of issuing equity?
- control
- no tax incentive
- effective on key ratios
control
issuing additional shares of stock dilutes ownership control
no tax incentive
dividends are not tax deductible whereas interest expense is tax deductible
effect on key ratios
EPS “earnings per share”
authorized shares
MAXIMUM number of shares that can be sold to the public
issued shares
TOTAL number of shares issued (sold) to the stockholders since formation
outstanding shares
number of shares held by OUTSIDE shareholders
treasury stock
shares of the company’s own stock that were originally issued (sold) and have now been bought back and are being held by the company
treasury stock is a ______ to _____
reduction
SHE
how do you solve for outstanding shares?
issued shares-treasury stock
par value
- a nominal value that establishes “legal capital”
- protests creditors
- par is usually below anticipated selling price
- may indicated a “stated value”
“legal capital”
the amount of capital that must remain invested in the business
(set in the corporation’s articles of incorporation)
how does par value protect creditors?
by limiting the amount of assets than can be distributed to shareholders before liquidation
par is usually below anticipated selling price
when selling price exceeds par, the excess is APIC
preferred stock
“first dibs” on dividends to preferred shareholders
common stock
only class of stock with voting rights
additional paid in capital (APIC)
excess of selling price over par value
contributed capital
preferred stock
common stock
additional paid in capital
earned capital
retained earnings
- increased by net income
- decreased by net losses and dividends
IPO-Initial Public Offering
the first time a corporation sells stock to the public
what is the most famous IPO this century?
secondary markets
transactions between two investors buying and selling the company’s stock (these transactions do not affect the corporations accounting records)
employee compensation
stock can also be issued (sold) to employees as part of their compensation package
stock options
allow employees to purchase stock from the company at a predetermined, fixed price
how do you record an issuance of par value stock?
cash x
common stock x
APIC-common stock x
what are the basic rights of common stockholders?
- voting rights
- dividends
- preemptive right
- liquidation
dividends
right to receive share of corporation earnings as their return on investment
preemptive right
right to maintain a proportionate ownership interest when new shares are issued
liquidation
right to a proportionate share of assets upon liquidation
what are the basic rights of preferred stock?
dividend preference
cumulative preference
dividend preference
right to receive a dividend before common stockholders receive anything
“dibs”
once dividends are declared…
you must keep giving them out
all preferred stock is…
outstanding
cumulative preference
any unpaid preferred dividends from the past + current year’s dividend must be paid in full before common shareholders receive any dividends
where do you keep track of cumulative preference?
off books
dividends
distribution of earnings to shareholders
usually cash
once board declares a dividend, it becomes a
liability
what are the requirements of dividends?
sufficient retained earnings and sufficient cash flow
what are the three important dates of cash dividends?
- date of declaration
- date of record
- date of payment
date of declaration
record the liability (increases current liability)
date of record
stockholders as of this date are entitled to receive dividends
date of payment
record distribution of cash (decreases current asset)
retained earnings are reduced when?
ALWAYS at closing (regardless of if the dividend has been paid yet)
issuing new stock increases ________ and reduces ______
contributed capital (# of shares issued) retained earnings (no effect on SHE)
stock dividends decrease _____
retained earnings (DIRECTLY)
small stock dividend
less than 20-25%
how do you record a small stock dividend?
at current market value of stock
what is the purpose of stock dividends?
to issue additional shares of common stock
each stockholder’s % of ownership remains the same
what is the purpose of stock splits?
- decrease market price of stock
- increase number of shares authorized, issued, and outstanding
- decrease (split) the par value
what is the effect of stock splits?
- no change in value of corporation
- no change in total SHE
- no change in retained earnings
