Lesson 24 Flashcards
What are the two types of stock
Preferred and Common
What does preemptive right mean?
the right to maintain one’s percentage ownership in the firm
What does liquidation right mean?
a share in assets upon liquidation of the firm
What are the common stock phases?
- authorized and unissued
- issued and outstanding
- issued and in the treasury
- retired
What is the equation for outstanding shares?
of shares outstanding = # of shares issued - # in treasury
What do registrars and transfer agents do for corporations?
They specialize in providing services for recording and transferring stock.
What is common stock?
it is the residual corporate interest that bears the ultimate risks of loss and receives the benefits of success.
What is preferred stock?
it is stock that gains preferences over common stock by making sacrifices
What are the 4 components of stockholder’s equity?>
- capital stock
- additional paid in capital (APIC)
- retained earnings
- accumulated other comprehensive income
What is contributed (paid in) capital?
it is the total amount paid in on capital stock - the amount provided by stockholders to the corporation for use in the business.
What is earned capital?
is the capital that develops from profitable operations.
What is retained earnings?
it represents the earned capital of the company
What is accumulated other comprehensive income
it reflects the aggregate amount of the other comprehensive income items. it includes items such as unrealized gains/losses
What is stockholders’ (owners’) equity
it represents the cumulative net contribution by stockholders plus retained earnings.
What is residual interest
owners’ interest in the company
what is paid in capital in excess of par
any excess over par value paid in by stockholders in return for the shares issued to them. aka APIC
what is no par value
the issuance of capital stock without a par value
What are the 2 reasons companies would issue a no par stock
- it avoids the contingent liability that might occur if the company issued par value stock at a discount
- the questionable treatment of using par value as a basis for fair value never arises.
what is stated value
the amount per share assigned by the board of directors to no par stock that becomes legal capital per share
what are the 2 allocation methods used to record lump sum sales of stock
- proportional method
- incremental method
proportional method is used when companies know the fair value of each class of stock. true or false
true.
if a company cannot determine the fair value of all classes of securities, what method of allocation is used.
incremental
what is the general rule for the issuance of stock in exchange for non cash property
companies should record stock issued for services or property other than cash at either the fair value of the stock issued or the fair value of the non cash consideration received, whichever is more clearly determinable
what is treasury stock
issued shared that has be reacquired not retired
what is watered stock
the overvaluation of the stockholders’ equity resulting from inflated asset value
what is secret reserves
when a corporation undervalues the recorded assets
what is dividend in arrears
it what happens when directors fail to declare a dividend at a normal date for dividend action, it is then known as “passed”. any passed dividend on cumulative preferred stock is called dividend in arrears.
what is convertible preferred stock
allows stockholders to exchange preferred shares for common stock at a predetermined ratio.
what is callable preferred stock
it permits the corporation at its option to call or redeem the outstanding preferred stock at specified future dates and at stipulated prices.
what is redeemable preferred stock
it has a mandatory redemption period or a redemption feature that the issuer cannot control - they are more like debt (legal obligation to pay) instead of an equity instrument.
In every corporation, what is the one class of stock that represents the basic ownership interest called?
Common stock
Correct. Each corporation has Common Stock, the one class of stock that represents basis ownership interest.
Who does the residual interest in a corporation belong to?
The common stockholders
Correct. The holders of common stock own the residual interest in the corporation and bears the ultimate risk of loss and assets upon dissolution.
Which type of preferred stock generates a dividend in arrears?
Cumulative preferred stock
Correct. Only 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. If the directors fail to declare a dividend at the normal date for dividend action, the dividend is said to have been “passed.” Any passed dividend on cumulative preferred stock constitutes a dividend in arrears.
