Lesson 24

Question 1

What are the two types of stock

Answer 1

Preferred and Common

Question 2

What does preemptive right mean?

Answer 2

the right to maintain one’s percentage ownership in the firm

Question 3

What does liquidation right mean?

Answer 3

a share in assets upon liquidation of the firm

Question 4

What are the common stock phases?

Answer 4

1. authorized and unissued
2. issued and outstanding
3. issued and in the treasury
4. retired

Question 5

What is the equation for outstanding shares?

Answer 5

of shares outstanding = # of shares issued - # in treasury

Question 6

What do registrars and transfer agents do for corporations?

Answer 6

They specialize in providing services for recording and transferring stock.

Question 7

What is common stock?

Answer 7

it is the residual corporate interest that bears the ultimate risks of loss and receives the benefits of success.

Question 8

What is preferred stock?

Answer 8

it is stock that gains preferences over common stock by making sacrifices

Question 9

What are the 4 components of stockholder’s equity?>

Answer 9

1. capital stock
2. additional paid in capital (APIC)
3. retained earnings
4. accumulated other comprehensive income

Question 10

What is contributed (paid in) capital?

Answer 10

it is the total amount paid in on capital stock - the amount provided by stockholders to the corporation for use in the business.

Question 11

What is earned capital?

Answer 11

is the capital that develops from profitable operations.

Question 12

What is retained earnings?

Answer 12

it represents the earned capital of the company

Question 13

What is accumulated other comprehensive income

Answer 13

it reflects the aggregate amount of the other comprehensive income items. it includes items such as unrealized gains/losses

Question 14

What is stockholders’ (owners’) equity

Answer 14

it represents the cumulative net contribution by stockholders plus retained earnings.

Question 15

What is residual interest

Answer 15

owners’ interest in the company

Question 16

what is paid in capital in excess of par

Answer 16

any excess over par value paid in by stockholders in return for the shares issued to them. aka APIC

Question 17

what is no par value

Answer 17

the issuance of capital stock without a par value

Question 18

What are the 2 reasons companies would issue a no par stock

Answer 18

1. it avoids the contingent liability that might occur if the company issued par value stock at a discount
2. the questionable treatment of using par value as a basis for fair value never arises.

Question 19

what is stated value

Answer 19

the amount per share assigned by the board of directors to no par stock that becomes legal capital per share

Question 20

what are the 2 allocation methods used to record lump sum sales of stock

Answer 20

1. proportional method
2. incremental method

Question 21

proportional method is used when companies know the fair value of each class of stock. true or false

Answer 21

true.

Question 22

if a company cannot determine the fair value of all classes of securities, what method of allocation is used.

Answer 22

incremental

Question 23

what is the general rule for the issuance of stock in exchange for non cash property

Answer 23

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

Question 24

what is treasury stock

Answer 24

issued shared that has be reacquired not retired

Question 25

what is watered stock

Answer 25

the overvaluation of the stockholders’ equity resulting from inflated asset value

Question 26

what is secret reserves

Answer 26

when a corporation undervalues the recorded assets

Question 27

what is dividend in arrears

Answer 27

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.

Question 28

what is convertible preferred stock

Answer 28

allows stockholders to exchange preferred shares for common stock at a predetermined ratio.

Question 29

what is callable preferred stock

Answer 29

it permits the corporation at its option to call or redeem the outstanding preferred stock at specified future dates and at stipulated prices.

Question 30

what is redeemable preferred stock

Answer 30

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.

Question 31

In every corporation, what is the one class of stock that represents the basic ownership interest called?

Answer 31

Common stock
Correct. Each corporation has Common Stock, the one class of stock that represents basis ownership interest.

Question 32

Who does the residual interest in a corporation belong to?

Answer 32

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.

Question 33

Which type of preferred stock generates a dividend in arrears?

Answer 33

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.