Act 230 Final Exam

Price Earnings Ratio

Stock Price/ Earnings per share

Seasoned Equity Offerings

any future stock issuings

Declaring cash dividends to be paid

board of directors declares on the declaration date. creates legal obligation

Preferred Stock carries priority over common stock

both for dividends and at liquidation

Corporations start raising money

by selling stock to founders of the business or friends and family

Items that require seperate disclosure on the income statement after income from continuing operations are:

discontinued operations and extraordinary items

Stock Dividends/Splits

distributing more shares of companies stock rather than cahs

Privately Held Corporaton

doesnt allow investment by the general public and has fewer stockholders, no SEC

Disadvantages of a Corporation

double taxation and more paperwork

Typical Iventory Ratios

Grocery Stores (perishable): 20.0 Auto Dealership: 3.0 Dept. Stores: 6.0

On declaration date

1) increase dividends account 2) increase dividends payable account 3)will determine which/when stock owners will get the distribution

Paid in capital

amount stockholders have invested in the company

Corporation issued 10,00 shares of $1 par value common stock at $10 per share. Recorded as 100,000 debit to cash and $100,000 credit to common stock. Result of this entry:

Additional paid in capital will be understated. Common stock will be overstated

The Accounting Equation

Assets=Liiabilities + SE

Calculating Issued Shares

Authorized- Unissued

Income Statement

determines cash flows from operating activities

Recording Sale of Treasury Stock

Debit Cash Credit- Treasury Stock and Additonal Paid in capitaal

Recording Large Stock Split

Debit Stock Dividends, Credit to Common Stock

Recording Small Stock Split

Debit Stock Dividends, Credit- Common Stock and Additional Paid in Capital

Recording Issuance of NO par value shares for cASH

Debit- Cash Credit Common Stock

Recording Preferred Stock Issues

Debit- Cash Credit- Preferred stock and Additional Paid in capital

Recording Declaration of Cash Dividend

Debit- Dividends Credit- Dividends payable

Recording Par value stock issueance

Debit- cash Credit- Common Stock Credit- Additional Paid-in Capital fro the portion of cash above par value

Recording Payment of Cash Dividends

Debit- dividends payable credit- cash

Recording Treasury Stock

Debit-treasury stock credit- cash

Calculating Outstanding Shares

Issued - Treasury Stock

Two Primary Advantages of a corporation

Limited Liability and the ability to raise capital and transfer ownership

Earnings Per SHare Equation

Net Income- Dividends on Preferredd stock/ Avg shares of Common stock outstanding

Return on Equity Equation

Net income/ Avg. SE

Se w/ Accumulated Deficit

Total paid in capital- accumulated deficit= SE on balance sheet

Accumulated Deficit

a debit balance in retained earnings. result of losses exceeding income

S Corporation

allows a company to enjoy limited liability as a corporation but taxes as a partnership. smaller companies

retained earnings

amount of earnings a corporation has kept or retained

Invested capital

amount of money paid into a company by its owners

Stock of a Publicly held corporation

can be traded on the NYSE, NASDAQ, OTC regulated by the SEC

Operating Activities

cash receipts and cash payments for transactions relating to revenue and expense activities. include payment of cash on inventory purchases, salaries and rent

Investing Actvities

cash transactions involving the ourchase and sale of long term assets and current investments

Balance Sheet

changes in asset, liability and SE accounts

No par value

common stock that has not been assigned a par value

Stockholders

control the company

3 Characteristics of Preferred Stock

convertible- exhcnaged for common stock redeemable- returned to corp. for set price CUmulative- priority over future dividends, if divs are not given for a year

Ratios that evaluate a company's ability to pay long term debts

debt to equity ratio, times interest earned ratio

Buying shares back

decreases stockholders equity debits treasury stock (increases, and credits cash (decreases)

Articles of incorporation

describe: a) the nature of the firms business activities b) shares of stock to be issued c) the initial board of directors

Retained Earnings

earnings not paid out as dividends to stockholders Net Income- Dividends usuallycredit balance

corporation

entity that is legally separate from its owners and pays its own income taxes

Ratio Analysis is Useful for:

evaluating a company's performance given the level of its other resources, comparing a company's performance with itself over time, comparing two companies of different size in the same industry

Financing Activities

external financing , stockholders and lenders

Requires Seperate disclosure after income from continuing operations

extraordinary gain or loss not resurecting costs, impairment loss or gain on sale of land

Net Income

forecasts future cash flow and future net income

Limited Liability

guarantees that stockholders in a corporation can lose no more than what they invested

Preferred Stock

have first rights ti specified amount in regard to dividends, and get preference in distribution of assets no voting rights usually cumulative

An extraordinary gain or loss is reported seperately because:

it materiality affects current year income, it is unlikely to occur again in the forseeable future, and if it remains in income from continuing operations it distorts earnings

Par Value

legal capital per share of stock when the corporation is first established has no relationship to the market value of common stock is not market value!

Extraordinary gain or loss

material, unusual, infrequent

Return on Market Value of Equity

net income/ market value of equity(ending stock price X shares outstanding)

Stockholders equity accounts

normally have credit balances except in balance sheet

outstanding stock

number of shares held by investors

issued stock

number of shares sold to investors

Where are extraordinary items presented on the financial statements?

on the income statement after discontinued operations

Three Primary Classifications of SE

paid in capital, retained earnings and treasury stock

Venture Capital Firms

provide additional financing for a percentage of ownership in the company

Indirect Method

reporting operating activities in the statement of cash flows, less costly and easy to prepare begins w/ net income

Direct Method

reporting operating activities in the statement of cash flows, more logically presents it ignored transactions that have no cash flow effect like depreciation

Treasury Stock

repurchased shares included as shares issued but not shares outstanding contra account

Stockholder Rights

right to vote, to receive dividends, share in the distribution of assets

value stocks

stocks priced low in relation to current earnings.

growth stocks

stocks whose future earnings investors expect higher.

statement of SE

summarizes the changes in the balance in each SE account over a period of time

treasury stock

the corporations own stock

Initial Public Offering

the first time a corporation issues stock to the public

Why do companies buy back their own stock?

to boost underpriced stock, to distribute surplus cash without paying dividends, to boost earnings per share, and to satisfy employee stock ownership plans

Result of stock split

total assets,liabilites and SE do NOT change

Indirect and Direct Methods

total net cash flows from operating activities are identical

Authorized Stock

total number of shares available to sell

Noncash activities

transactions that do not increase or decrease cash but resulting significant investing and financing activities -purchase of long term assets by issuing debt -purchase of long term assets by issuing stock -conversion of bonds payable into CS -exchange of long term assets

stated value

treated and recorded the same as pra value shares

dividends in arrears

unpaid dividends\not reported as a liability. recorded in the notes to financial statements

Angel Investors

wealthy individuals willing to invest funds on a promising business venture

When to issue stock to the public

when equity financing exceeds $20 million