Financial Accounting Chapter 11- Self Study

What are the principal differences between common stock and preferred stock?

Common stock and preferred stock both represent ownership of the corporation. Common stock signifies the basic residual ownership; preferred stock is ownership with certain privileges or preferences. Preferred stockholders typically have a preference as to dividends and as to assets in the event of liquidation. However, preferred stockholders generally do not have voting rights.

Identify the events that result in credits and debits to retained earnings.

Debits: 1. net loss 2. prior period adjustments for overstatement of net income 3. cash and stock dividends 4. some disposals of treasury stock Credits: 1. net income 2. prior period adjustments for understatement of net income.

How are dividends in arrears presented in the financial statements?

Dividends in arrears are disclosed in the notes to the financial statements.

Preferred stock may be cumulative. Discuss this feature.

Some preferred stocks possess the additional feature of being cumulative. Most preferred stock is cumulative—preferred stockholders must be paid both current-year dividends and unpaid prior year dividends before common stockholders receive any dividends.

A cash dividend.....

decreases assets, retained earnings, and total stockholders' equity. A stock dividend decrease retained earnings, increase paid-in capital, and has no effect on total assets and total stockholders' equity.

Jan Kimler maintains that adequate cash is the only requirement for the declaration of a cash dividend. Is Jan correct?

no

Three dates are important in connection with cash dividends. Identify these dates, and explain their significance to the corporation and its stockholders.

-Declaration date is the date when the board of directors formally declares the cash dividend and announces it to stockholders. The declaration commits the corporation to a binding legal obligation that cannot be rescinded. -Record date is the date that marks the time when ownership of the outstanding shares is determined from the stockholder records maintained by the corporation. The purpose of this date is to identify the persons or entities that will receive the dividend. -Payment date is the date on which the dividend checks are mailed to the stockholders.

Identify the accounting entries that are made for a cash dividend and the date of each entry.

-Declaration date—Debit Cash Dividends and Credit Dividends Payable. -No entry is made on the record date. -Payment date—Debit Dividends Payable and Credit Cash.

The corporate charter of Luney Corporation allows the issuance of a maximum of 100,000 shares of common stock. During its first two years of operations, Luney sold 70,000 shares to shareholders and reacquired 7,000 of these shares. After these transactions, how many shares are authorized, issued, and outstanding?

-Luney Corporation is authorized to sell Entry field with incorrect answer shares. -Luney has Entry field with incorrect answershares issued. -Luney has Entry field with incorrect answer shares outstanding

What are the basic ownership rights of common stockholders in the absence of restrictive provisions?

-vote in the election of board of directors and in corporate actions that require stockholders' approval. -share in corporate earnings through the receipt of dividends. -keep the same percentage ownership when new shares of common stock are issued (the preemptive right). -share in assets upon liquidation.

For what reasons might a company like IBM repurchase some of its stock (treasury stock)?

A corporation may acquire treasury stock: (1) to reissue the shares to officers and employees under bonus and stock compensation plans, (2) to increase trading of the company's stock and signal that management believes the stock is underpriced, which they hope will enhance its market price, (3) to have additional shares available for use in the acquisition of other companies, (4) to reduce the number of shares outstanding and thereby increase earnings per share, (5) to eliminate hostile investors, perhaps to avoid a takeover.

What is a prior period adjustment, and how is it reported in the financial statements?

A prior period adjustment is a correction of an error in previously issued financial statements. The correction is reported in the current year's retained earnings statement as an adjustment of the beginning balance of retained earnings.