ACC chapter 11

Three dates are important in connection with dividends:

(1) the declaration date, (2) the record date, and (3) the payment date.

the primary objectives in accounting for the issuance of common stock are

(1) to identify the specific sources of paid-in capital and (2) to maintain the distinction between paid-in capital and retained earnings.

return on common stockholders' equity(ROE)

(net income-preferred dividends)/(average common stockholders' equity)--*take the year asked and the year before, add them up and divide by 2*

A corporation may acquire treasury stock for various reasons:

1. To reissue the shares to officers and employees under bonus and stock compensation plans. 2. To increase trading of the company's stock in the securities market. Companies expect that buying their own stock will 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 acquiring other companies. 4. To reduce the number of shares outstanding and thereby increase earnings per share.

the date the board of directors formally authorizes the dividend and announces it to stockholders. -The declaration of a cash dividend commits the corporation to a binding legal obligation. -must record this obligation' cash div....XX div payable....XX

declaration date

entity exists with the ultimate goal of making a profit for its shareholders

for profit

two classifications of corporations:

for purpose and by ownership

capital stock that has not been assigned a value in the corporate charter. -fairly common today

no par-value stock

entity exists with the ultimate goal of something other than earning a profit(such as a charitable organization)

not for profit

payout ratio(percentage)

total cash div declared to common shareholders/net income

a corporation's own stock that has been reacquired by the corporation and is being held for future use.

treasury stock

-Under the cost method, companies increase (debit) Treasury Stock by the price paid to reacquire the shares. -Treasury Stock decreases by the same amount when the company later sells the shares. -treasury stock is a contra-stockholders equity account -when company resells the stock, credit treasury

true

Preferred stockholders have the right to share in the distribution of corporate income before common stockholders.

true

the authorization of common stock does not result in a normal accounting entry

true

the cumulative effect of the declaration and payment of a cash dividend on a company's financial statements is to decrease both stockholders' equity and total assets.

true

the issuance of common stock affects only paid-in capital accounts.

true

allows for legal treatment as a corporation but tax treatment as a partnership-no double taxation

S corporation

-is a distribution by a corporation to its stockholders on a pro rata (proportional to ownership) basis. -can take four forms: cash, property, scrip (promissory note to pay cash), or stock. -they are not paid on treasury stock and paid only on outstanding shares -are generally reported quarterly as a dollar amount per share

dividend

(Common stock = Number of shares issued × Par value per share)

equation

-dividends on common shares are normally expressed as a: -dividends on preferred shares are normally expressed as a:

-dollar amount per share -percentages of the par value

accounts listed under paid-in capital(in this order):

-preferred stock -common stock -paid in capital in excess of par value-preferred stock -paid in capital in excess of par value-common stock

the characteristics of a corporaation:

-separate legal entity -limited liability of stockholders -transferable ownership rights -ability to acquire capital -continuous life -corporation management -government regulation

The stockholders' equity section of a corporation's balance sheet consists of two parts:

(1) paid-in (contributed) capital and (2) retained earnings (earned capital).

disadvantages of a corp:

-corporation management--separation of ownership and management -government regulations -additional taxes

the number of shares a corporation can issue as indicated in the state charter

authorized shares

the amount of stock that a corporation is authorized to sell as indicated in its charter.

authorized stock

- a pro rata (proportional to ownership) distribution of cash to stockholders -must have retained earnings, adequate cash, declared dividends

cash dividends

two types of stock:

common and preferred

the number of shares a corporation has sold to shareholders, including shares that have been repurchased as treasury stock(treasury stock is still considered issued)

issued shares

if a company has no treasury stock:

issued shares=outstanding shares

the number of shares a corporation has sold to shareholders and that is still held by shareholders( treasury stock is not considered outstanding)

outstanding stock/shares

the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock. -a.k.a contributed capital

paid in capital

capital stock that has been assigned a value per share in the corporate charter. -many states do not require this today

par value stock

the date cash dividend payments are made to stockholders -record: div pay.....XX cash....................XX -payment of the dividend on the payment date reduces both current assets and current liabilities, but it has no effect on stockholders' equity.

payment date

has contractual provisions that give it preference or priority over common stock in certain areas.

preferred stock

the date when the company determines ownership of the outstanding shares for dividend purposes. -NO journal entry

record date

net income that a corporation retains in the business. -a.k.a earned capital

retained earnings

the amount per share assigned by the board of directors to no-par stock

stated value