Accounting 1- Test 6

Government body that the corporation must have approval from to operate

state

What is the government body (local, state, federal) that dictates if stock may be par or stated value stock?

state

Preferred stock

stock that gives its owners certain advantages over common stockholders, such as the right to receive dividends before the common stockholders and the right to receive assets before the common stockholders if the corporation liquidates

Issued stock

stock that has been issued but may or may not be held by stockholders

No-par stock

stock that has no amount (par) assigned to it

Preemptive right

stockholder's right to maintain his or her proportionate ownership in the corporation

Large stock dividend

A stock dividend greater than 20% to 25% of the issued and outstanding stock

Small stock dividend

A stock dividend of less than 20% to 25% of the issued and outstanding stock.

What is the effect of a stock split on stock price?

A stock split also decreases the market price per share of the stock

How is treasury stock recorded?

At cost (what the company paid to reacquire the shares), without reference to par value

What are the various ways partnership profits and losses are allocated?

Based on a stated ratio, based on each partner's capital balance, based on each partner's service, and based on a combination of stated ratios, capital balances, and service

What are two classes of stock

Capital and Preferred Stock

What is the normal balance of Treasury Stock?

DEbit

What entity form is does the accounting for an LLC follow?

Legal entity

What are the 4 reasons a corporation would purchase treasury stock?

Management wants to increase net assets by buying low and selling high, management wants to support the company's stock price, management wants to avoid a takeover by an outside party by reducing the number of outstanding shares that have voting rights, and management wants to reward valued employees with stock

Is the par value of a stock the price at which the stock is bought and sold?

Most companies set par value low to avoid issuing their stock below par. The par value of a stock has no relation to the market value, which is the price at which the stock is bought and sold.

What are the two basic sources of the stockholders' equity section?

Paid-in capital and retained earnings

What is the difference on the accounting for par value stock and stated value stock?

Par value stock is treated the same as stated value stock except for the account names

Disadvantages of partnerships

Partnership agreement may be difficult to formulate. Each time a new partner is admitted, or a new partner withdraws, the business needs a new partnership agreement. Relations among partners may be fragile. Mutual agency and unlimited liability create personal obligations for each partner.

Main advantages that preferred stockholders have over common stockholders

Receive a dividend preference over common stockholders. Receive assets before common stockholders if the corporation liquidates.

How is a stock split recorded?

Recorded in a memorandum entry- an entry in the journal that notes a significant event but has no debit or credit amount

How is the balance sheet presentation for equity different from a sole proprietorship?

Reports a separate capital account for each partner

How is the statement of partners' equity different from the statement of owner's equity?

Shows the changes in each partner's capital account for a specific period of time

Features that make an LLC like a partnership

The LLC can elect not to pay a business income tax. The income of the LLC can be taxed to the members as though they were partners. This is the other big advantage of an LLC as compared to a corporation. Corporations pay a corporate income tax. Then the stockholders pay personal income tax on any dividends they receive from the corporation. This is why we say that corporations face double taxation, the members (owners of the LLC) can participate actively in management of the business, and the accounting for an LLC generally follows the pattern for a partnership.

Features that make an LLC like a corporation

The LLC is a legal entity that required the business to file articles of organization with the state, the business name must include "LLC" or a similar designation to alert the public about the limited liability of the members, and the members are not personally liable for the business's debts. This is one of the chief advantages of an LLC compared to a sole proprietorship or partnership.

Does a corporation have to issue both classes of stock?

There is no limit as to the number or types of classes of stock that a corporation may issue

Why would a corporation issue a stock dividend?

To continue dividends but conserve cash, to reduce the market price per share of its stock, and to reward investors

What are the rights of stockholders?

Vote, Dividends, Liquidation, Preemptive right

Corporation

a business organized under state law that is a separate legal entity

Partnership

a business with two or more owners and not organized as a corporation

S Corporation

a corporation with 100 or fewer stockholders that can elect to be taxed in the same way as a partnership

Stockholder's equity

a corporation's equity that includes paid-in capital and retained earnings

Treasury Stock

a corporation's own stock that it has previously issued and later reacquired

Stock Dividend

a distribution by a corporation of its own stock to its stockholders

Dividend

a distribution of a corporation's earning to stockholders

Underwriter

a firm that handles the issuance of a company's stock to the public, usually assuming some of the risk by agreeing to buy the stock if the firm cannot sell all of the stock to its clients

Limited Liability Company (LLC)

a form of business organization that is neither a partnership nor a corporation but combines the advantages of both

General partnership

a form of partnership in which each partner is a co-owner of the business, with all the privileges and risks of ownership

Limited Liability Partnership (LLC)

a form of partnership in which each partner is protected from the malpractice or negligence of the other partners

Limited partner

a partner who has limited personal liability in the partnership

General partner

a partner who has unlimited personal liability in the partnership

Limited Partnership (LP)

a partnership with at least two classes of partners: one or more general partners and one or more limited partners

Dividend in Arrears

a preferred stock dividend is in arrears if the dividend has not been paid for the year and the preferred stock is cumulative

Par value

an amount assigned by a company to a share of its stock

Memorandum entry

an entry in the journal that notes a significant even, but has no debit or credit amount

Stock split

an increase in the number of issued and outstanding shares of stock coupled with a proportionate reduction in the par value of the stock

Advantages of a corporation

corporations can raise more money than a proprietorship or partnership, a corporation has a continuous life, the transfer of corporate ownership is easy, there is no mutual agency among the stockholders and the corporation, and stockholders have limited liability and disadvantages

3 dates involved in declaring and paying dividends

declaration date, date of record, and payment date

Dissolution

ending of a partnership

Retained earnings

equity earned by profitable operations of a corporation that is not distributed to stock holders

Mutual agency

every partner can bind the business to a contract within the scope of the partnership's regular business operations

What are 3 types of partnerships?

general, limited, limited liability

Outstanding stock

issued stock in the hands of stockholders

What are the owners of and LLC called

members

Stated value stock

no-par stock that has been assigned an amount similar to par value

Disadvantages of a corporation

ownership and management are often separated, the earnings of a corporation may be subject to double taxation, government regulation is expensive, and start-up costs are higher than other business forms.

Stock certificate

paper evidence of ownership in a corporation

Partnership advantages compared to sole proprietorship

partnership can raise more capital partnership brings together the abilities of more than one person partners working well together can add more value than by working alone & corporations

Partnership advantages compared to corporations

partnership is less expensive to organize than a corporation, which requires a charter from the same there's no double taxation-partnership income is taxed only to the partners as individuals .

Noncumulative Preferred Stock

preferred stock whose owners do not receive passed dividends

Cumulative Preferred Stock

preferred stock whose owners must receive all dividends in arrears plus the current year dividend before the corporation pays dividends to the common stockholders

Paid-in capital

represents amounts received from the stockholders of a corporation in exchange for stock

Paid-in capital in excess of par

represents amounts receives from stockholders in excess of par value

Common stock

represents the basic ownership of a corporation

Capital stock

represents the individual's ownership of the corporation's capital

What account is dividends closed to

retained earnings

Premium

the amount above par at which a stock is issued

Issue Price

the amount that the corporation receives from using stock

Partnership Agreement

the contract between partners that specifies such items as the name, location, and nature of the business, duties of each partner, and the method of sharing profits and losses among the partners

Authorized stock

the maximum number of shares of stock that the corporate charter allows the corporation to issue

Legal Capital

the portion if stockholders' equity that cannot be used for dividends

Unlimited personal liability

when a partnership (or a sole proprietorship) cannot pay its debts with business assets, the partners (or the proprietor) must use personal assets to meet the debt