Accounting - Chapter 13

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.

Authorized Stock

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

Legal Capital

The portion of stockholders' equity that cannot be used for dividends.

Issue Price

The price the stock initially sells for the first time it's sold.

No-par Stock

Stock that has no amount (par) assigned to it - has an advantage because there is no confusion between the par value and market value of the stock.

Preemptive Right

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

No personal liability of the owner(s) for business's debts:

Stockholders are not personally liable for the debts of the corporation.

Lack of mutual agency

Stockholders of the corporation are not mutual agents of the business. Stockholders cannot bind the business to a contract.

Premium

The amount above par at which a stock is issued.

Paid-In Capital

(Also called contributed capital), represents amounts received from the stockholders of a corporation in exchange for stock.

Stockholders' Rights:

1. Vote 2. Dividends 3. Liquidation 4. Preemptive Right

Corporation

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

Separate legal entity

A corporation is a separate legal entity. It is organized independently of its owners.

Stockholders' Equity

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

Treasury Stock

A corporation's own stock that is has previously issued and later reacquired.

Prior-Period Adjustment

A correction to Retained Earnings for an error of an earlier period.

Stock Dividend

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

Dividend

A distribution of a corporation's earnings 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.

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.

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.

Earnings per Share (EPS)

Amount of a company's net income (loss) for each share of its outstanding common stock. (Net Income - Preferred Dividends/ Weighted average number of common shares outstanding)

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 event, but has no debit or credit amount.

Corporations: Advantages

Can raise more money than a proprietorship or partnership, has continuous life, transfer of corporate ownership is easy, no mutual agency, and limited liability.

Taxation

Corporations are separate taxable entities. The corporation pays the income tax on the business earnings and is also responsible for paying payroll taxes on employee salaries and wages.

Capital accumulation

Corporations can raise more money than sole proprietorships and partnerships - completed through an initial public offering (IPO).

Indefinite life

Corporations have indefinite life. They can exist until the business decides to terminate. Withdrawal or death of an owner does not cause termination.

Number of owners

Corporations have one or more owners (called stockholders).

Deficit

Debit balance in the Retained Earnings account.

Retained Earnings

Equity earned by profitable operations of a corporation that is not distributed to stockholders.

Outstanding Stock

Issued stock in the hands of the stockholders.

Issued Stock

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

A corporation may purchase treasury stock for several reasons:

Management wants to increase net asset by buying low and selling high, they want to support the company's stock price, wants to avoid a takeover by an outside party (therefore reducing the number of outstanding shares that have voting rights), or wants to reward valued employees with stock.

P/E Ratio:

Market price per share of common stock/earnings per share.

Rate of Return on Common Stockholders' Equity:

Net income - Preferred dividends/ Average common stockholders' equity

Stated Value Stock

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

Corporations: Disadvantages

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

Stock Certificate

Paper evidence of ownership in a corporation - issued when stockholders buy the stock. Showing the following: company name, stockholder name, and number of shares owned by the stockholder.

Preferred Dividend Calculation:

Preferred Dividend = Outstanding shares x Par value x Preferred dividend rate

Noncumulative Preferred Stock

Preferred stock k 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 in Excess of Par

Represents amounts received from stockholders in excess of par value.

Common Stock

Represents the basic ownership of a corporation. (Class A has the right to vote, Class B may be non voting)

Capital Stock

Represents the individual's ownership of the corporation's capital.

Appropriation of Retained Earnings

Restriction of a portion of retained earnings that is recorded by a journal entry.

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.

Why issue stock dividends?

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

Dividends are only paid on outstanding shares (T/F)

True.

Treasury stock is a contra equity account (T/F)

True.

When stock is issued at premium, common stock is always recorded at the par value (T/F)

True.