Accounting Test 1 Prep (Part 2: Chapter 13)

preferred stockholders have a priority to

1. distribute earnings (dividends) = (a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves). 2. distribute assets in the event of liquidation

3 responsibilities for the controller

1. maintaining the accounting records 2. ensuring an adequate system of internal control 3. preparing financial statements, tax returns, and internal reports

1. the company's anticipated future earnings 2. It's expected dividend rate per share 3. it's current financial position 4. the current state of the economy 5. the current state of the securities market

3 terms for setting a price for a new issue of stock

privately held corporation

A corporation that has only a few stockholders and whose stock is not available for sale to the general public

publicly held corporation

A corporation that may have thousands of stockholders and whose stock is regularly traded on a national securities exchange

Treasury Stock

A corporation's own stock that has been issued and subsequently reacquired from shareholders by the corporation but not retired.

charter

A document that's issued by the state to set forth important terms and features regarding the creation of a corporation

advantages and disadvantages of a corporation compared to a proprietorship and a partnership.

Advantages -Separate legal existence -Limited liability of stockholders -Transferable ownership rights -Ability to acquire capital -Continuous life -Corporation management—professional managers Disadvantages -Corporation management—separation of ownership and management -Government regulations -Additional taxes

incurred

Are corporation expense organization costs are incurred or accrued?

Yes

Are corporations subjected to numerous state and federal regulations?

stock market price

As discussed earlier, par value does not indicate a ________. Therefore, the cash proceeds from issuing par value stock may be equal to, greater than, or less than par value.

Yes, through an investment banking firm

Can a corp also issue the stock indirectly?

Yes

Can a corporation issue common stock directly to their investors?

Yes

Can corporations also issue stock for services (compensation to attorneys or consultants) or for noncash assets (land, buildings, and equipment)?

Par value stock

Capital stock that has been assigned a value per share in the corporate charter

preferred stock

Capital stock that has some preferences over common stock

the cost method

Companies generally account for treasury stock by ______

stockholder's equity section

Companies report paid-in capital and retained earnings in the_____

organization costs

Costs incurred in the formation of a corporation (legal and state fees, and promotional expenditures)

fraud

Creditors have no legal claim on the personal assets of the owners unless _____has occurred.

Yes

Do corporations need a license from each state (in each state) for interstate commerce?

yes

Does a corporation have most of the rights and privileges of a person?

No It also doesn't affect assets, liabilities, and total ownership equity.

Does the transfer of ownership rights between stockholders has any effect on the operating activities of the corp?

By grant of a state charter

How is a corporation formed?

They must have a consent of the state to amend its charter

If a corporation sells all authorized stock, what do they need in order to issue additional shares?

bind

In a partnership, the acts of the owners _______ the partnership

agents (for example, if you owned shares of Nike stock, you would not have the right to purchase inventory for the company unless you were designated as an agent of the corporation)

In contrast, the acts of its owners do not bind the corporation unless such owners are ____ of the corporation

1.False. The liability of stockholders is normally limited to their investment in the corporation. 2.True. 3.False. The separation of ownership and management is a disadvantage of the corporate form of business. 4.False. The authorization of capital stock does not result in a formal accounting entry. 5.False. Many states do not require a par value.

Indicate whether each of the following statements is true or false. ________1. Similar to partners in a partnership, stockholders of a corporation have unlimited liability. ________2. It is relatively easy for a corporation to obtain capital through the issuance of stock. ________3. The separation of ownership and management is an advantage of the corporate form of business. ________4. The journal entry to record the authorization of capital stock includes a credit to the appropriate capital stock account. ________5. All states require a par value per share for capital stock.

To illustrate, assume that on July 1, Mead, Inc. sells for $10 per share 1,000 of the 4,000 shares of its treasury stock previously acquired at $8 per share. The entry is as follows.

Mead does not record a $2,000 gain on sale of treasury stock for two reasons. 1. Gains on sales occurred when assets are sold, treasury stock is not an asset 2. A corporation doesn't realize a gain or suffer a loss from stock transactions with their own stockolders

stock certificate

Proof of stock ownership is evidenced by this.

SEC

Securities and Exchange Commission

controller

The Chief Accounting Officer (senior manager responsible for the analysis of data within an organization) is the _____

authorized stock

The amount of stock that a corporation is authorized to sell as indicated in its charter (A document that's issued by the state to set forth important terms and features regarding the creation of a corporation)

stated value

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

1. Capital stock

They identify the specific sources of paid-in capital, using the following classifications

equivalent price

To comply with the historical cost principle, in a noncash transaction cost is the cash _________

False It's attractive because a stockholder has limited liability and shares of stock are readily transferable.

True or False Buying stock in a corporation is not attractive to an investor.

True

True or False Corporations must pay federal and state income taxes as a separate legal entity (legal entity with detached accountability)

True

True or False? A corporation is subject to the same duties and responsibilities as a person. (follow laws and pay taxes)

True

True or False? In order to transfer an ownership, you must have consent of each order.

False it's never a factor in determining the cost of the assets received in a non-c ash transaction

True or False? the par value of the stock is always a factor in determining the cost of the assets or services received in non-cash transactions.

purpose, ownership

Two common ways to classify corporations are by _____ and by __________

Treasury stock

Under the cost method, the company debits______ for the price paid to reacquire the shares.

Their owners

What do government regulations protect in a corporation?

the investment banker buys the stock from the corp at a stipulated price and resells the shares to investors

What happens if the banking firm underwrites a stock issue

the corporation credits the entire proceeds to common stock

What happens when no-par stock does not have a stated value?

contra stockholders' equity account

What type of account is Treasury Stock

corporations avoids any risk of being unable to sell the shares.

What's the benefit of underwriting?

65% of U.S. companies have treasury stock. Nike purchased 6 million treasury shares

What's the percentage of U.S. companies that have treasury stock

it debits to Retained Earnings any additional excess of cost over selling price.

When a company fully depletes the credit balance in Paid-in Capital from Treasury Stock__________

it usually debits to Paid-in Capital from Treasury Stock the excess of cost over selling price.

When a company sells treasury stock below its cost, _________

Preferred Stock, Common Stock, Paid-in-Capital in Excess of par ---Preferred Stock, and Paid-in Capital in Excess of Par--- Common Stock

When a corporation has more than one class of stock, each paid-in capital account title should identify the stock to which it relates. A company might have the following accounts:

common stock

When a corporation has only one class of stock

Paid-in Capital in Excess of Par—Common Stock

When a corporation issues stock for less than par value, it debits the account

the same amount

When the company disposes of the shares, it credits to Treasury Stock _______it paid to reacquire the shares.

-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 under-priced, 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.

Why would a corporation acquire treasury stock?

corporation

a business organized as a legal entity separate and distinct from its owners under state corporation law

closely held corporations

another term for privately held corporations

No-Par value stock

capital stock to which the charter has not assigned a value

treasurer

has custody of the corporation's funds and is responsible for maintaining the company's cash position

retained earnings

net income that a corporation returns for future use

two types of corporations

profit (McDonalds) and not-for-profit (Salvation Army)

paid-in capital

total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock

Paid-in Capital in Excess of Stated Value—Common Stock.

when the selling price of no-par stock exceeds stated value, the corporation credits the excess to