Chapter 10

Retained earnings represents:

All net income, less all dividends, since the company began operations.

retained earnings

An amount earned by a corporation and not yet distributed in dividends to stockholders

How companies seek investment? + differences

Angel investors- wealthy investors like Shark Tank Venture capital firms- provide additional funding and business expertise IPOs- first time a corporation issues stocks to the general public

How do you record a small stock dividend?

At market value, credit common stock and additional paid-in capital, debit stock dividends

How do you record a large stock dividend?

At par value, credit common stock, debit stock dividends (decreases retained earnings)

Retained Earnings Equation

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings Net Income-Dividends

On the date of dividend declaration, which of the following entries is recorded?

Debit Dividends; Credit Dividends Payable.

What are the 3 dividend dates? + definition of each

Declaration date- date on which board of directors declares the cash dividend to be paid, cash dividend is recorded Record date- specific date on which the company will determine who will receive the dividend (registered owners of stock) Payment date- date of actual cash distribution

Value vs. Growth Stocks

Growth stocks are those companies that are considered to have the potential to outperform the overall market over time because of their future potential Value stocks are classified as companies that are currently trading below what they are really worth and will thus provide a superior return.

Do you have to record a stock split?

No

Stock dividend vs stock split

Stock dividend-a dividend payment made in the form of shares rather than cash Stock split- a large stock dividend that includes a reduction in the par or stated value per share

The PE ratio is higher for _ stocks

growth

Is net income affected by sale of treasury stock?

no

Large stock dividends relate to _ value, while small stock dividends relate to ___ value

par; market

Stockholders Rights

right to vote, right to receive dividends, right to share in the distribution of assets

Outstanding stock

share issued and held by investors

Issued stock

shares actually sold (= outstanding + treasury)

Authorized stock

shares available to sell (=issued and unissued)

What does it mean for preferred stock to be redeemable?

shares can be returned to the corporation at a fixed price

Treasury stock

shares issued and repurchased by the company

What does it mean for preferred stock to be cumulative?

shares receive priority for future dividends if dividends are not paid in a given year(addsupeachyear)

Paid-in capital

the amount stockholders have invested in the company

par value

the legal capital per share of stock that's assigned when the corporation is first established no relationship with market value *relates to common stock

Treasury stock is a ______ account

contra equity

Features of preferred Stock

convertible, redeemable, cumulative

Retained earnings has a normal _____ balance

credit

When treasury stock is purchased, what is the effect on total shareholders' equity?

decrease

Dividend yield

dividends per share/stock price

Preferred stock generally (has/does not have) ______ voting rights and (has/does not have) ______ preference as to dividends.

does not have; has

An accumulated deficit is:

A debit balance in retained earnings.

Corporation pros and cons

Pro: Limited liability (stockholder can't lose more than amount invested), ability to raise capital and transfer ownership Con: Additional taxes, more paperwork

Preferred stock can have features of __ and __

SE and liabilities

Which of the following shows activity over a period of time?

Statement of stockholders' equity.

Why companies buy back their own stock?

To boost underpriced stock To distribute surplus cash without paying dividends To boost earnings per share To satisfy employee stock ownership plans

Treasury Stock

a company's own issued stock that it has repurchased

What does it mean for preferred stock to be convertible?

can be exchanged for common stock