Chapter 10: Stockholders' Equity

How do we record the issuance of preferred stock?

Debit cash and credit preferred stock and additional paid in capital.

How do we record the issuance of treasury stock?

Debit treasury stock and credit cash. Par value has no effect on the entry.

What do the articles of incorporation describe?

The nature of the firm's business activities, the shares to be issued, and the composition of the initial board of directors.

What is outstanding stock?

The number of shares held by investors. Issued and outstanding stock are the same amounts as long as the corporation has not repurchased by any of its own shares.

What is issued stock?

The number of shares that have been sold to investors. A company usually does not issue all of its authorized stock.

What is additional paid-in capital?

The portion of the cash proceeds above par value.

What four rights do stockholders have?

The right to vote, to receive dividends, to share in the distribution of assets, and the preemptive right.

How do we record the issuance of stated value stock?

The same way as par value stock.

What is authorized stock?

The total number of shares available to sell, stated in the company's articles of incorporation.

Most firms do not considering going public until what?

Their equity financing needs exceed $20 million.

What do the convertible, redeemable, and cumulative features of preferred stock mean?

They mean that preferred shares can be exchanged for common stock, returned to the corporation at a fixed price, and receive priority for future dividends, if dividends are not paid in a given year.

What are four reasons corporations repurchase their stock?

To boost under-priced stock, to distribute surplus cash without paying dividends, to boost earnings per share, to satisfy employee stock ownership plans.

What are the main roles of the board of directors?

To establish corporate policies and to appoint officers who manage the corporation.

What are dividends in arrears?

Unpaid dividends on cumulative preferred stock.

Who are angel investors?

Wealthy individuals in the business community willing to risk investment funds on a promising business venture.

How do we record the issuance of no-par value stock?

Debit cash and credit common stock.

What is an accumulated deficit?

A debit balance in Retained Earnings.

What's the difference between a publicly held corporation and a privately held corporation?

A publicly held corporation allows investment by the general public, whereas a privately held corporation does not, is regulated by the SEC, whereas a privately held corporation is not, and generally has more stockholders.

What are the two disadvantages of a corporation?

Additional taxes and more paperwork.

What are seasonal equity offerings (SEOs)?

All stock issues after the first.

What are limited liability companies (LLCs) and limited liability partnerships (LLPs)?

Business forms that offer limited liability, avoid double taxation, and have no limits on the number of owners as in an S corporation.

What is no-par value stock?

Common stock that has not been assigned a par value.

What is the ability to raise capital?

Corporations sell ownership interest in the form of shares of stock, hence, ownership rights are easily transferred. An investor can sell his or her shares of stock at any time without affecting the structure of the corporation.

How do we record the issuance of par value stock?

Debit cash and credit common stock for par value and additional paid-in capital for the difference.

How do we calculate earnings per share?

Divide earnings by the number of shares outstanding.

What are venture capital firms?

Firms that provide additional financing, often in the millions, for a percentage ownership in the company.

What are the stages of equity financing?

First, an investment is made by the founders of the business. Second, an investment is made by friends and family of the founders. Next, an outside investment is made by angel investors and venture capital firms. Last, an initial public offering (IPO) is made.

What does an S corporation allow?

It allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership.

What does the preemptive right allow?

It allows a stockholder to maintain his or her percentage share of ownership when new shares are issued. Most companies have dropped this right.

What is one of the major restrictions of an S corporation?

It cannot have more than 100 stockholders.

What does limited liability guarantee?

It guarantees that stockholders in a corporation can lose no more than the amount they invested in the company, even in the event of bankruptcy.

What does mutual agency mean?

It means that individual partners in a partnership each have the power to bind the business to a contract.

What does the Model Business Corporation Act serve to do?

It serves as a guide to states in the development of their corporate statutes.

What are the three advantages of a corporation?

Limited liability, ability to raise capital, and lack of mutual agency.

What are the three primary classifications of stockholders' equity?

Paid-in capital, retained earnings, and treasury stock.

What is a disadvantage of preferred stock to the stockholder?

Preferred stock does not have voting rights, leaving control of the company to common stockholders.

What is preferred stock?

Stock with preference over common stock in the payment of dividends and the distribution of assets.

What is the line of authority for a typical corporation?

Stockholders are on top, followed by the board of directors, the CEO, and the following 5 categories which are all on the same page: vice president management, vice president marketing, CFO, legal counsel, and vice president human resources.

What is the right to vote?

Stockholders can vote on certain matters that come before the stockholders, such as electing the board of directors.

What is the right to receive dividends?

Stockholders share in profits when the company declares dividends.

What is the right to share in the distribution of assets?

Stockholders share in the distribution of assets if the company is liquidated. Stockholders receive their shares after creditors and preferred stockholders are paid.

What is the retained earnings amount?

The amount of earnings the corporation has kept or retained-that is, the earnings not paid out in dividends.

What is the paid-in capital amount?

The amount stockholders have invested in the company.

What is treasury stock?

The corporation's own stock that it has reacquired.

What is the payment date?

The date of actual cash distribution of dividends.

What is the record date?

The date on which the company will determine the registered owners of stock and therefore who will receive dividends.

What is the declaration date?

The day on which the board of directors declares the cash divided to be paid.

What is an IPO?

The first time a corporation issues stock to the public.

What is the stated value?

The legal capital assigned per share to no-par stock.

What is par value?

The legal capital per share of stock that's assigned when a corporation is first established.

What does an organization chart trace?

The line of authority for a typical corporation.