AC 210- chapter 11

earnings per shares equals

net income divided by the average shares of common stock outstanding

debt financing

when a company needs a large amount of long-term financing it may borrow from lenders

Why might a company issue a stock dividend?

-to demonstrate commitment to stockholders while conserving cash during difficult times -to signal an expectation of significant future earnings -to lower the market price per share

Dilution Solutions, Inc. repurchased 1,000 shares of its $1 par value common stock for $5,000. The journal entry to record this transaction includes:

a $5,000 debit to treasury stock

the entry to record the issuance 100 shares of 3%, $100 par value preferred stock at a price of $105 is recorded with a debit to:

cash of $10,500 and credit to preferred stock of $10,000 and additional paid-in capital -preferred of $500

stock splits

cause the par value per share to change

stock splits and stock dividends

cause total stockholders' equity to remain the same

an advantage of ______ financing is that interest expense is tax deductible

debt

all transactions between a company and its stockholders do not affect the income statement

dividends do not affect net income

payment date

dividends payable is decreased

When a stockholder sells its shares to another person for more than its original cost, the corporation ______.

does not make a journal entry

EPS is a good predictor of

future stock prices

stock dividend

similar to a stock split, a stock dividend also distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders

date of record

stock records are finalized to determine which stockholders are to receive payment

contributed capital of $1,000,000 is found on the _________ section of the _________

stockholders' equity; balance sheet

declaration date

the board of directors officially approves a dividend

outstanding shares equal:

the number of shares issued minus the number of shares repurchased by the company

equity financing

when a company needs a large amount of long-term financing it may issue stock

income investment

would pay the most dividend

During the year, Lox, Stock and Bagel Inc.'s net income was $60,000. Its average stockholders' equity was $240,000, and it had 120,000 shares outstanding the entire year. Its stock was selling for $10 per share. Its P/E ratio equals ___________

- 20.00 - (10/(60,000/120,000))

Mega Corporation repurchased 1,000 shares of its $1 par value common stock for $8,000. The effect of this transaction on the accounting equation includes a(n)______.

- decrease in assets - decrease in stockholders' equity

investors acquire stock because they expect a return on their investment from:

- increase in stock prices - distribution of dividends

Atomic, Inc. had 100,000 shares authorized, and 10,000 shares issued and outstanding of its $2 par value common stock. At December 31, Common Stock equaled $20,000 and total stockholders' equity equaled $100,000 prior to a 2-for-1 stock split. As a result of a 2-for-1 stock split,

- stockholders' equity equals $100,000 - par value equals $1 - the number of shares outstanding equals 20,000 - the common stock equals $20,000

Dividends on preferred stock ______.

-may be paid at a fixed rate, such as 7% -are paid before dividends on common stock -are more attractive than common stock dividends to investors who want a stable income

Earnings per share (EPS) may be determined by ______.

- dividing net income less preferred dividends by the average common shares outstanding - dividing the stock price by the P/E ratio

retained earnings are:

- increased by net income - decreased by dividends - sometimes called earned capital - all of a company's earnings kept rather than distributed to stockholders

accumulated deficit:

- indicates accumulated net losses - means that retained earnings has a debit balance - is shown in parentheses on the balance sheet

Under IFRS, if the company issuing preferred stock is contractually obligated to pay dividends or to redeem the shares at a future date, then the preferred stock is classified as

a liability

stock dividends

require a journal entry

line items that would be found on the statement of stockholders' equity but not on the statement of retained earnings:

- additional paid-in capital - common stock - treasury stock

What is the effect on the accounting equation of the entry to record the payment of dividends that were previously declared?

- assets decrease - liabilities decrease

preferred stock:

- is useful for raising capital without reducing common stockholders' control - has preference as to dividends

Before the board of directors declares a cash dividend, it should consider whether _____.

-there are sufficient retained earnings -there is sufficient cash

Items such as unrealized gains and losses from pensions, foreign currencies or financial investments are reported as

accumulated other comprehensive income

Cumulative preferred stock is entitled to receive current dividends plus "dividends in _____" before any future common dividends can be paid.

arrears

the effect of issuing 1,000,000 new shares of common stock will _______ EPS

decrease

a share of stock that has a dividend rate specified on it must be

preferred stock

Corporations will declare stock dividends (or stock split) in order to

reduce the market price of a share of stock and make it more attractive to some investors

ROE

reports net income relative to average common stockholders' equity

treasury stock

shares that were previously issued to and owned by stockholders but have been reacquired and now held by the corporation

A stock dividend ______.

-decreases retained earnings -has no effect on total stockholder's equity -increases common stock

Wok N Roll, Inc. began on January 1, 2017 by issuing 100,000 shares of $1 par value common stock and 1,000 shares of $100 par value, 5%, cumulative preferred stock. No dividends were declared in 2017 or 2018. In 2019, Wok N Roll declared and paid a $.50 dividend to its common stockholders. Assuming all shares originally issue are outstanding, the total dividend declared and paid in 2019 equals

- $65,000 - (cumulative preferred stock receives 1,000 shares x $100 x 5% x 3 years and common stock receives 100,000 shares x $.50)

When Diva, Inc., declared a $10,000 cash dividend, it recorded a debit to ____ and a credit to Dividends _____.

Dividends; Payable

the date of record is

The cut-off date established by a company in order to determine which shareholders are eligible to receive a dividend or distribution.

treasury stock is:

a contra equity account

any difference between the cost of treasury stock and the price of when it is re-issued is recorded as:

a debit to additional paid-in capital when the price is below the cost - GAAP does not allow gains or losses to be reported when a company reissues its treasury stock

A common stock's _____ value is typically set at a low amount and has little meaning today other than being used to by some states to assess fees.

par

A corporation _________ have a legal obligation to pay dividends

DOES NOT

Ima Rich purchased 100 shares of Stockits, Inc.'s $1 par value common stock for $5 per share. Which statements are true regarding the effect of this transaction on Stockits' financial statements?

- Stockholders' equity on the balance sheet increases - the financing activities section of the statement of cash flows increases

a corporation may be restricted from paying a dividend if:

- a creditor's loan is violated - the dividend is greater than the amount of retained earnings

comparing EPS across companies is not advised because:

- number of outstanding shares may vary - accounting methods used may vary

Dividends are reported on:

- on the statement of retained earnings - the ending retained earnings balance is found on the balance sheet

stock options:

- provide the holder with the option to purchase stock at a specified price at a specified time - are often given to employees as part of their compensation

the risk from financial leverage:

-increases when the cost of borrowing is greater than the return -decreases when a company issues new shares of stock

The entry to record the issuance of preferred stock is ______.

-similar to the issuance of common stock -increases stockholders' equity

Refurbish Inc reissued 1,000 shares of its treasury stock for $10,000. Prior to the reissuance, the Treasury stock balance was $12,000, which included the $8,000 cost of the 1,000 shares reissued. After recording this transaction,

-stockholders' equity on the balance sheet will be $10,000 higher -treasury stock on the balance sheet will equal $4,000