AC210 Final (Ch.11)

Stock options are expensed

when granted and are recorded at the estimated cost of the options

When should a corporation record a liability for dividends on its cumulative preferred stock?

when the dividends have been declared

An IPO

stands for initial public offering is when a private company goes public

T/F Some states allow corporations to issue no-par value common stock

True, since par value is less meaningful today, some states no longer require a specified legal value per share

The journal entry to record the payment of a previously declared dividend includes a

debit to dividends payable credit to Cash

Earnings per share may be determined by

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

Treasury stock is reported in the

equity section of the balance sheet

A dividend date of record is the date on which the corporation

makes no entry

A corporation may be restricted from paying a dividend if

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

Stock splits and stock dividends cause

total stockholders' equity to remain the same

T/F No gain or loss is reported when treasury stock is reissued because GAAP does not consider transactions between a corporation and its owners to be profit-making activities

True, GAAP does not allow gains or losses to be reported when a corporation reissues its treasury stock

The declaration and payment of a cash dividend ultimately causes a(n)

a decrease in Retained Earnings a decrease in Cash decrease in stockholders' equity

The effect on the accounting equation of declaring a cash dividend includes

a decrease in stockolders' equity an increase in liabilities

A stock dividend

has no effect on total stockholders' equity increases common stock decreases Retained Earnings

Preferred stock is advantageous in that it

has priority over common stock when dividends are declared has priority over common stock at liquidation

An increase in EPS is an indicator of

higher profitability

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

Reports net income relative to average common stockholders

ROE

What reports net income relative to average common stockholders' equity in dollars?

ROE

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

Treasury stock

is shares of stock no longer outstanding is a contra-equity account reduces total stockholders' equity

Retained earnings represent a corporation's cumulative earnings __________ and is shown on the __________

kept and is shown on the balance sheet and statement of retained earnings

Accumulated Deficit

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

A stock dividend causes a stockholders' percentage ownership in a company to

remain the same it reduces Retained Earnings and increases Common Stock, the stockholders receive the same percentage so their percentage ownership remains the same

A higher ROE means

stockholders may enjoy higher returns the company used financial leverage to its stockholders' advantage

What items would be found on a statement of stockholders' equity?

Dividends, Net income, Stock issuances, Additional paid-in capital, treasury stock

What is needed to calculate the P/E ratio?

Earnings per share and stock price since it is calculated by dividing the stock price by EPS

Accounts that are closed into Retained Earnings at year-end

Expense accounts, Dividends, and Revenue Accounts

If Squid Roe's P/E ratio is 12, this means that

Investors are willing to pay 12 times the current year's earnings per share of stock

What would be under the Retained Earnings column of a statement of stockholders' equity?

Net Income Dividends: Preferred Dividends: Common

Earnings per share (EPS) appears

on the income statement

Lenders will sometimes impose dividend restrictions to

prevent the corporation from paying out too much to stockholders

Shares outstanding equals

shares issued - treasury shares

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

debit to dividends credit to dividends payable

The closing entry required at year end, includes a

debit to retained earnings credit to dividends

Dividends Payable is recorded as a credit on the _________

declaration date

The effect of issuing 1,000,000 new shares of common stock will do what to EPS?

decrease

A cash dividend differs from a 2-for-1 stock split in that a cash dividend _______________

decreases current assets decreases retained earnings

A distribution of a company's accumulated prior earnings is a

dividend

Investors who acquire preferred stock...

have preference as to dividends that is cumulative have the right to receive dividends in arrears once dividends are declared

A company's past profits that are kept instead of being paid to stockholders are

retained earnings

Dividends is closed into __________ _____________ at the end of the fiscal year

retained earnings

Investors earn a return on stock investments by

selling the stock for more than its cost receiving dividends

Preferred stock carries priority over common stock both for

dividends and at liquidation

Ima Rich purchased 100 shares of Stockits, Inc.'s $1 par value common stock from Stockits for $5 per share. How would this effect Stockits' financial statements?

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

Stockit, Inc. issues 100,000 shares of the 1,000,000 shares it is allowed to issue. Stockit has repurchased 10,000 of its own shares. The number of shares authorized equals

1,000,000 and has 90,000 shares outstanding

Reasons a company would repurchase its own stock

To have shares of stock to issue when stock options are exercised To reduce the number of outstanding shares To give the impression that the stock is worth buying To buy another company using stock

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

accumulated other comprehensive income

Common stock's par value is

an insignificant amount specified in the corporate charter was introduced to prevent bankrupt companies from unfairly distributing company resources affects how common stock is recorded has become less meaningful because states use other means to prevent stockholders from removing capital from financially distressed companies

Dividends on preferred stock

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

Preferred stockholders

have the right to receive dividends only in the years the board of directors declares dividends

The repurchase of treasury stock will cause earnings per share (EPS) to

increase

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 number of shares outstanding equals the number of shares

issued - the number of shares in treasury