Ch. 11 Financial Accounting

large stock dividend

A stock dividend greater than 20% to 25% of the issued stock - price assigned to the dividend is the par or stated value

outstanding stock

capital stock that has been issued and is being held by stockholders

By-laws

establish the internal rules and procedures for conducting the affairs of the corporation

stated value

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

stock dividend

a pro rata distribution to stockholders of the corporation's own stock - Results in a decrease in retained earnings and an increase in paid-in capital - does not increase total stockholders' equity or total assets (unlike cash dividend) - changes the composition of stockholders' equity b/c they transfer to paid-in-capital a portion of retained earnings, but total stockholders' equity remains the same

stockholders' equity statement

a statement that shows the changes in each stockholders' equity account and in total stockholders' equity during the year

par value stock

capital stock that has been assigned a value per share in the corporate charter - usually an immaterial amount - no relationship with market price

corporation

a business organized as a legal entity separate and distinct from its owners under state corporation law - classified by purpose (profit vs not for profit) and by ownership (publicly held vs privately held)

double taxation

a corporation pays income taxes on its earnings, and when dividends are distributed to stockholders, the stockholders pay taxes a second time on the corporate dividends they receive

privately held corporation

a corporation that has only a few stockholders and whose stock is not available for sale to the general public - generally smaller than publicly held

publicly held corporation

a corporation that may have thousands of stockholders and whose stock is regularly traded on a national securities exchange ex: IBM, General Electric

dividend

a corporation's distribution of cash or stock to its stockholders on a pro rata (proportional) basis - can take 4 forms -- cash, property, scrip (promissory note to pay cash), stock .. cash and stock dominate - generally reported quarterly as a dollar amount per share - amount and timing are also important to consider - declaration date, record date, payment date (2-4 weeks between each date)

treasury stock

a corporation's own stock that has been issued and subsequently reacquired from shareholders by the corporation but not retired - uses the cost method for the price paid to reacquire the shares - contra stockholder's equity account (acquisition of treasury stock reduces stockholders' equity) Dr. Treasury Stock, Cr. Cash

deficit

a debit balance in Retained Earnings - if cumulative losses exceed cumulative income over a company's life

liquidating dividend

a dividend declared out of paid-in capital - reduces or liquidates the amount originally paid in by stockholders

charter

a document that is issued by the state to set forth important terms and features regarding the creation of a corporation - name and purpose of organization, types and numbers of shares of stock that are authorized to be issued, names of ppl that formed the company, etc.

cumulative dividend

a feature of a preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive dividends - preferred dividends not declared in a given period are called dividends in arrears -- companies cannot pay dividends to common stockholders while any preferred dividends are in arrears

retained earnings statement

a financial statement that shows the changes in retained earnings during the year - net income increases retained earnings, while net loss decreases

return on common stockholder's equity

a measure of profitability that shows how many dollars of net income were earned for each dollar invested by the owners; computed as net income minus preferred dividends divided by average common stockholders' equity = (net income - preferred dividends) / avg common stockholders' equity

cash dividend

a pro rata distribution of cash to stockholders - not paid on treasury shares For a corporation to pay a cash dividend, it must have 1. retained earnings, 2. adequate cash, 3. declared dividends - decreases retained earnings - cumulative effect of declaration and payment of a cash dividend is to decrease stockholders' equity and total assets

paid-in capital - 2 classifications

1. capital stock 2. additional paid-in capital

stockholders' rights

1. right to vote 2. right to receive dividends 3. right to keep the same percentage ownership when new shares of stock are issued (preemptive right) 4. right to share in assets upon liquidation in proportion to their holdings - residual claim b/c owners are paid with assets that remain after all other claims have been paid

Corporation may acquire treasury stock for these reasons ...

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 - signals that management believes stock is underpriced in hopes to enhance market price 3. to have additional shares available for use in acquisition of other companies 4. to reduce the number of shares outstanding and thereby increase earnings per share

journal entry to record declaration of a cash dividend

Dr. Cash Dividends, Cr. Dividends Payable

journal entry to record sale of common stock

Dr. Cash, Cr. Common Stock - # of shares * par value - the par value of a stock is never a factor in determining the cost of the assets recieved

journal entry to record issues of common stock at no-par

Dr. Cash, Cr. Common Stock, Cr. Paid-In Capital in Excess of Stated Value - Common Stock

paid-in capital

total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock - when a corporation has only one class of stock, it is common stock - issuance of common stock affects only paid-in capital accounts

Corporations issue stock dividends for the following reasons ...

1. to satisfy stockholders' dividend expectations w/o spending cash 2. to increase marketability of the corporation's stock -- when # of shares outstanding increases, market price per share decreases, which makes it easier for smaller investors to purchase the shares 3. to emphasize that a company has permanently reinvested in the business a portion of stockholders' equity, which is unavailable for cash dividends

small stock dividend

A stock dividend of less than 20% to 25% of the corporation's issued stock shares previously outstanding - predominate in practice - value assigned to the dividend is the fair value per share - assumed that small stock dividend will have little effect on market price of

journal entry to record issues of common stock at market value

Dr. Cash, Cr. Common Stock, Cr. Paid-In Capital in Excess of Par - Common Stock - when a corporation issues stock for less than par value, debits Paid-In Capital in Excess of Par - Common Stock account

journal entry to record issuance of preferred stock

Dr. Cash, Cr. Preferred Stock, Cr. Paid-In Capital in Excess of Par - Preferred Stock

journal entry for sale of treasury stock above cost

Dr. Cash, Cr. Treasury Stock, Cr. Paid-In Capital from Treasury Stock - use Paid-In Capital for the difference between cost and the resale price of the shares - sale of treasury stock increases both total assets and total stockholders' equity

journal entry for sale of treasury stock below cost

Dr. Cash, Dr. Paid-In Capital from Treasury Stock, Cr. Treasury Stock - use Paid-In Capital for the difference between cost and the resale price of the shares - sale of treasury stock increases both total assets and total stockholders' equity

journal entry to record issuance of stock dividend shares

Dr. Common Stock Dividends Distributable, Cr. Common Stock

journal entry to record issues of common stock to acquire a non-cash asset (i.e. land)

Dr. Land, Cr. Common Stock, Cr. Paid-In Capital in Excess of Par - Common Stock

journal entry to record declaration of stock dividend

Dr. Stock Dividends, Cr. Common Stock Dividends Distributable, Cr. Paid-In Capital in Excess of Par - Common Stock - Common Stock Dividends Distributable is a stockholders' equity account

preferred stock

capital stock that has contractual provisions that gives it some preferences over common stock - Preferred stockholders have the right to receive dividends before common stockholders. - used to appeal to a larger segment of potential investors as an additional class of stock - has priority as to 1. distributions of earnings (dividends) and 2. assets in the event of liquidation - may have either a par value or a no-par value - listed first in stockholders' equity section of balance sheet b/c of its dividend and liquidation preferences over common stock

no-par value stock

capital stock that has not been assigned a value in the corporate charter - (fairly common today)

retained earnings restrictions

circumstances that make a portion of retained earnings currently unavailable for dividends, resulting from the following causes ... 1. legal restrictions 2. contractual restrictions 3. voluntary restrictions

organization costs

costs incurred in the formation of a corporation, including legal and state fees, promotional expenditures - Corporations expense organization costs as incurred as a conservative approach

owners' equity

identified by stockholders' equity, shareholders' equity, or corporate capital - consists of 1. paid in (contributed) capital and 2. retained earnings (earned capital)

retained earnings

net income that the corporation retains for future use - net income is recorded as retained earnings in closing entry Dr. Income Summary, Cr. Retained Earnings

authorized stock

the amount of stock that a corporation is authorized to sell as indicated in its charter - anticipates both initial and subsequent capital needs - number of shares authorized generally exceeds number of shares initially sold - The authorization of capital stock does not result in a formal accounting entry. The reason is that the event has no immediate effect on either corporate assets or stockholders' equity. total shares authorized - total shares issued = number of unissued shares

prior period adjustment

the correction of an error in previously issued financial statements - correction made directly to Retained Earnings b/c effect of the error is now in this account Dr. Retained Earnings, Cr. Accumulated Depreciation - added to beginning retained earnings balance - may either increase or decrease retained earnings

payment date

the date dividends are transferred to stockholders through cash payments by company Dr. Dividends Payable, Cr. Cash - reduces both current assets and current liabilities w/ no effect on stockholders' equity

declaration date

the date the board of directors formally declares (authorizes) a dividend and announces it to stockholders - commits the corporation to a legal obligation - must make an entry to recognize increase in Cash Dividends and increase in (current) liability Dividends Payable - Dr. Cash Dividends, Cr. Dividends Payable

record date

the date when ownership of outstanding shares is determined for dividend purposes - stockholders records maintained by corporation supply this information - no entry required on this date b/c the corporation's liability recognized on the declaration date is unchanged

stock split

the issuance of additional shares of stock to stockholders according to their percentage ownership. It is accompanied by a reduction in the par or stated value per share - purpose is to increase the marketability of the stock by lowering its market price per share, making it easier for the corporation to issue additional stock - effect of a split on market price is inversely proportional to the size of the split - number of shares increases in the same proportion that par or stated value per share decreases - Does not have any effect on total paid-in capital, retained earnings, or stockholders' equity, therefore, it is not necessary to journalize it