Chapter 11

Outstanding Stock

Shares of stock a corporation has issued that are still owned by outside parties, i.e., all stock that has been issued less any treasury stock the corporation has repurchased.

Limited Liability Company (LLC)

Organizational form that offers many of the favorable characteristics and legal benefits of a corporation (e.g. limited liability and centralized management) but is permitted by federal law to be taxed as a partnership, thereby avoiding double taxation of profits.

Cumulative Dividends

Preferred dividends that accumulate from year to year until paid

The par value or stated value of stock represents the amount of legal capital that a corporation must maintain for the protection of the creditors.

true

Preferred Stock has:

usually has a stated dividend rate and normally has no voting rights.

Paid-In Capital in Excess of Par (or Stated) Value

The account in which a company records any amount received above the par or stated value of stock when stock is issued.

Market Value

The price at which securities sell in the secondary market; also called fair value.

How will declaring a cash dividend affect a corporations financial statement?

Total assets will not be affected; total liabilities will increase

If a company sells treasury stock for more than it paid to acquire the stock, it will record a gain that will be shown in the nonoperating section of the income statement?

false

On the balance sheet, paid-in excess accounts are normally shown after the retained earnings account?

false

The number of shares a corporation has outstanding may exceed the amount of shares authorized.

false

The stated value of a share of stock is established by the federal government?

false

Treasury stock is listed as the first account under the stockholders' equity section of the balance sheet?

false

In general, common stockholders experience

greater risk and greater potential rewards than preferred stockholders.

Purchasing treasury stock does not impact the ________.

income statement

Stock dividends have no effect on?

net income; cash flows; total assets

Articles of Incorporation

Information about a proposed corporation, such as its name, purpose, location, expected life, proposed capital stock, and a list of the members of its board of directors, filed with a state agency when applying for the legal formation of the corporation.

Stockholders

Owners of a corporation.

Double Taxation

Recognition that corporate profits distributed to owners are taxed twice, once when the income is reported on the corporation's income tax return and again when the dividends are reported on the individual's return.

When a corporation issues a stock dividend, the amount of:

Retained Earning decreases and the amount of Paid-in Capital increases.

Common Stock

Basic class of corporate stock that has no preferential claim on assets or dividends; certificates that evidence ownership in a company.

Sole Proprietorship

Business (usually small) owned by one person.

Declaring a cash dividend is a(n)?

Claims exchange event

Stock Certificate

Document showing ownership interest issued to an investor in exchange for contributing assets to a corporation; describes ownership rights and privileges.

Why would a company buy its own stock?

Employee stock option plans; preparation for a merger; to increase earnings per share; supporting the stock price; to avoid a hostile takeover.

Continuity

Presumption that a corporation's existence may extend well beyond the time at which any particular shareholder retires or sells his or her stock.

Stock Dividends

Proportionate distribution of additional shares of the declaring corporation's stock.

Par valué ________?

Represents the maximum liability of the investors; multiplied by the number of shares of stock represents legal capital.

The book value of a share of stock may be:

equal to the market value of the stock; less than the market value of the stock; more than the market value of the stock.

Appropriating retained earnings is a(n)

equity exchange event

A company reported significant growth in 2012; it was less growth than analysts expected. Under these conditions, the company's stock may decline?

false

All common stockholders have the same rights and privileges?

false

Stock dividends are based on the number of shares?

outstanding

The party that owns the stock on the date of __________ is legally entitled to a cash dividend.

record

Which of the followings is a reason a company would acquire treasury stock?

reduce the likelihood of a hostile takeover

Common stockholders have the right to:

share n the distribution of profits; participate in the election of directors; vote on significant matters that affect the corporate charter.

How will paying a cash dividend that was previously declared affect a corporations financial statements?

total assets and total liabilities will decrease

Issued Stock

Stock a company has sold to the public.

Corporation

Legal entity separate from its owners, created by the state pursuant to an application submitted according to state law by a group of individuals with a common purpose.

Double taxation refers to the fact that:

Income is taxed at both the corporate level and when stockholders receive dividends.

Stated Value

Arbitrary value assigned to stock by the board of directors; like par value, designates legal capital.

Par Value

Arbitrary value assigned to stock by the board of directors; like stated value, designates legal capital.

Partnership Agreement

Legal document that defines the rights and responsibilities of each partner and describes how income and losses are to be divided.

Corporate Disadvantages

Governmental regulation; Corporate double taxation

The price-earnings ration =

market price per share / earnings per share

Payment Date

Date on which a dividends is actually paid.

Par Value has two parts:

Nominal Amount and Legal Capital

Retained earnings appears _____ treasury stock on the balance sheet.

before

Legal Capital

Amount of assets that should be maintained as protection for creditors; the number of shares multiplied by the par value.

Transferability

Characteristic of corporations referring to the ease of exchanging ownership interests since ownership is divided into small, readily traded ownership units (shares of stock).

Preferred Stock

Class of stock, usually nonvoting, that has preferential claims (usually to dividends) over common stock.

Limited Liability

Concept that investors in a corporation may not be held personally liable for the actions or debts of the corporation; stockholders' liability is limited to the amount they paid for their stock.

Stock Split

Corporate action that proportionately reduces the par value and increases the number of outstanding shares; designed to reduce the market value of the split stock.

When a corporation buys treasury stock, the number of shares of stock _________.

authorized is not affected; outstanding decreases

How will declaring a cash dividend affect a corporation's financial statements?

cash flow from financing activities will not be affected; net income will not be affected.

The journal entry to record a 10% stock dividend on $10 par value when the market value is $30 a share will include a:

debit to dividends account; debit to the retain earnings account; credit to the additional paid in capital in excess of par value account.

The journal entry to record a 10% stock dividend on a $10 par value when the market value is $30 a share will include a:

debit to the retained earnings account; credit to the additional paid in capital in excess of par value account; credit to the common stock account.

What is not a common characteristic associated with preferred stock?

voting rights

Distributions to owners of proprietorships are called

withdrawals

Treasury Stock

Stock previously issued to the public that the issuing corporation has bought back. Contrast with outstanding stock.

Ex-Dividend

Stock traded after the date of record but before the payment date; does not receive the benefit of the upcoming dividend.

Book Value Per Share

An accounting measure of a share of common stock, computed by dividing total stockholders' equity less preferred rights by the number of common shares outstanding.

Partnership

Business entity owned by at least two people who share talents, capital, and the risks of the business.

Closely Held Corporation

Corporation whose stock is exchanged among a limited number of individuals.

Dividends In Arrears

Cumulative dividends on preferred stock that were not paid in prior periods; must be paid before paying any dividends to holders of common stock.

Date of Record

Data that establishes who will receive the dividends payment; shareholders who actually own the stock on the record data will receive the dividend even if they sell the stock before the dividend is paid.

Withdrawls

Distributions of assets to the owners of proprietorships and partnerships.

Securities Ac

Federal legislation passed after the stock market crash of 1929 to regulate the issuance and subsequent trading of public company stocks and bonds; created the Securities and Exchange Commission (SEC).

Sarbanes-Oxley Act of 2002

Federal legislation passed in 2002 that sets higher ethical standards for public corporations and accounting firms. Key provisions limit conflict-of-interest issues and require financial officers and CEOs to certify the validity of their financial statements.

Board of Directors

Group of individuals elected by the stockholders of a corporation to oversee its operations.

Price-Earnings (P/E) Ratio

Measure that reflects the values of different stocks in terms of earnings; calculated as market price per share divided by earnings (net income) per share; a higher P/E ratio generally indicates that investors are optimistic about a company's future.

Cost Method of Accounting for Treasury Stock

Method of accounting for treasury stock in which treasury stock purchases are recorded in the Treasury Stock account at their cost to the company without regard to the original issue price or par value.

Authorized Stock

Number of shares of stock a corporation has state approval to issue.

Issued stock can be labeled as

Outstanding stock and treasury stock

Appropriated Retained Earnings

Retained earnings restricted by the board of directors for a specific purpose (e.g., to repay debt or for future expansion); part of total retained earnings, but not available for distribution as dividends.

Corporate Advantages

Separate legal entity; Limited liability of stockholders; Continuous life; Easily transferable ownership rights; Ability to raise capital.

Declaration Date

The date on which the board of directors officially approves a dividend.

Other things being equal, the management of a company will prefer that the price-earnings ratio of its company's stock be _____

high

Treasury stock is a(n) ______ account?

contra equity

The journal entry to record the declaration of a cash dividend will include:

credit to the dividends payable account; debit to the dividends.

Common reasons corporations purchase treasury stock include to:

have stock available to satisfy the requirements of employee stock option plans; avoid a hostile takeover; and keep the price of the stock high when it appears to be falling.

Cumulative dividends _________.

may also be called dividends in arrears; accumulate for future payment when unpaid.

Normally companies sell stock for an amount that is

more than the par value

A stock split will:

not affect cash flow; increase the number of shares outstanding; decrease the market value per share.

Which of the following is normally in the description of cumulative preferred stock when shown in the stockholders' equity section of the balance sheet?

the par value of the stock; the number of shares authorized, issued, and outstanding; the amount of the dividend.

When a corporation appropriates retained earnings?

total assets are not affected; total liabilities are not affected.

A stock split has no affect on:

total assets; net income; total liabilities; stockholders' equity.

A stock split has no affect on?

total liabilities; stockholders equity; net income; total assets

A corporation may have issued more shares of stock than it has outstanding.

true