Chapter 11 - Stockholders Equity (Learnsmart)

contributed capital

(aka paid-in capital) reports the amount of capital the company received from investors

a corporation is a separate legal entity that can

- own assets - enter into contracts - sue or be sued

the P/E ratio is calculated by

Dividing the stock price by EPS

ROE

Net Income/Total Equity reports net income relative to av. common stockholders equity

a corporation may be restricted from paying a dividend if

a creditors loan agreement is violated the dividend is greater than the amount of retained earnings

corporations are created by submitting an application to

a state gov.

dividends on preferred stock

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

equity financing

funds provided by the owners of a company advantage: dividends are optional

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 effect of repurchasing stock using the cost method is to

increase treasury stock decrease assets decrease stockholders equity

preferred stock _____.

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

the number of shares outstanding equals the number of shares

issues minus the number of shares in treasury

earning per share (EPS) =

net income - preferred dividends / average shares of common stock outstanding

StockIt Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock outstanding. In its first two years of business, StockIt did not declare a dividend. StockIt's balance sheets at the end of its first two years of business should include ___________.

no dividends payable

when a corporate charter does not specify a legal value per share, then the stock issued is referred to as

no-par value stock

what does a corporation record an increase in dividends payable

on the declaration date

another term for stockholders is

owners

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

preferred stock

statement of stockholders' equity

reports the changes in retained earnings as well as paid in capital

corporations can raise large amounts of money because

shares of stock in public companies can easily be bought and sold by investors

the date of record

the cut off date for determining which specific stockholders are to be paid in the dividend

initial public offering

the first time a company issues stock that may be bought by the general public

comparing EPS across companies is not advised because

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

when a corporation buys back its own stock, the stock is reported on the balance sheet as

treasury stock

the owners of a corporation are NOT personally responsible for the debts of the business: T/F

true

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

dive inc. declared and paid 10,000 of dividends. dividends of 10,000 may be found in the

Statement of retained earnings

articles of incorporation

a written legal document that defines ownership and operating procedures and conditions for the business

transactions between a company and its stockholders affect the company's ____ accounts only

balance sheet

a stock dividend

causes retained earnings to decrease distributes additional shares of stock to existing stockholders on a pro rata basis

when shares of stock that were issued to the public are later bought and sold among investors on the stock exchange, the issuing corporation

does not record any entry because it doesn't receive or give anything of value

issuing 1000 shares of 5%, $100 par value, cumulative preferred stock for 110 cash per share affects the accounting equation by ____

- increasing total stockholder equity - increasing total assets - increasing additional paid-in capital

a higher ROE means

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

a corporation's board of directors could prefer a stock split to a stock dividend because a stock split

does not reduce retained earnings, so it does not reduce the ability to declare a cash dividend in the future

stock splits

cause the par value per share to change

stock splits and stock dividends

cause total stockholders' equity to remain the same

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

debit to dividends payable credit to cash

to raise large amounts of long-term financing, a company issued bonds. the form of financing is referred as

debt financing

A corporation ______ have a legal obligation to pay dividends.

does not

equity vs. debt financing

equity: when a company needs a large amount of long-term financing, it may issue stock debt financing: borrow from lenders

treasury stock

is reported in the equity section of the balance sheet is a contra-equity account, reduces total stockholder equity, is shares of stock no longer outstanding

the number of shares authorized represents the

maximum number of shares allowed to issue

stock option

recorded as an expense at the time granted gives an employee the right to buy stock during a specified period of time or under other specified conditions.

retained earnings

reports the cumulative amount of net income earned by the company minus the cumulative amount of dividends since the corporation began

stock dividends

require a journal entry

dividends are closed into

retained earrings (at the end of the fiscal year)

common stocks par value

set at a low amount and has little meaning today other than being used to by some states to assess fees