Equity Financing
How is treasury stock recorded?
at the reacquisition cost, NOT par value
What are the three types of shares that each class of stock has?
authorized shares issued shares outstanding shares
What are cash dividends?
cash distributions of earnings to stockholders
What kind of account is treasury stock?
contra equity
What are the two categories of equity?
contributed capital retained earnings
What are the 3 important dates related to dividends?
date of declaration date of record date of payment
How does the reacquisition of treasury stock affect the balance sheet?
decreases assets; increases equity
What are dividends?
distributions of net income (earnings) to the stockholders of a corporation
What is the price earnings ratio?
measures investors' expectations regarding the growth potential and earnings stability of a company (allows for meaningful comparison of earnings across firms) (higher # is better)
What is the earnings per share ratio?
measures the amount of net income associated with each share of common stock (tells an individual how much of a company's net income is associated with her/her ownership interest) (higher # is better)
What is the return on equity ratio?
measures the amount of profit earned per dollar of invested capital (higher # is better)
What are characteristics of cash dividends?
must be declared by the BOD before they can be paid the corporation is not legally required to declare and pay dividends does not affect net income classified as a CONTRA EQUITY account once a dividend is declared, a LIABILITY is created
How does the reacquisition of treasury stock affect net income?
no effect
What are the two classes of capital stock?
preferred stock common stock
What does it mean that most preferred stock is cumulative?
preferred stockholders must be paid both current and prior year's unpaid dividends before common stockholders can receive dividends
What is equity financing?
raising capital by selling shares of a company's stock (no responsibility to repay; the investor takes a risk and is rewarded by the company's future success
When issue price is GREATER THAN reacquisition cost
record the excess in the equity account, PAID IN CAPITAL-TREASURY
When issue price is LESS THAN reacquisition cost
reduce paid in capital-treasury; if deficit still exists, REDUCE RE
What are the three ratios related to stock
return on equity (ROE) earnings per share (EPS) price earnings ratio (P/E ratio)
What is common stock?
stock that gets paid dividends after preferred stock; common stockholders have voting rights; dividend rates are determined by the BOD, based on corporate profitability
What is preferred stock?
stock that gets paid dividends first; has no voting rights; dividend rates are a fixed percentage
What are authorized shares?
the TOTAL NUMBER of shares of stock that the company has allowed to sell to the public
What happens when shares that were reacquired are reissued?
the accounting treatment depends on the relationship between the reissue price and the reacquisition cost
What is contributed capital?
the amount that owners have contributed through the purchase of stock (capital stock)
What is the date of payment?
the date a corporation pays the dividends to stockholders
What is the date of record?
the date that a stockholder must own the stock in order to receive a dividend
What is the date of declaration?
the date the company's BOD formally decides to pay a dividend to stockholders
What is paid-in capital (in excess of par)?
the excess of the selling price over the par value
What is par value?
the monetary amount assigned to each class of stock (for accounting purposes only); has no relationship to market value
What is retained earnings?
the net income earned by a company that is not paid out as dividends
What are retained earnings?
the net income of a company that is not paid out by dividends
What are outstanding shares?
the total number of shares ACTUALLY IN THE HANDS of the public
What are issued shares?
the total number of shares that have been SOLD TO THE PUBLIC
What effect does sale of stock have on net income?
there is no effect on net income
Why woulda corporation buy back its stock (4 reasons)?
to reduce outstanding shares in order to increase market value per share to remove shares from the market to avoid hostile takeover to use in employee stock option programs to give cash back to existing stockholders
What are dividends in arrears?
unpaid dividends on prior years
Because treasury stock is considered issued, owners have no _________ and cannot ________.
voting rights; receive dividends
What is treasury stock?
a company's own stock that has been REACQUIRED
What effect does sale of stock have on the statement of cash flows?
financing cash inflow
How does the reacquisition of treasury stock affect the statement of cash flows?
financing cash outflow
What effect does sale of stock have on the balance sheet?
increases assets; increases equity
Treasury stock is considered _____ but not ______
issued; outstanding