accounting chapter 10

ROE relates ______.

net income to the average stockholders' equity.

dividends in arrears

unpaid dividends on cumulative preferred stock.

Preferred stock is advantageous in that it:

1. has priority over common stock at liquidation 2. has priority over common stock when dividends are declared.

Albert Inc. has both common and preferred stock outstanding. Which should be listed first in the stockholders' equity section of the balance sheet?

preferred stock

Which of the following is typically presented first in the equity section of the balance sheet?

preferred stock

venture capital firms

provide additional financing, often in the millions, for a percentage ownership in the company.

invested capital

the amount of money paid into a company by its owners

When a business incorporates, it must file its ______ with the state in which it incorporates.

articles of incorporation

initial public offering

the first time a corporation issues stock to the public.

par value

the legal capital assigned per share of stock.

stated value

the legal capital assigned per share to no-par stock.

value stocks

stocks that tend to have lower price-earnings ratios and are priced low in relation to current earnings.

angel investors

wealthy individuals in the business community willing to risk investment funds on a promising business venture. ex: people from shark tank.

X-Co issued 1,000 shares of its 5%, $10 par value, cumulative preferred stock for $100 cash per share. The journal entry to record this event includes:

10,000 credit to preferred stock, 100,000 debit to cash, and 90,000 credit to additional paid-in capital.

the total number of shares that a company may sell is referred to as _________ shares

authorized

Wyanot Company issued 1,000 shares of its 5%, $100 par value, cumulative preferred stock for $110 cash per share. The journal entry to record this transaction includes:

110,000 debit to cash, 100,000 credit to preferred stock, and 10,000 credit to additional paid-in capital- preferred.

Which of the following reports net income relative to average stockholders' equity in dollars?

ROE

which of the following reports net income relative to average stockholders' equity in dollars?

ROE

Which financial statement summarizes the changes in the balance of each stockholders' equity account?

Statement of stockholders' equity only

treasury stock

a company own issued stock that it has purchased.

publicly held corporation

allows investment by the general public and is regulated by the securities and exchange commission.

corporation

an entity that is legally separate from its owners and even pays its own income taxes.

The number of shares authorized is set forth in the company's:

articles of incorporation

no par value stock

common stock that has not been assigned a par value.

double taxation

corporate income is taxed once on earnings at the corporate level and gain on dividends at the individual level.

Limited liability and ease of raising outside capital are advantages of this business form:

corporation

Special contractually granted features can make preferred stock:

cumulative, redeemable, or convertible.

The amount of dividends paid out relative to the share price is referred to as:

dividend yield

return on _______ measures the ability of company management to generate earnings from the resources provided by owners.

equity

return on _________ measures the ability of company management to generate earnings from the resources provided by owners.

equity

True or false: A corporation is owned by debt and equity holders.

false

PE ratio (price earnings ratio)

indicates how the stock is trading relative to current earnings. stock price divided by earnings per share.

__________ capital is the amount of money paid into a company by its owners.

invested

The amount of money paid into a company by its owners is referred to as:

invested capital

Evaluation of the company's profitability requires consideration of the amount of a company's earnings in relation to the size of the

investment

The number of shares outstanding equals the number of shares ______.

issued minus the number of shares in treasury

Preferred stock has a mixture of attributes of both equity and

liabilities

The most important advantage to the corporate form of business is

limited liability

the total number of issued shares can then be divided into two categories:

outstanding stock and treasury stock

The legal capital per share of stock that is assigned when the corporation is first established is referred to as

par value

Which of the following ratios measures the ability of company management to generate earnings from the resources owners provide?

return on equity

Which of the following are included in the rights of common stockholders?

right to vote on certain matters

convertible

shares can be converted into common stock

limited liability

stockholders in a corporation can lose no more than the amount they invested in the company, even in the event of bankruptcy.

shareholders' equity is another common term for _________ equity

stockholders'

organization chart

stockholders, board of directors, CEO's appoint to Vice President management, Vice President marketing, CFO, legal counsel, and Vice President Human Resources.

growth stocks

stocks that tend to have a higher price earnings ratios and are expected to have higher future earnings.

The statement of shareholders' equity reports

the changes in each shareholder equity account.

payment date

the date of the actual distribution of dividends.

record date

the date on which a company looks at its records to determine who the stockholders of the company are.

declaration date

the date the board of directors announces the next dividend to be paid.

outstanding stock

the number of issued shares held by investors. only these shares receive dividends.

treasury stock

the number of issued shares repurchased by the company.

pay cash dividends

total assets and and total liabilities decrease.

issue preferred stock

total assets and total stockholders equity increases.

resell treasury stock

total assets and total stockholders equity increases.

declare cash dividends

total liabilities increases and total stockholders equity decreases.

Preferred stock is advantageous in that it:

1. has priority over common stock when dividends are declared. 2. has priority over common stock at liquidation.

investors who acquire preferred stock

1. have preference as to dividends 2. do not have voting rights.

Preferred stock tends to have attributes of

both bonds and common stock.

dividends

distributions to stockholders, typically in the form of cash.

Preferred stock is "preferred" over common stock by providing preferred stock holders with these rights:

first right to specified amount of dividends, and preference in distribution of assets during dissolution of corporation.

cumulative

shares receive priority for future dividends, if dividends are not declared in a given year.

purchase treasury stock

total assets and total stockholders equity decreases.

stages of equity financing

1. investment by the founders of the business, 2. investment by friends and family of the founders, 3. outside investment by "angel" investors and venture capital firms, 4. initial public offering.

AnuU, Inc. sold 100,000 shares of the 1,000,000 shares it is allowed to sell. AnuU repurchased 10,000 of these shares. The number of shares issued equals ______ shares.

100,000

articles of incorporation (corporate chapter)

describes the nature of the firms business activities, the shares to be issued, and the composition of the initial board of directors.

stock splits

a large stock dividend that includes a reduction in the par or stated value per share.

stock dividends

additional shares of a company's ow stock given to stockholders.

the advantages to the corporate form of business include

1. ease of raising capital 2. transferability of ownership.

Which of the following are included in the duties of the board of directors?

1. establish corporate policies 2. appoint officers to manage the corporation.

Preferred stock:

1. generally does not have voting rights 2. has preference as to dividends. 3. is useful for raising capital without reducing common stockholders' control.

Disadvantages of the corporate form of business are

1. more paperwork 2. additional taxation

A corporate charter:

1. names the board of directors 2. describes the business activities 3. specifies the shares of stock to be issued.

preferred stock is "preferred" over common stock in two ways:

1. preferred stockholders usually have first rights to a specified amount of dividends (a stated dollar amount per share or a percentage of par value per share). if the board of directors declared dividends, preferred shareholders will receive the designated dividend before common shareholders receive any. 2. preferred stockholders receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved.

The rights of common stockholders typically include which of the following?

1. right to distribution of assets in liquidation. 2. right to dividends when declared. 3. right to vote for corporate directors.

Morgan Company issued cumulative preferred stock. What additional special feature(s) could also have been granted to preferred stock holders?

1. the right to convert the shares to common shares 2. the right to redeem the preferred shares for cash.

whether public or private, stockholders are the owners of the corporation and have certain rights:

1. the right to vote 2. the right to receive dividends 3. the right to share in the distribution of assets.

what would motivate a company to buy back its own stock?

1. to boost underpriced stock. 2. to distribute surplus cash without paying dividends. 3. to boost earnings per share. 4. to satisfy employee stock ownership plans.

Bagel, Inc. issued 50,000 shares of the 100,000 authorized. It has since repurchased 5,000 of its shares. The number of shares outstanding equals ______ shares.

45,000

issued stock

the number of shares that have been sold to investors. a company usually does not issue all its authorized stock. =outstanding+treasury

authorized stock

the total number of shares available to sell, stated in the company's articles of incorporation. =issued+unissued

issue common stock

total assets and total stockholders equity increases.

organization chart

traces the line of authority within the corporation.

Shares of stock previously sold by the corporation that are repurchased are called

treasury stock

accumulated deficit

a debit balance in retained earnings.

statement of stockholders' equity

a financial statement that summarizes the changes in stockholders' equity OVER time.

in a corporation, the stockholders' potential loss is

limited to the amount of the investment.

ROE (Return on Equity)

measures the ability of company management to generate earnings from the resources that owners provide. net income divided by average stockholders' equity; measures the net income generated per dollar of equity.

earnings per share

measures the net income per share of common stock. net income available to common shareholders divided by average shares of common stock outstanding.

The dividend yield is calculated by dividing:

dividends per share by the stock price per share.

dividend yield

dividends per share divided by the stock price.

privately held corporation

does not allow investment by the general public and normally has fewer stockholders.

positive __________ represent the key to a company's long-run survival.

earnings

retained earnings

earnings not distributed as dividends to stockholders over the life of the company.

Preferred stockholders:

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

retained earnings

represents earned capital that has been retained by the company.

redeemable

shares can be returned to (or redeemed by) the corporation at a fixed price.

total stockholders' equity

stock split and stock dividend no change

par value per share

stock split decrease stock dividend no change.

retained earnings

stock split no change stock dividend decrease.

common stock

stock split no change stock dividend increase

preferred stock

stock with preference over common stock in the payment of dividends and the distribution of assets.

a corporation is owned by its __________

stockholders

property dividend

the distribution of a non cash asset to stockholders.

Historically, par value was considered to be

the value of the company's shares of stock.

S corporation

allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership.