Chapter 10

Using bonds or other debt to increase a company's earnings per share of common stock is called _______ or using ______.

trading on the equity; leverage

A company's own stock that it has issued and later reacquired is called _______.

treasury stock

Issued stock

Number of shares the company has issued to stockholders

Outstanding stock

Number of shares the stockholders own

What are the three most common forms of dividends?

1. Cash 2. Stock 3. Non-cash assets

GAAP identifies stock dividends above ______% of outstanding shares as large and permits large stock dividends to be recorded at _________ value.

25; par

Financing transactions that affect both cash and equity fall into three main categories:

1. Issuance of stock 2. Treasury stock 3. Dividends

Stockholders' equity represents the stockholders' ownership interest in the assets of a corporation. Stockholders' equity is divided into two main parts:

1. Paid-in capital 2. Retained earnings

Two ratios that measure profitability per dollar invested are:

1. Return on assets (ROA) 2. Return on equity (ROE)

Name six ways corporations differ from proprietorships and partnerships?

1. Separate legal entity 2. Continuous life and transferability of ownership 3. Limited liability 4. Separation of ownership and management 5. Corporate taxation 6. Government regulation

What are the three main ways to finance an asset purchase?

1. Through profitable operations (with retained earnings) 2. By issuing equity (stock) 3. By issuing bonds (or notes) payable

Give two reasons why a corporation may choose to distribute stock dividends.

1. To continue dividends but conserve cash 2. To reduce the per-share market price of its stock

What four basic rights do all stockholders have, unless specifically withheld by an agreement?

1. Vote 2. Dividends 3. Liquidation 4. Preemption

What is a company's market capitalization (market cap)?

A company's market capitalization is the value of the company as measured by the market price of one share of its common stock at a given date, multiplied by the number of shares of common stock the company has outstanding as of that date.

Put the following accounts in the order in which a corporation should list them on its balance sheet. A. Retained earnings B. Preferred stock C. Additional paid-in capital D. Common stock

B-D-C-A

Declaration date

Board of directors announces the dividend

What would be the journal entry to record the issuance of common stock at par?

Cash XXX -Common Stock XXX

The journal entry to record the resale of treasury stock at a price higher than the average cost of the treasury shares would include which of the following?

Credit to Paid-in Capital from Treasury Stock Transactions

The journal entry to record the issuance of common stock above par would include which of the following?

Credit to common stock

Explain the difference between cumulative and noncumulative preferred stock.

Cumulative preferred stock is preferred stock whose owners must receive all dividends in arrears plus current year dividends before the corporation can pay dividends to the common stockholders. Dividends in arrears are dividends from a past year that the corporation failed to pay. If the preferred stock is noncumulative, the corporation is not obligated to pay passed dividends.

When a corporation issues stock in exchange for assets other than cash, what value are the assets received recorded at?

Current mark value

Explain what double taxation means.

Double taxation applies to corporations. Corporate earnings are subject to double taxation on their income to the extent they are distributed to shareholders in the form of dividends. First, corporations pay income taxes on their corporate income. Then, stockholders pay income tax on the cash dividends received from corporations.

A 2 for 1 stock split means that

Each share's par value will be cut in half and The company will have twice as many shares of stock issued and outstanding

A company neither ______________ nor ______________ when it sells its stock to, or buys its stock from, its own stockholders.

Earns a profit; Incurs a loss

It is illegal to compensate employee's by granting them shares of stock. True or false?

False

Treasury stock is recorded at its par value. True or false?

False

Which one of the three main ways to finance an asset purchase is low risk to the company and why?

Financing with retained earnings means that the company has enough cash from operating profitably to purchase needed assets. Because there is no need to issue more stock or borrow money, this strategy is low risk to the company.

Suppose Allen Company hired an attorney. The attorney provided legal services worth $10,000 in exchange for 1,000 shares of $1 par common stock. The fair market value of the stock is $10 per share. What is the journal entry to record this transaction?

Legal Expense 10,000 -Common Stock 1,000 -Paid-in Capital in Excess of Par - Common 9,000

Authorized stock

Maximum number of shares a company can issue under its charter

What is the only item that increases retained earnings?

Net income

What is the formula for Earnings per share (EPS)?

Net income - Preferred dividends / Weighted-average number of shares of common stock outstanding

__________ is an arbitrary amount assigned by a company to a share of its stock upon original issuance.

Parvalue

Payment date

Payment is recorded by debiting Dividends Payable and crediting Cash

Which of the following would not be found in the stockholders' equity section on the balance sheet?

Revenue

Date of record

Stockholders as of this date will receive the declared dividend

What is a healthy rate of return on total assets?

Ten percent is considered a strong benchmark for most industries.

In what section of the balance sheet is the Paid-in Capital account listed?

The Paid-in Capital account is listed in the stockholders' equity section of the balance sheet.

What does the dividend yield ratio measure?

The dividend yield ratio measures the percentage of a stock's market value returned annually to the stockholders as dividends.

What information is needed to determine if a company's returns are strong, weak, or somewhere in between?

To answer whether a company's returns are strong, weak, or somewhere in between, we need to see the comparative returns for prior years as well as the comparative returns for other companies in the same industry.

What journal entry would a company make to record the purchase of treasury stock?

Treasury Stock XXX -Cash XXX

Accounting for no-par stock with a stated value is identical to accounting for par-value stock. True or false?

True

Most leading companies in the United States have split their stock. True or false?

True

Preferred stock gives its owners certain advantages over common stockholders. True or false?

True

Who has the authority to declare a dividend?

board of directors

A _____________ balance in Retained Earnings is normal, indicating that the corporation's lifetime earnings exceed lifetime losses and dividends.

credit

Whenever ROA is positive, ROE is always __________ than ROA because of the "multiplier" effect of the ___________.

higher; leverage ratio

The creation of a corporation begins when its organizers, called the ___________, obtain a charter from the state.

incorporators

The price-earnings ratio (P/E), or multiple, is the ___________ of a share of common stock divided by the company's ______________of common stock.

market price ; earnings per share

A company ___________ records gains or losses on transactions involving its own treasury stock.

never

Which of the following would you find on a stock certificate?

par value, company name, and number of shares

When a company has issued both preferred and common stock, the ____________ stockholders receive their dividends first. The _____________ stockholders receive dividends only if the total dividend is large enough to pay the _____________ shareholders first.

preferred; common;preferred