Chapter 11&12

Direct Method

Adjust income statement accounts related to operating activities for changes in their related balance sheet accounts

indirect method

Common adjustments to net income when computing net cash provided or used by operating activities under the

Difference between Preferred Stock Vs. Common Stock

First, preferred stockholders have a higher claim to a company's assets and earnings. When a company has excess cash and distributes the cash as dividends, preferred stockholders are paid before common stockholders. When a company becomes insolvent and must liquidate assets, preferred stockholders receive money before common stockholders. Second, the dividends from preferred stocks are paid at regular intervals, similar to a fixed-income security whose payments do not fluctuate. Dividends from common stocks are paid when the Board of Directors says so.

Date of Declaration

Record liability for dividend.

Date of Payment

Record payment of cash to stockholders.

direct and indirect methods.

The net cash amount provided by operating activities is identical under both the

Par value

is an arbitrary amount assigned to each share of stock when it is authorized

Minimum Legal Capital

Minimum legal capital is the amount of assets that shareholders are required to contribute to a corporation by law. In other words, many states have laws that require shareholders to invest a minimum amount of assets in the company at all times. The minimum levels are usually based on the par value of the stock.

Date of Record

No entry required

Cash flow statement

The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company.

Authorized stock

Authorized stock represents the maximum number of common shares that can be issued legally by the company as stated in the company's charter. The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation. Authorized stock, also known as "authorized shares" or "authorized capital stock," is also usually listed in the capital accounts section of the balance sheet. Authorized shares should not be confused with outstanding shares, which are the number of shares the corporation has actually issued that are held by the public.

Financing Activities

These constitute activities that will alter the equity or borrowings of a business. Examples are the sale of company shares, the repurchase of shares, and dividend payments. Cash receipts and disbursements generally related to long-term liabilities and equity. (And non-operating short-term debts)

Investing Activities

These constitute payments made to acquire long-term assets, as well as cash received from their sale. Examples of investing activities are the purchase of fixed assets and the purchase or sale of securities issued by other entities. Cash receipts and disbursements generally related to the purchase and sale of long-term assets. (And non-operating short-term investments)

Operating Activities

These constitute the revenue-generating activities of a business. Examples of operating activities are cash received and disbursed for product sales, royalties, commissions, fines, lawsuits, supplier and lender invoices, and payroll. Day-to-day cash receipts and disbursements that determine net income (Generally related to current assets and current liabilities.)

Treasury Stock

Treasury stock is shown as a reduction in total stockholders' equity on the balance sheet. Represents shares of a company's own stock that has been acquired. A corporation might acquire its own stock to: 1. Use its shares to buy other companies. 2. Avoid a hostile takeover. 3. Reissue to employees as compensation. 4. Support the market price.

Retained earnings

is the total cumulative amount of reported net income less any net losses and dividends declared since the company started operating.