Financial Accounting, Chapter 11

Where is the effect or retiring a stock reflected?

In the cash account and the Stockholders' Equity accounts.

When stock is sold for cash the asset cash is increased or decreased?

Increased

Comprehensive income?

Is the net assets resulting from all transactions except for investments by owners and distributions to owners during a time period.

Why is preferred stock attractive to many investors?

It offers a return in the form of a dividend at a level of risk that is lower than that of most common stocks.

What results when treasury stock is resold?

It results in additional paid in capital if sold or more than its cost or a reduction in equity if sold for less than its cost.

What are cash dividends?

NOT an expense of the income statement. They are a liability at the date of declaration.

When do cash dividends become a liability?

On the date they are declared. (accounting entry should be recorded on that date to acknowledge the liability and reduce the balance of the Retained Earnings account.)

When are cash dividends declared?

Only if a company has sufficient cash available and adequate retained earnings.

Convertible

Preferred stock may allow stockholders the right to convert the stock into common stock.

Redeemable

Preferred stock may allow stockholders to redeem their stock at a specified price.

Callable

Preferred stock may be callable at the option of the company. In this case, the company can choose to pay a specified amount to the stockholders in order to redeem or retire the stock.

Statement of stockholders' equity

Reflects the differences between beginning and ending balances for all accounts in the stockholders' equity category of the balance sheet.

What do cash dividends REDUCE?

Retained earnings account

Market value per share

The selling price of the stock as indicated by the most recent transaction

Comprehensive income definition

The total change in net assets from all sources except investments by or distributions to the owners.

Book Value Per Share

Total stockholders' equity/numbers of shares of common stock outstanding.

When is treasury stock created?

When a company buys back its own stock sometime after issuing it.

When a company buys its own stock, it is ____it's size and ____ the equity of stockholders. Therefor it is a ______, not an ____.

When a company buys its own stock, it is contracting it's size and reducing the equity of stockholders. Therefor it is a contra equity account not an asset.

Participating

When preferred stock carries a participating feature, it allows the preferred stockholders to receive a dividend in excess of the regular rate when the firm has been particularly profitable and declares an abnormally large dividend.

When retiring a stock, the Paid-In Capital account that were created when the stock was issued must be______. If the original price is _____ than the repurchase price of the stock, the difference is reflected in Paid-In Capital from Stock Retirement Account

When retiring a stock, the Paid-In Capital account that were created when the stock was issued must be eliminated. If the original price is higher than the repurchase price of the stock,the difference is reflected in Paid-In Capital from Stock Retirement Account.

Retirement of stock

When the stock is repurchased with no intension or reissuing at a later date.

Stock split and stock dividend both result in

additional shares of stock outstanding and is nontaxable.

Participating feature

allows preferred stockholders to share on a percentage basis in the distribution of an abnormally large dividend.

Difference between large and small stock dividends

amount transferred from retained earnings to the contributed capital portion of equity.

Par Value

an arbitrary amount that represents the legal capital of the firm (represents the legal capital of the corporation).

The repurchase or retirement of stock

cash outflow should be reflected as a: reduction of cash in the financing activities section.

Stock dividend occurs when

corporation declares and issues additional shares of its own stock to existing stockholders.

Purpose of the statement of stockholders' equity

explains the difference between the beginning and ending balances of each account in the stock holders' equity section of the balance sheet.

Is issuance and repurchase of stock and payment of dividends an operating, investing, or financing activity?

finance

Preferred stock

flexible, with provisions tailored to a company's needs.

When stock is issued for cash or other consideration, the number of outstanding shares Is in increased or decreased?

increased and the par-value of stock is recorded along with any amount in excess of par being recorded to the Additional Paid-In Capital account.

Cash outflow from sale of stock to stockholders should be reflected as

inflow in the financing activities.

When a large stock dividend is declared, the stock dividend is reported at

par value rather than fair market value.

Articulated statements

refer to the fact that information on the income statement is related to the information on the balance sheet.

What does Book Value Per Share NOT indicate?

the price that should be paid by those who want to buy or sell the stock on the stock exchange.

Book Value Per Share represents

the rights of each share of stock to the net assets of the company.

Net assets refers to

total assets of the firm-total liabilities

If preferred stock is present

total stockholders' equity - rights that preferred stockholders have to the net assets. (SUBTRACT the redemption value or liquidation value of the preferred stock & dividends in arrears on cumulative preferred stock.

Authorized stock

The maximum number of shares that will be allowed to issue.

Outstanding shares

The number of shares issued less the number of shares held as treasury stock

Retained earnings

(The amount not paid as dividends): Net income that has been made by the corporation but not paid out as dividends (Earned but not paid)

Why do firms use stock dividends?

1. Do not require the use of cash 2 reduce the market price of the stock (may make the stock more attractive to a wider range of investors) 3. Do not represent taxable income to recipients and may be attractive to some wealthy investors

two requirements that need to be met before declaring cash dividend

1. Sufficient cash must be available by the payment date to pay the stockholders. 2. Retained earnings account must have a sufficient positive balance, because dividends reduce the balance of the account.

Why do most corporations set the part value of the stock at very low amounts?

Because there are legal difficulties if stock is sold at less than par.

Other terms for "additional paid-in capital"?

Capital in excess of par value, premium on stock, excess of par.

What does treasury stock represent?

Corporation's own stock, previously held for various purposes, issued to stockholders at some point. Repurchased, NOT retired. NOT outstanding.

Issued shares

The number of shares sold or distributed to stockholders:

What happens when treasury stock is purchased?

Debit to treatury stock, contra-equity account is recorded.

DO NOT affect he par value per share of the stock

Stock dividends

Reduce the par value per share

Stock splits

How does Book Value Per Share change if preferred stock is present?

Stockholders' equity must be adjusted to reflect its liquidation value.

Additional Paid-In Capital

The amount received for the issuance of stock in excess of the par value of the stock.

Dividend payout ratio

The annual dividend amount divided by the annual net income.

Where does it appear if treasury stock is resold for more than it cost

The difference between the sales price and the cost appears in the Additional Paid-In Capital- Treasury Stock account.

Where does it appear if treasury stock is resold for less than it cost

The difference between the sales price and the cost is DEDUCTED from the Additional Paid-In Capital- Treasury Stock account.

Cumulative

The dividend on preferred stock may be cumulative. When this is the case, dividends that are not paid are considered to be in arrears. Before a dividend on common stock can be declared in a subsequent period, the dividend in arrears as well as the current year's dividend must be paid to the preferred stockholders.

Stock Dividend

The issuance of additional shares of stock to existing stockholders

Authorized shares

The maximum number of shares a corporation may issue as indicated in the corporate charter

What factors does the market value per share depend on?

must evaluate a corporation's earnings and liquidity as indicated in the financial statements. economic factors.

Dividends paid should be reflected as a cash ____

outflow in financing section.