Accounting 1- Test 6
Government body that the corporation must have approval from to operate
state
What is the government body (local, state, federal) that dictates if stock may be par or stated value stock?
state
Preferred stock
stock that gives its owners certain advantages over common stockholders, such as the right to receive dividends before the common stockholders and the right to receive assets before the common stockholders if the corporation liquidates
Issued stock
stock that has been issued but may or may not be held by stockholders
No-par stock
stock that has no amount (par) assigned to it
Preemptive right
stockholder's right to maintain his or her proportionate ownership in the corporation
Large stock dividend
A stock dividend greater than 20% to 25% of the issued and outstanding stock
Small stock dividend
A stock dividend of less than 20% to 25% of the issued and outstanding stock.
What is the effect of a stock split on stock price?
A stock split also decreases the market price per share of the stock
How is treasury stock recorded?
At cost (what the company paid to reacquire the shares), without reference to par value
What are the various ways partnership profits and losses are allocated?
Based on a stated ratio, based on each partner's capital balance, based on each partner's service, and based on a combination of stated ratios, capital balances, and service
What are two classes of stock
Capital and Preferred Stock
What is the normal balance of Treasury Stock?
DEbit
What entity form is does the accounting for an LLC follow?
Legal entity
What are the 4 reasons a corporation would purchase treasury stock?
Management wants to increase net assets by buying low and selling high, management wants to support the company's stock price, management wants to avoid a takeover by an outside party by reducing the number of outstanding shares that have voting rights, and management wants to reward valued employees with stock
Is the par value of a stock the price at which the stock is bought and sold?
Most companies set par value low to avoid issuing their stock below par. The par value of a stock has no relation to the market value, which is the price at which the stock is bought and sold.
What are the two basic sources of the stockholders' equity section?
Paid-in capital and retained earnings
What is the difference on the accounting for par value stock and stated value stock?
Par value stock is treated the same as stated value stock except for the account names
Disadvantages of partnerships
Partnership agreement may be difficult to formulate. Each time a new partner is admitted, or a new partner withdraws, the business needs a new partnership agreement. Relations among partners may be fragile. Mutual agency and unlimited liability create personal obligations for each partner.
Main advantages that preferred stockholders have over common stockholders
Receive a dividend preference over common stockholders. Receive assets before common stockholders if the corporation liquidates.
How is a stock split recorded?
Recorded in a memorandum entry- an entry in the journal that notes a significant event but has no debit or credit amount
How is the balance sheet presentation for equity different from a sole proprietorship?
Reports a separate capital account for each partner
How is the statement of partners' equity different from the statement of owner's equity?
Shows the changes in each partner's capital account for a specific period of time
Features that make an LLC like a partnership
The LLC can elect not to pay a business income tax. The income of the LLC can be taxed to the members as though they were partners. This is the other big advantage of an LLC as compared to a corporation. Corporations pay a corporate income tax. Then the stockholders pay personal income tax on any dividends they receive from the corporation. This is why we say that corporations face double taxation, the members (owners of the LLC) can participate actively in management of the business, and the accounting for an LLC generally follows the pattern for a partnership.
Features that make an LLC like a corporation
The LLC is a legal entity that required the business to file articles of organization with the state, the business name must include "LLC" or a similar designation to alert the public about the limited liability of the members, and the members are not personally liable for the business's debts. This is one of the chief advantages of an LLC compared to a sole proprietorship or partnership.
Does a corporation have to issue both classes of stock?
There is no limit as to the number or types of classes of stock that a corporation may issue
Why would a corporation issue a stock dividend?
To continue dividends but conserve cash, to reduce the market price per share of its stock, and to reward investors
What are the rights of stockholders?
Vote, Dividends, Liquidation, Preemptive right
Corporation
a business organized under state law that is a separate legal entity
Partnership
a business with two or more owners and not organized as a corporation
S Corporation
a corporation with 100 or fewer stockholders that can elect to be taxed in the same way as a partnership
Stockholder's equity
a corporation's equity that includes paid-in capital and retained earnings
Treasury Stock
a corporation's own stock that it has previously issued and later reacquired
Stock Dividend
a distribution by a corporation of its own stock to its stockholders
Dividend
a distribution of a corporation's earning to stockholders
Underwriter
a firm that handles the issuance of a company's stock to the public, usually assuming some of the risk by agreeing to buy the stock if the firm cannot sell all of the stock to its clients
Limited Liability Company (LLC)
a form of business organization that is neither a partnership nor a corporation but combines the advantages of both
General partnership
a form of partnership in which each partner is a co-owner of the business, with all the privileges and risks of ownership
Limited Liability Partnership (LLC)
a form of partnership in which each partner is protected from the malpractice or negligence of the other partners
Limited partner
a partner who has limited personal liability in the partnership
General partner
a partner who has unlimited personal liability in the partnership
Limited Partnership (LP)
a partnership with at least two classes of partners: one or more general partners and one or more limited partners
Dividend in Arrears
a preferred stock dividend is in arrears if the dividend has not been paid for the year and the preferred stock is cumulative
Par value
an amount assigned by a company to a share of its stock
Memorandum entry
an entry in the journal that notes a significant even, but has no debit or credit amount
Stock split
an increase in the number of issued and outstanding shares of stock coupled with a proportionate reduction in the par value of the stock
Advantages of a corporation
corporations can raise more money than a proprietorship or partnership, a corporation has a continuous life, the transfer of corporate ownership is easy, there is no mutual agency among the stockholders and the corporation, and stockholders have limited liability and disadvantages
3 dates involved in declaring and paying dividends
declaration date, date of record, and payment date
Dissolution
ending of a partnership
Retained earnings
equity earned by profitable operations of a corporation that is not distributed to stock holders
Mutual agency
every partner can bind the business to a contract within the scope of the partnership's regular business operations
What are 3 types of partnerships?
general, limited, limited liability
Outstanding stock
issued stock in the hands of stockholders
What are the owners of and LLC called
members
Stated value stock
no-par stock that has been assigned an amount similar to par value
Disadvantages of a corporation
ownership and management are often separated, the earnings of a corporation may be subject to double taxation, government regulation is expensive, and start-up costs are higher than other business forms.
Stock certificate
paper evidence of ownership in a corporation
Partnership advantages compared to sole proprietorship
partnership can raise more capital partnership brings together the abilities of more than one person partners working well together can add more value than by working alone & corporations
Partnership advantages compared to corporations
partnership is less expensive to organize than a corporation, which requires a charter from the same there's no double taxation-partnership income is taxed only to the partners as individuals .
Noncumulative Preferred Stock
preferred stock whose owners do not receive passed dividends
Cumulative Preferred Stock
preferred stock whose owners must receive all dividends in arrears plus the current year dividend before the corporation pays dividends to the common stockholders
Paid-in capital
represents amounts received from the stockholders of a corporation in exchange for stock
Paid-in capital in excess of par
represents amounts receives from stockholders in excess of par value
Common stock
represents the basic ownership of a corporation
Capital stock
represents the individual's ownership of the corporation's capital
What account is dividends closed to
retained earnings
Premium
the amount above par at which a stock is issued
Issue Price
the amount that the corporation receives from using stock
Partnership Agreement
the contract between partners that specifies such items as the name, location, and nature of the business, duties of each partner, and the method of sharing profits and losses among the partners
Authorized stock
the maximum number of shares of stock that the corporate charter allows the corporation to issue
Legal Capital
the portion if stockholders' equity that cannot be used for dividends
Unlimited personal liability
when a partnership (or a sole proprietorship) cannot pay its debts with business assets, the partners (or the proprietor) must use personal assets to meet the debt