ACCT 222 Chapter 8

Assume that Nelson's Board of Directors appropriated $1,000 of retained earnings for future expansion. The effects on the financial statements follow:

RE : (1,000) Appropriated RE: +$1,000

Authorized shares

The maximum number of shares of capital stock that can be sold to the public.

Market value

The price at which securities sell in the secondary market: also called fair value.

Purchasing treasury stock reduces the number of issued shares.

This is false. Purchasing treasury stock reduces the number of outstanding shares, but does not affect the number of issued shares

One reason for a corporation to buy its own stock is to boost its net income when treasury stock is reissued for a higher price.

This is false. Reissuing treasury stock does not impact net income

Corporations may buy back their own stock (treasury stock) to avoid hostile takeovers.

This is true. Purchasing treasury stock keeps those shares away from the company attempting the takeover

The treasury stock account is classified as a negative equity account.

This is true. Treasury stock is a negative equity account

Articles of Incorporation

set of formal documents filed with a government body to legally document the creation of a corporation

Common stock

shares entitling their holder to dividends that vary in amount and may even be missed, depending on the fortunes of the company

A distribution by a sole proprietorship to the owner is called a withdrawal. T or F

True *Explanation:* Withdrawals are distributions to the owners of sole proprietorships. Dividends are distributions to corporate stockholders.

Coporation

separate legal entity created by the authority of a state government -Each state has separate laws governing establishing corporations

Investing Activities

the net amount of cash received and paid during an accounting period for long-term assets and investments. Ex: the money a company uses to invest in itself or the money it makes from its investments

Captial Stock

total shares of ownership in a corporation

Partnership

Owned by two or more individuals -require clear agreements about authority, risks, and the sharing of profits and losses

Double Taxation

Policy to tax corporate profits distributed to owners twice, once when the income is reported on the corporation's income tax return and again when the dividends are reported in the individual's return

Cumulative dividends

Preferred dividends that accumulate from year to year until paid

Stock dividends

Proportionate distribution of additional shares of the declaring corporation's stock. - No change in total stockholders' equity - No change in par values - All stock holders retain same percentage of ownership

Stock splits

Proportionate increase in the number of outstanding shares; designed to reduce the market value of the stock and its par value -The number of outstanding shares increase and par value is decreased proportionately. -Retained earnings is not affected.

Reasons for purchasing treasury stock

- Employee stock option plans - Preparation for a merger - To increase earnings per share - Supporting the stock price - To avoid a hostile takeover

Appropriation of Retained Earnings

- Retained earnings that are set aside by the board and are assigned to a specific purpose. - They will not be distributed to shareholders as dividend payments - A corporation's directors can voluntarily limit dividends because of a special need for cash.

How does regulation differ with businesses?

-*Few laws* govern the operation of proprietorships and partnerships -Corporations are *subject to to regulations* -Large, publicly traded corporations are much *more heavily regulated* than smaller, closely held corporations

Rights of common stock holders

-Buy and sell stock -Share in the distribution of profits -Share in the distribution of assets in the case of liquidation -Vote on significant matters that affect the corporate charter -Participate in the election of directors

Corporate Disadvantages

-Governmental regulation -Corporate double taxation

Corporate Advantages

-Separate legal Entity -Limited liability of stockholders -Continuous life -Management Structure -Easily transferable ownership rights -Ability to raise capital

Two ways stockholders benefit when a company generates earnings

-dividends -increase in market price per share

- Board of Directors decided to issue a 10 percent stock dividend on the 150 outstanding shares of its $20 par value, Class B common stock. -Market value at the time of the stock dividend was $30 per share. The effects on the financial statements would be as follows:

0.10 × 150 shares × $20 par = $300 0.10 × 150 shares × $30 per share = $450 - Common stock increase: $300 - Paid-in capital in excess: 150 - Retain earnings: (450) RE is recorded as a negative because the amount in RE is moving to another equity account *(RE->CS)*

Sole Proprietorship

A business owned by one person

Treasury Stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use.

Preferred stock

A separate class of stock, typically having priority over common shares in: - dividend distributions - distribution of assets in case of liquidation - Preferred stock usually has a stated dividend rate - *Normally has no voting rights*

*Stock split ex:* Nelson's Board of Directors declared a 2-for-1 stock split on the 165 outstanding shares of its $20 par value, Class B common stock Before split: Common Stock shares - 165 Par Value per Share - $20 Total Par Value - $3,300 What would this look like after the split?

After Split: Common Stock Shares - 330 Par Value per Share - $10 Total Par Value - $3,300 - The number of outstanding shares increase and par value is decreased proportionately. Does not affect RE - No journal entry required — Change par value and number of shares authorized and outstanding

Continuity

Concept that describes the fact that a corporation's life may extend well beyond the time at which any particular shareholder decides to retire or to sell their stock

Limited Liability

Concept that investors in a corporation may not be held personally liable for the actions of the corporation -The creditors cannot lay claim to the owners' personal assets as payment for the corporation's debts

The par value of a company's stock: A. dictates the initial price of the stock. B. may be revised each time a company issues more shares of stock. C.is generally greater than market value. D. has little connection to the market value of the stock.

D. has little connection to the market value of the stock.

Date of record

Date in the future that the board of directors identifies the day it declares dividends. - All the shareholders on the date of record will receive a dividend. - The date of record is usually about two-three weeks after the date of declaration. *No entry required*

payment date (dividends)

Date on which a declared stock dividend is scheduled to be paid *Record payment of cash to stockholders*

Reasons for acquiring Treasury stock

Employee stock option plans Preparation for a merger To increase earnings per share Supporting the stock price To avoid a hostile takeover

Stock Certificates

Evidence of ownership interest issued when an investor contributes assets to a corporation -Describes the rights and privileges that accompany ownership

When a corporation records a stock dividend, it decreases the retained earnings account for the par value of the stock. True or false?

False *Explanation:* Retained earnings is decreased for the market value of the stock dividend (rather than the par value of the stock issued).

Van Buren Corporation issued 5,000 shares of $6 par common stock for $24 per share. For this transaction, Common Stock should be increased for $120,000. True or false?

Fasle Common stock increases by $30,000 (= 5,000 shares × $6 par value per share)

Partnership Agreement

Legal document that defines the responsibilities of each partner and describes the division of income and losses

No-par Stock

No par value stock is shares that have been issued without a par value listed on the face of the stock certificate

cash dividend

a cash distribution of earnings by a corporation to its shareholders

Issed shares

authorized shares of stock that have been sold

Unissued shares

authorized shares of stock that have never been sold

Transferability of Ownership

corporate shares are freely transferable by the shareholder

Preferred Stock Dividends

have priority over common stock dividends. - Two types: Cumulative and Noncumulative - Most preferred stock is cumulative

Outstanding shares

issued shares that are owned by stockholders

Treasury shares

issued shares that have been reacquired by the corporation - No voting or dividend rights - Should be reported in the financial statements of a corporation as a *deduction from total stockholder equity*

par value stock

per share amount appearing on stock certificates. It is also an amount that appears on bond certificates.

A reason often given for a corporate stock split is to?

reduce the market price of stock

Where is treasury stock reported on a corporation's balance sheet? A. As an addition to total paid-in capital B. As a deduction from total stockholders' equity, following retained earnings C. As a deduction from total paid-in capital D. As a deduction from retained earnings

B. As a deduction from total stockholders' equity, following retained earnings

Which of the following is not normally a preference given to the holders of preferred stock? A. The right to receive a specified amount of dividends prior any being paid to common stockholders. B. The right to vote before the common stockholders at the corporation's annual meeting. C. The right to receive preference over common stockholders as to the distribution of assets during a liquidation process. D. All of these are preferences given to preferred stock.

B. The right to vote before the common stockholders at the corporation's annual meeting.

Which form of business organization is established as a legal entity separate from its owners? A. Sole proprietorship B. Partnership C. Corporation D. None of these

C. Corporation

Operating Activities

Cash inflows and outflows associated with operating the business. Normally result from *revenue and expense transactions* including interest.

Financing Activities

Cash inflows and outflows from transactions with investors and creditors (except interest). Ex: - Receiving cash from issuing stock or spending cash to repurchase shares. - Receiving cash from issuing debt or paying down debt. - Paying cash dividends to shareholders

declaration date

Date on which the board of directors actually declares a dividend *record liability on date*