Chapter 10

Treasury

Shares issued and repurchased by the company

The number of shares outstanding equals the number of shares

issued minus the number of shares in treasury

dividends in arrears

unpaid dividends on cumulative preferred stock

Bagel, Inc. issued 50,000 shares of the 100,000 authorized. It has since repurchased 5,000 of its shares. The number of shares outstanding equals ______ shares.

45,000 The 45,000 shares outstanding equals the number issued of 50,000 minus the 5,000 shares bought back by the company.

Return on Equity (ROE)

measures the ability of company management to generate earnings from the resources that owners provide. (= Net Income / Average Stockholders' Equity)

Types of Stock

-Authorized -Issued -Outstanding -Treasury

disadvantages of a corporation

-additional taxes -more paperwork

Which of the following are included in the duties of the board of directors?

-appoint officers to manage the corporation -establish corporate policies

Canadian Falcon issues 1,000 shares of $30 par value preferred stock for $40 per share. We record the transaction as:

-debit cash $40,000 -credit preferred stock $30,000 -credit additional paid-in capital $10,000

Preferred stock tends to have attributes of

both bonds and common stock

dividend yield

dividends per share/Stock price

retained earnings

earnings retained in the business- earnings not distributed as dividends to stockholders over the life of the company. (= net income-dividends)

Retained earnings of $100,000 represent a corporation's cumulative earnings ______ and is shown on the ______.

not paid out by dividends; balance sheet and statement of retained earnings

Par value originally indicated the real value of a company's shares of stock. Today,

par value has no relationship to the market value of the common stock.

convertible

allows the stockholder to exchange shares of preferred stock for common stock at a specified conversion ratio.

"True owners" of the business

common stockholders. In most cases, each share of common stock represents one unit of ownership.

Dividends

distributions by a corporation to its stockholders

Cumulative

preferred stock shares receive priority for future dividends, if dividends are not paid in a given year

Authorized

shares available to sell (=issued + Unissued)

Which of the following will decrease the par value of shares?

stock split

statement of stockholders' equity

summarizes the changes in the balance in each stockholders' equity account over time.

organization chart

traces the line of authority for a typical corporation

Declaration date

the date on which the board of directors officially approves a dividend

redeemable

allow preferred stockholders the option, under specified conditions, to return their shares for a predetermined redemption price.

authorized stock

the total number of shares available to sell, stated in the company's articles of incorporation

Issued

Shares actually sold (=outstanding + treasury)

Outstanding

Shares issued and held by investors

Stock dividends

additional shares of a company's own stock given to stockholders.

Stock split = no change Stock dividend = increase

common stock

No-par value stock

common stock that has not been assigned a par value.

articles of incorporation (corporate charter)

describes the nature of the firm's business activities, the shares of stock to be issued, and the initial board of directors.

Stock split = decrease Stock dividend = no change

par value per share

The declaration and payment of a cash dividend ultimately causes a(n):

-decrease in stockholders' equity. -decrease in Retained earnings. -decrease in Cash

Preferred stock is advantageous in that it:

-has priority over common stock at liquidation -has priority over common stock when dividends are declared

The effect on the accounting equation of declaring a dividend that will be paid at a later date includes a(n):

-increase in liabilities -decrease in stockholders' equity

advantages of a corporation

-limited liability -the ability to raise capital and transfer ownership

Stockholder rights

1. right to vote 2. Right to receive dividends 3. Right to share in the distribution of assets

AnuU, Inc. sold 100,000 shares of the 1,000,000 shares it is allowed to sell. AnuU repurchased 10,000 of these shares. The number of shares issued equals ______ shares.

100,000 The number of shares authorized equals 1,000,000 which is the maximum shares the company is allowed to sell. Of the 1,000,000 shares, the company has sold 100,000 and bought back 10,000 leaving 90,000 shares outstanding.

We record large stock dividends at the _____ ______ per share. We record small stock dividends at the _______ ________, rather than the par value per share.

par value; market value

Preferred stock

preferred over common stock because: 1. usually have first rights to a specified amount of dividends. 2. receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved.

Stock split = no change Stock dividend = decrease

retained earnings

Invested Capital

the amount of money paid into a company by its owners

record date

the date when the company determines who the stockholders of the company are.

Par value

the legal capital per share of stock that's assigned when the corporation is first established.

Treasury Stock

the name given to a company's own issued stock that it has purchased.

Why would a company declare a 2-for-1 stock split when the stockholders are not really receiving anything of substance?

to lower the trading price of the stock to a more acceptable trading range, making it attractive to a large number of potential investors.

Stock split = no change Stock dividend = no change

total stockholders' equity

stock splits

a large stock dividend that includes a reduction in the par or stated value per share.

Limited liability

guarantees that stockholders in a corporation can lose no more than the amount they invested in the company, even in the event of bankruptcy.

who controls the company?

A corporation's stockholders. They are the owners of the corporation. By voting their shares, stockholders determine the makeup of the board of directors- which in turn appoints the management to run the company.

Earnings Per Share (EPS)

A measure of the net income earned on each share of common stock; ((= net income -preferred dividends) / the average number of common shares outstanding)