chapter 8: proprietorships, partnerships, and corporations

common stock

Basic class of corporate stock that has no preferences as to claims on assets or dividends; certificates that evidence ownership in a company.

dividends in arrears

Cumulative dividends on preferred stock that have not been paid; must be paid prior to paying dividends to common stockholders.

average days to sell inventory

Financial ratio that measures the average number of days that inventory stays in stock before it is sold.

partnership agreement

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

long-term liabilities

Liabilities with maturity dates beyond one year or the company's operating cycle, whichever is longer; noncurrent liabilities.

average days to collect accounts receivable

Measure of how quickly, on average, a business collects its accounts receivable; calculated as 365 divided by the accounts receivable turnover.

cost method of accounting for treasury stock

Method of accounting for treasury stock in which treasury stock purchases are recorded in the Treasury Stock account at their cost to the company without regard to the original issue price or par value.

Sole Proprietorship

A business(usually small) owned by one person

trend analysis

Study of the performance of a business over a period of time.

Inventory Turnover

a measure of sales volume relative to inventory levels; calculated as the cost of goods sold divided by average inventory; indicates how many times a year, on average, the inventory is sold(turned over).

Securities Act of 1933 and Securities Exchange Act of 1934

acts passed after the stock market crash of 1929 designed to regulate the issuance of stock and govern the stock exchanges; created the securities and exchange commission, which has the authority to establish accounting policies for companies registered on the stock exchanges.

legal capital

amount of assets that should be maintained as protection for creditors; the number of shares multiplied by the par value.

ratio analysis

analysis of relationships between two different items to draw conclusions or make decisions.

horizontal analysis

analysis technique that compares amounts of the same item over several time periods

working capital ratio

another term for the current ratio: calculated by dividing current assets by current liabilities

paid-in capital in excess of par(or stated) value

any amount received above the par or stated value of stock when stock is issued

par value

arbitrary value assigned to stock by the board of directors

stated value

arbitrary value assigned to stock by the board of directors

partnership

business entity owned by at least two people who share talents, capital, and the risks of the business.

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 his or her stock.

limited liability

concept that investors in a corporations may not held personally liable for the actions of the corporations(the creditors cannot lay claim to the owner's personal assets as payment for the corporation's debts)

closely held corporation

corporation whose stock is exchanged between a limited number of individuals.

working capital

current assets minus current liabilities

payment date

date on which a dividend is actually paid

declaration date

date on which the board of directors actually declares a dividend

withdrawals

distributions to the owners of proprietorships and partnerships

absolute amounts

dollar totals reported in accounts on financial reports that can be misleading because they make no reference to the relative size of the company being analyzed

stock certificates

evidence of ownership interest issued when an investor contributes to a corporation; describes the rights and privileges that accompany ownership.

debt to assets ratio

financial measure of a company's level of risk, calculated as total debt divided by total assets

Debt to Equity Ratio

financial ratio that compares creditor financing, expressed as the dollar amount of liabilities for each dollar of stockholders equity

accounts receivable turnover

financial ratio that measures how fast accounts receivable are turned into cash; computed by dividing sales by accounts receivables

board of directors

group of individuals elected by the stockholders of a corporation to oversee its operations

articles of incorporation

items on an application filed with a state agency for the formation of a corporation; contains such information as the corporation's name, its purpose, its location, its expected life, provisions for its capital stock, and a list of the members of its board of directors.

corporation

legal entity separate from its owners; formed when a group of individuals with a common purpose join together in an organization according to state laws.

entrenched management

management that may have become ineffective but because of political implications may be difficult to remove

quick ratio

measure of immediate debt-paying ability; calculated by dividing very liquid assets(cash, receivables, and marketable securities) by current liabilities.

current ratio(working capital ratio)

measure of liquidity; calculated by dividing current assets by current liabilities

Solvency Ratios

measures of a firm's long-term debt-paying ability

liquidity ratios

measures of short-term debt-paying ability

authorized stock

number of shares that the corporation is approved by the state to issue

limited liability company

organization offering many of the best features of corporations and partnerships and with many legal benefits of corporations(ex limited liability and centralized management) but permitted by the internal revenue service to be taxed as a partnerships

stockholders

owners of a corporation

cumulative dividends

preferred dividends that accumulate from year to year until paid

stock dividend

proportionate distribution of additional shares of the declaring corporation's stock

Number of Times Interest Earned

ratio that measures a company's ability to make its interest payments; calculated by dividing the amount of earnings available for interest payments(net income before interest and income taxes) by the amount of the interest payments

Appropriated Retained Earnings

retained earning restricted by the board of directors for a specific purpose(ex: to repay debt or for future expansion) although a part of total retained earnings, not available for distribution as dividends.

information overload

situation in which the presentation of too much information confuses the user of the information

treasury stock

stock first issued to the public and brought back to the corporation

outstanding stock

stock owned by outside parties; normally the amount of stock issued less the amount of treasury stock

issued stock

stock sold to the public

preferred stock

stock that receives some form of preferential treatment(usually as to dividends) over common stock; normally has no voting rights

ex-dividend

stock traded after the date of record but before the payment date; does not receive the benefit of the upcoming dividend

materiality

the point at which knowledge of information would influence a user's decision; can be measured in absolute, percentage, quantitative terms. The concepts allows nonmaterial matters to be handled in any convenient way, such as charging a pencil sharpener to expense rather than recording periodic depreciation over its useful life.

market value

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

book value per share

An accounting measure of a share of common stock, computed by dividing total stockholders' equity less preferred rights by the number of common shares outstanding.

date of record

Date that establishes who will receive the dividend payment: shareholders who actually own the stock on the record date will receive the dividend even if they sell the stock before the dividend is paid.

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 on the individual's return.

stock split

Proportionate increase in the number of outstanding shares; designed to reduce the market value of the stock and its par value.