AC210 Final (Ch.11)
Stock options are expensed
when granted and are recorded at the estimated cost of the options
When should a corporation record a liability for dividends on its cumulative preferred stock?
when the dividends have been declared
An IPO
stands for initial public offering is when a private company goes public
T/F Some states allow corporations to issue no-par value common stock
True, since par value is less meaningful today, some states no longer require a specified legal value per share
The journal entry to record the payment of a previously declared dividend includes a
debit to dividends payable credit to Cash
Earnings per share may be determined by
dividing the stock price by the P/E ratio or dividing net income - preferred dividends by the average common shares outstanding
Treasury stock is reported in the
equity section of the balance sheet
A dividend date of record is the date on which the corporation
makes no entry
A corporation may be restricted from paying a dividend if
the dividend is greater than the amount of retained earnings a creditor's loan agreement is violated
Stock splits and stock dividends cause
total stockholders' equity to remain the same
T/F No gain or loss is reported when treasury stock is reissued because GAAP does not consider transactions between a corporation and its owners to be profit-making activities
True, GAAP does not allow gains or losses to be reported when a corporation reissues its treasury stock
The declaration and payment of a cash dividend ultimately causes a(n)
a decrease in Retained Earnings a decrease in Cash decrease in stockholders' equity
The effect on the accounting equation of declaring a cash dividend includes
a decrease in stockolders' equity an increase in liabilities
A stock dividend
has no effect on total stockholders' equity increases common stock decreases Retained Earnings
Preferred stock is advantageous in that it
has priority over common stock when dividends are declared has priority over common stock at liquidation
An increase in EPS is an indicator of
higher profitability
Corporations will declare stock dividends (or stock split) in order to
reduce the market price of a share of stock and make it more attractive to some investors
Reports net income relative to average common stockholders
ROE
What reports net income relative to average common stockholders' equity in dollars?
ROE
Under IFRS, if the company issuing preferred stock is contractually obligated to pay dividends or to redeem the shares at a future date, then the preferred stock is classified as
a liability
Treasury stock
is shares of stock no longer outstanding is a contra-equity account reduces total stockholders' equity
Retained earnings represent a corporation's cumulative earnings __________ and is shown on the __________
kept and is shown on the balance sheet and statement of retained earnings
Accumulated Deficit
means that retained earnings has a debit balance is shown in parentheses on the balance sheet indicates accumulated net losses
A stock dividend causes a stockholders' percentage ownership in a company to
remain the same it reduces Retained Earnings and increases Common Stock, the stockholders receive the same percentage so their percentage ownership remains the same
A higher ROE means
stockholders may enjoy higher returns the company used financial leverage to its stockholders' advantage
What items would be found on a statement of stockholders' equity?
Dividends, Net income, Stock issuances, Additional paid-in capital, treasury stock
What is needed to calculate the P/E ratio?
Earnings per share and stock price since it is calculated by dividing the stock price by EPS
Accounts that are closed into Retained Earnings at year-end
Expense accounts, Dividends, and Revenue Accounts
If Squid Roe's P/E ratio is 12, this means that
Investors are willing to pay 12 times the current year's earnings per share of stock
What would be under the Retained Earnings column of a statement of stockholders' equity?
Net Income Dividends: Preferred Dividends: Common
Earnings per share (EPS) appears
on the income statement
Lenders will sometimes impose dividend restrictions to
prevent the corporation from paying out too much to stockholders
Shares outstanding equals
shares issued - treasury shares
When Diva, Inc. declared a $10,000 cash dividend, it recorded debit to __________ and a credit to __________
debit to dividends credit to dividends payable
The closing entry required at year end, includes a
debit to retained earnings credit to dividends
Dividends Payable is recorded as a credit on the _________
declaration date
The effect of issuing 1,000,000 new shares of common stock will do what to EPS?
decrease
A cash dividend differs from a 2-for-1 stock split in that a cash dividend _______________
decreases current assets decreases retained earnings
A distribution of a company's accumulated prior earnings is a
dividend
Investors who acquire preferred stock...
have preference as to dividends that is cumulative have the right to receive dividends in arrears once dividends are declared
A company's past profits that are kept instead of being paid to stockholders are
retained earnings
Dividends is closed into __________ _____________ at the end of the fiscal year
retained earnings
Investors earn a return on stock investments by
selling the stock for more than its cost receiving dividends
Preferred stock carries priority over common stock both for
dividends and at liquidation
Ima Rich purchased 100 shares of Stockits, Inc.'s $1 par value common stock from Stockits for $5 per share. How would this effect Stockits' financial statements?
-The financing activities section on the statement of cash flows increases -Stockholders' equity on the balance sheet increases
Stockit, Inc. issues 100,000 shares of the 1,000,000 shares it is allowed to issue. Stockit has repurchased 10,000 of its own shares. The number of shares authorized equals
1,000,000 and has 90,000 shares outstanding
Reasons a company would repurchase its own stock
To have shares of stock to issue when stock options are exercised To reduce the number of outstanding shares To give the impression that the stock is worth buying To buy another company using stock
Items such as unrealized gains and losses from pensions, foreign currencies or financial investments are reported as
accumulated other comprehensive income
Common stock's par value is
an insignificant amount specified in the corporate charter was introduced to prevent bankrupt companies from unfairly distributing company resources affects how common stock is recorded has become less meaningful because states use other means to prevent stockholders from removing capital from financially distressed companies
Dividends on preferred stock
are more attractive than common stock dividends to investors who want a stable income are paid before dividends on common stock may be paid at a fixed rate, such as 7%
Preferred stockholders
have the right to receive dividends only in the years the board of directors declares dividends
The repurchase of treasury stock will cause earnings per share (EPS) to
increase
The risk from financial leverage
increases when the cost of borrowing is greater than the return decreases when a company issues new shares of stock
The number of shares outstanding equals the number of shares
issued - the number of shares in treasury