Accounting Chapter 10
privately held corporation
A corporation that has only a few stockholders and whose stock is not available for sale to the general public
What are the different types of preferred stock?
1. Convertible: stock can convert into common stock 2. Redeemable: stock can be returned to (redeemed by) the corporation at a fixed price 3. Cumulative: stock receives priority for future dividends, if dividends are not declared in the current year (dividends in arrears) i. cumulative stock accumulates
What 3 things can a company do with stock?
1. Issue common stock for cash a. debit cash b. credit common stock and additional paid-in capital 2. Purchase own common stock (treasury stock) a. debit treasury stock b. credit cash 3. Declare dividends on outstanding stock a. debit dividends b. credit dividends payable
How is preferred stock preferred over common stock?
1. Preferred stockholders usually have first rights to a specified amount of dividends if the board of directors declares dividends. 2. Preferred stockholders receive preference over common stockholders in the distribution of assets if the company is dissolved.
What are the disadvantages of a corporation?
1. additional taxes 2. more paperwork
What are the advantages of a corporation?
1. limited liability (stockholders can't lose more than the money they invest in the corporation) 2. ability to raise capital and transfer ownership
What are the 3 primary components of stockholders' equity?
1. paid-in capital 2. retained earnings 3. treasury stock
What are the rights of the stockholders of a corporation?
1. right to vote (including elect the board of directors) 2. right to receive dividends 3. right to share in the distribution of assets if the company is dissolved
Why do companies repurchase their own stock?
1. to boost underpriced stock 2. to distribute surplus cash without paying dividends 3. to boost earnings per share 4. to satisfy employee stock ownership plans
articles of incorporation (corporate charter)
The basic governing documents of a corporation a. includes the: 1. nature of the firm's business activities 2. shares of stock to be issued 3. the initial board of directors
dividend yield
a stock's expected cash dividend/stock's current price
S corporation
allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership
invested capital
amount of money paid into a company by its owners
corporation
an entity that is legally separate from its owners and pays its own income taxes
no-par value stock
common stock that has not been assigned a par value a. Ex. Nike, Proctor and Gamble
publicly held corporation
corporation that sells stock on the open market
What type of stock is preferred stock usually?
cumulative
record date
date on which the company looks at its records to determine who the stockholders of the company are
How do you record common stock?
debit cash credit common stock and additional paid-in capital i. additional paid-in capital is the difference between cash and common stock
How do you record preferred stock?
debit cash credit preferred stock and additional paid-in capital i. additional paid-in capital is the difference between cash and preferred stock
How would you record treasury stock?
debit cash and additional paid-in capital credit treasury stock a. additional paid-in capital is the difference between cash and treasury stock b. treasury stock is higher than cash
How do you record dividends?
debit dividends credit dividends payable
How do you record dividends payable?
debit dividends payable credit cash
How do you record stock dividends when there is additional paid-in capital?
debit stock dividends credit cash and additional paid-in capital a. additional paid-in capital is difference between stock dividends and cash
How do you record stock dividends?
debit stock dividends credit common stock
Buying back stock (treasury stock) ____________________ stockholders' equity.
decreases
dividends
distributions by a corporation to its stockholders a. NOT paid on treasury stock
stock dividends
distributions of additional shares of stock to a firm's stockholders instead of cash
retained earnings
earnings retained by a firm for its use rather than paid out as dividends to stockholders a. equation: retained earnings= all net income- all dividends
What do the board of directors do?
establish corporate policies and appoint officers who manage the corporation
initial public offering (IPO)
first time a corporation issues stock to the public
Issuing stock __________________ stockholder's equity.
increases
price-earnings ratio (PE ratio)
indicates how the stock is trading relative to current earnings
Why would a company declare a stock split?
lower the trading price of the stock to a more acceptable trading range, making it attractive to a large number of potential investors
return on equity
measures the ability of company management to generate earnings from the resources that owners provide
earnings per share
measures the net income earned per share of common stock a. useful in comparing earnings performance for the same company over time b. NOT useful for comparing earnings performance of one company with another because of wide differences in the number of shares outstanding between the companies
For stock split, what happens to total stockholders' equity, common stock, retained earnings and par value per share?
no change for total stockholders' equity, common stock, and retained earnings decrease in par value per share
treasury stock
number of issued shares repurchased by the company
outstanding stock
number of shares held by investors; excludes treasury stock a. only outstanding stock can receive dividends
issued stock
number of shares that have been sold to investors; includes treasury stock a. usually a company does not issue all of its authorized stock
venture capital firms
provide additional financing, often in the millions, for a percentage ownership in the company
What are the two types of corporations?
public and private
We do not record stock _______________.
splits
For stock dividend, what happens to total stockholders' equity, common stock, retained earnings and par value per share?
stockholders' equity= no change common stock= increase retained earnings= decrease par value per share= no change
value stocks
stocks that are priced low in relation to current earnings a. may be justified due to poor future prospects, or it might suggest an underpriced stock could boom in the future
growth stocks
stocks whose future earnings investors expect to be higher a. high in relation to current earnings because investors expect future earnings to be higher
statement of stockholders' equity
summarizes the changes in the balance in each stockholders' equity account over a period of time
stated value
the amount per share assigned by the board of directors to no-par stock a. treated and recorded the same as par value stock
payment date
the date on which a cash dividend is paid to the stockholders of record
declaration date
the date the board of directors announces the next dividend to be paid
stock split
the division of a single share of stock into more than one share
par value
the legal capital assigned per share of stock a. originally indicated the real value of of a company's shares of stock; however now par value has NO relationship to the market value of common stock
additional paid-in capital
the portion of the cash proceeds above par value
market value of equity
the price investors are willing to pay for a company's stock
book value of equity
the total stockholders' equity reported in the balance sheet a. equals market value on the date it's PURCHASED
What happens to total assets, total liabilities and stockholders' equity as a result of a stock dividend?
total assets, total liabilities and stockholders' equity do not change
authorized stock
total number of shares available to sell a. stated in the articles of incorporation
angel investors
wealthy individuals in the business community willing to risk investment funds on a promising business venture a. Ex. Shark Tank investors
