Accounting chapter 11

Cash paid for stock would be found by

# of issued shares * Mkt price/share

increase in Common stock is:

# of shares issued * par value/share

Dividends in arrears pref eq:

#shares x par val x % div x #yrs

Retained Earnings

(Net inc - Dividends) Reports the cumulative amount of net income earned by the company less the cumulative amount of dividends declared since the corporation was first organized. Retained Earnings represents earned capital.

Treasury Stock

(Repurchased Stock - reduction to SE) Reports shares that were previously owned by stockholders but have been reacquired and are now held by the corporation.

Advantages of Equity Financing

- equity doesn't have to be repaid. - dividends are optional.

Advantages of debt

-interest of debt is tax deductible. -debt does not change stockholder control.

Stockholder's Equity section of the balance sheet includes:

1. Contributed Capital 2. Retained Earnings 3. Treasury Stock 4. Accumulated Other Comprehensive Income (loss)

4 major Dividend dates:

1. Declaration date 2. Date of Record 3. Date of Payment 4. Year End

In Distribution of Additional shares to Stockholders there is:

1. No change in total SE 2. All stockholders retain same percentage of ownership 3. No change in par values

Preferred Stock characteristics

1. Priority over common stock 2. Usually has fixed dividend rate 3. usually has no voting rights

Corporations issue stock dividends to:

1. Reduce the market price per share of stock. 2. Demonstrate commitment to stockholders while conserving cash during difficult times. 3. Signal that the company expects strong financial performance in the future.

What are the 4 reasons a corporation repurchases stock:

1. Send a signal that the company believes its stock is worth acquiring. 2. Obtain shares to reissue for the purchase of other companies. 3. Obtain shares to reissue to employees as part of stock option plans. 4. Reduce the number of outstanding shares to increase per-share measures of earnings.

What are the 3 factors to ease of participation in Corporate Ownership?

1. Simple to become owner 2. Easy to transfer ownership 3. Provides limited liability

To pay cash dividends, a corporations must have 2 things:

1. Sufficient retained earnings (to cover the amount of the Dividend) 2. Sufficient Cash (to pay the dividend)

What are the 2 most common dividend preferences?

1. current Dividend pref 2. Cumulative Dividend pref

Which dividend dates require a journal entry?

1. declaration date (declare) 3. date of payment (pay) 4. Year End (close)

Because a corporation is a separate legal entity, it can:

1. own assets 2. incur liabilities 3. sue and be sued 4. enter into contracts

Stockholders basic benefits?

1. voting rights 2. dividends 3. residual claim 4. preemptive rights

Small Stock dividend

<25% of Company's outstanding stock

Large stock dividend

> 25% of company's outstanding stock

Accumulated Deficit is

A negative balance in retained earnings.

The difference between par value of the stock and the market value of the stock is credited to

Additional Paid-in Capital

Stock Splits

An increase in the number of shares and a corresponding decreasein par value per share. Retained earnings is not affected. No JE needed.

Cumulative Dividend Preference

Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid. Not on BS, but Notes to financial Statements.

Treasury shares

Are issued shares that have been required by the corporation.

Issued Shares are:

Authorized shares of stock that have been distributed to stockholders

Resistance of Treasury Stock accounts include:

Cash Treasury stock(-xSE) Additional paid-in Capital

Additional Paid-in Capital=

Cash - Common Stock

In order to close out dividends what do you have to do to them?

Credit (cr) them

what do u do to dividends when they increase? is that an inc or dec to SE?

Debit (dr) dec

For declaration date, what does the JE include?

Dividends (dr) Dividends payable (cr)

The date of payment JE includes?

Dividends Payable (dr {while clean}) Cash (Cr {payout cash})

Retained Earnings represents

Earned Capital

What is the single most widely watched/used financial ratio?

Earning Per share (EPS)

Which ratio is used in comparing a company with itself over time, not across companies?

Earnings Per share (EPS)

Preemptive Rights

Existing shareholders may be given the first chance to buy newly issued shares of stock before it is offered to others.

For the EPS, ROE, and P/E ratio, so you want a high or lower ratio?

Higher

What does EPS report?

How much profit is earned for each share of common stock outstanding.

residual claims

In the event of liquidation, stockholders share, according to their percentage ownership, in any remaining assets after creditors are paid.

Price/Earnings (P/E) Ratio

Measure of the value that investors place on a company's common stock.

Are profits or losses recognized on Treasury Stock Transactions?

No

Accumulated Other Comprehensive Income (Loss)

Reports unrealized gains and losses, which are temporary changes in the value of certain assets and liabilities the company holds.

The close out/ Year-end JE?

Retained Earnings (dr) Dividends (cr) {reduction to RE}

Outstanding shares

Shares that are currently owned by stock holders.

No-par Stock

Some states do not require a par value to be stated in the charter.

Seasoned New Issue

Subsequent issues of new stock to the public.

Return on Equity (ROE)

The amount earned earned for each dollar invested by common stockholders.

Current Dividend Preference

The current preferred dividends must be paid before paying any dividends to common stock.

Initial Public Offering (IPO)

The first time a corporation issues stock to the public.

Retained Earnings equals the

Total cumulative amount of reported net income (less) any net losses and dividends declared since the company started operating.

Stock used to compensate employees often include:

a combination of base pay, cash bonuses, and stock options.

Stock Dividends

a distribution of additional shares of stock to stockholders.

The difference between the stocks repurchase price and the resistance price is recorded as

additional paid-in capital

Stock options

allow employees to purchase stock at a later date from the corporation at a fraction of the stock's market price.

Par Value

an arbitrary amount assigned to each share of stock when it is authorized.

Treasury stock is not an _____.

asset

Unissued Shares of stock are:

authorized shares of stock that have never been issued to stock holders.

EPS is usually recorded...?

below Net Income on the I/S or in Notes to financial Statements

debt financing

borrowing money from lenders

Stock Issuance accounts include:

cash common stock Additional Paid-in Capital

Repurchase of stock accounts include:

cash Treasury stock(+xSE)

When dealing with preferred stock issuance, how do you get Additional paid-in capital?

cash - Preferred stock

Additional Paid in Capital is

cash - common stock

Each corporation must have at least what type of stock?

common stock

Treasury Stock is what kind of account?

contra-equity (xSE), subtracted form total stockholders' equity

Small Stock Dividend is recorded at

current market value of stock

Stock exchanged between investors:

does not affect the corporation's accounting records. So NO JOURNAL ENTRY.

How would u get outstanding shares given issued and treasury?

issued - treasury = outstanding

Authorized shares can be classified as _____ or ____.

issued or unissued

equity financing

issuing new stock to investors

are corporations required to pay dividends?

no

are dividends an expense?

no

Par Value is ____ to market price.

not equal, not related in any way.

Issued shares equation

outstanding + treasury

Issued shares can be classified as either_______ ______ or_______ _______.

outstanding shares or treasury shares

Contributed Capital represents:

paid-in capital

Large Stock Dividend is recorded at

par value of stock

Contributed Capital

reports the amount of capital the company received from investors' contributions, in exchange for the company's stock. For this reason, contributed capital represents paid-in capital.

Which ratio can be appropriately compared across companies?

return on equity (ROE)

a corporation is a _____ _____ _____. What does this mean?

separat legal entity. This means it exists apart from its owners, so it doesn't die when its owners die.

Dividends on preferred stock eq:

shares x par val x dividend %

The statement of stockholders' equity has a column for each

stockholders' equity account and shows the factors that increased and decreased these account balances during the period.

The major advantage of the corporate form of business is

the ease of raising capital as both large and small investors can participate in corporate ownership.

Authorized shares are:

the max number of share of stock that can be issued to the public.

Common stock dividends eq:

total dividends declared - dividends on preferred stock