Accounting Test 3 Chapters 11-13

Stockholders' equity

A corporation's equity

Long Term Liability

A liability that does not need to be paid within one year.

Current Liability

A liability that must be paid with cash or with goods and services within one year.

Pension Plan

A plan that provides benefits to retired employees.

Contingent Liability

A potential liability that depends on some future event.

Payroll Register

A schedule that summarizes the earnings, withholdings, and net pay for each employee.

Short-Term Note Payable

A written promise made by the business to pay a debt, usually involving interest, within one year or less.

Partnership contract

Agreement among partners that sets terms under which the affairs of the partnership are conducted.

Minimum legal capital

Amount of assets defined by law that stockholders must (potentially) invest in a corporation; usually defined as par value of the stock; intended to protect creditors.

Earnings per share (EPS)

Amount of income earned by each share of a company's outstanding common stock.

Paid-in capital in excess of par value

Amount received from issuance of stock that is in excess of the stock's par value.

Call price

Amount that must be paid to call and retire a callable preferred stock or a callable bond.

Warranty

An agreement that guarantees a company's product against defects.

Corporation

Business that is a separate legal entity under state or federal laws with owners called shareholders or stockholders.

Simple capital structure

Capital structure that consists of only common stock and nonconvertible preferred stock; consists of no dilutive securities.

Complex capital structure

Capital structure that includes outstanding rights or options to purchase common stock, or securities that are convertible into common stock.

Changes in accounting estimates

Change in an accounting estimate that results from new information, subsequent developments, or improved judgment that impacts current and future periods.

Par value stock

Class of stock assigned a par value by the corporate charter.

C corporation

Corporation that does not qualify for nor elect to be treated as a proprietorship or partnership for income tax purposes and therefore is subject to income taxes.

S corporation

Corporation that meets special tax qualifications so as to be treated like a partnership for income tax purposes.

Common stock

Corporation's basic ownership share; also generically called capital stock.

Stock dividend

Corporation's distribution of its own stock to its stockholders without the receipt of any payment.

Treasury stock

Corporation's own stock that it reacquired and still holds.

Prior period adjustment

Correction of an error in a prior year that is reported in the statement of retained earnings (or statement of stockholders' equity) net of any income tax effects.

Organization expenses (costs)

Costs such as legal fees and promoter fees to bring an entity into existence.

Retained earnings

Cumulative income less cumulative losses and dividends.

Date of record

Date directors specify for identifying stockholders to receive dividends.

Date of payment

Date the corporation makes the dividend payment.

Date of declaration

Date the directors vote to pay a dividend.

Retained earnings deficit

Debit (abnormal) balance in Retained Earnings; occurs when cumulative losses and dividends exceed cumulative income.

Liabilities

Debts that are owed to creditors.

Discount on stock

Difference between the par value of stock and its issue price when issued at a price below par value.

Partnership liquidation

Dissolution of a partnership by (1) selling non-cash assets and allocating any gain or loss according to partners' income-and-loss ratio, (2) paying liabilities, and (3) distributing any remaining cash according to partners' capital balances.

Liquidating cash dividend

Distributions of assets that returns part of the original investment to stockholders; deducted from contributed capital accounts.

Financial leverage

Earning a higher return on equity be paying dividends on preferred stock or interest on debt at a rate lower than the return earned with the assets from issuing preferred stock or debt.

Diluted earnings per share

Earnings per share calculation that requires dilutive securities be added to the denominator of the basic EPS calculation.

Book value per preferred share

Equity applicable to preferred shares (equals its call price [or par value if it is not callable] plus any cumulative dividends in arrears) divided by the number of preferred shares outstanding.

Times-Interest-Earned Ratio

Evaluates a business' ability to pay interest expense. (Net income + Income tax expense + Interest expense) / Interest expense.

Social Security (FICA) Tax

FICA tax, which is withheld from employees' pay and matched by the employer.

Statement of stockholders' equity

Financial statement that lists the beginning and ending balances of each major equity account and describes all changes in those accounts.

Statement of partners' equity

Financial statement that shows total capital balances at the beginning of the period, any additional investment by partners, the income or loss of the period, the partners' withdrawals, and the partners' ending capital balances.

Capital stock

General term referring to a corporation's stock used in obtaining capital (owner financing).

Net Pay

Gross pay minus all deductions. The amount of compensation that the employee actually takes home.

Income Tax Withholding

Income tax deducted from an employee's gross pay.

Proxy

Legal document giving a stockholder's agent the power to exercise the stockholder's voting rights.

Unlimited liability

Legal relationship among general partners that makes each of them responsible for partnership debts if the other partners are unable to pay their shares.

Mutual agency

Legal relationship among partners whereby each partner is an agent of the partnership and is able to bind the partnership to contracts within the scope of the partnership's business.

Basic earnings per share

Net income less any preferred dividends and then divided by weighted-average common shares outstanding.

Stated value stock

No-par stock assigned a stated value per share; this amount is recorded in the stock account when the stock is issued.

Reverse stock split

Occurs when a corporation calls in its stock and replaces each share with less than one new share; increases both market value per share and any par or stated value per share.

Stock split

Occurs when a corporation calls in its stock and replaces each share with more than one new share; decreases both the market value per share and any par or stated value per share.

Limited liability company (LLC)

Organization form that combines select features of a corporation and a limited partnership; provides limited liability to its members (owners), is free of business tax, and allows members to actively participate in management.

Partner return on equity

Partner net income divided by average partner equity for the period.

General partner

Partner who assumes unlimited liability for the debts of the partnership; responsible for partnership management.

Limited partners

Partners who have no personal liability for partnership debts beyond the amounts they invested in the partnership.

Limited liability partnership

Partnership in which a partner is not personally liable for malpractice or negligence unless that partner is responsible for providing the service that resulted in the claim.

General partnership

Partnership in which all partners have mutual agency and unlimited liability for partnership debts.

Limited partnership

Partnership that has two classes of partners, limited partners and general partners.

Unemployment Compensation Tax

Payroll tax paid by employers to the government, which uses the cash to pay unemployment benefits to people who are out of work.

Nonparticipating preferred stock

Preferred stock on which dividends are limited to a maximum amount each year.

Noncumulative preferred stock

Preferred stock on which the right to receive dividends is lost for any period when dividends are not declared.

Cumulative preferred stock

Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid.

Participating preferred stock

Preferred stock that shares with common stockholders any dividends paid in excess of the percent stated on preferred stock.

Callable preferred stock

Preferred stock that the issuing corporation, at its option, may retire by paying the call price plus any dividends in arrears.

Convertible preferred stock

Preferred stock with an option to exchange it for common stock at a specified rate.

Market value per share

Price at which stock is bought or sold.

Price-earnings (PE) ratio

Ratio of a company's current market value per share to its earnings per share.

Dividend yield

Ratio of the annual amount of cash dividends distributed to common shareholders relative to the common stock's market value (price).

Book value per common share

Recorded amount of equity applicable to common shares divided by the number of common shares outstanding.

Restricted retained earnings

Retained earnings not available for dividends because of legal or contractual limitations.

Appropriated retained earnings

Retained earnings separately reported to inform stockholders of funding needs.

Stock options

Rights to purchase common stock at a fixed price over a specified period of time.

Dilutive securities

Securities having the potential to increase common shares outstanding; examples are options, rights, convertible bonds, and convertible preferred stock.

No-par value stock

Stock class that has not been assigned a par (or stated) value by the corporate charter.

Small stock dividend

Stock dividend that is 25% or less of a corporation's previously outstanding shares.

Large stock dividend

Stock dividend that is more than 25% of the previously outstanding shares.

Preferred stock

Stock with a priority status over common stockholders in one or more ways, such as paying dividends or distributing assets.

Preemptive right

Stockholders' right to maintain their proportionate interest in a corporation with any additional shares issued.

Current Portion of Notes Payable

The amount of the principal that is payable within one year.

Federal Insurance Contributions Act (FICA)

The federal act that created the Social Security tax that provides retirement, disability and medical benefits.

Gross Pay

The total amount of salary, wages, commissions, and any other employee compensation before taxes and other deductions.

Authorized stock

Total amount of stock that a corporation's charter authorizes it to issue.

Partnership

Unincorporated association of two or more persons to pursue a business for profit as co-owners.

Dividend in arrears

Unpaid dividend on cumulative preferred stock; must be paid before any regular dividends on preferred stock and before any dividends on common stock.

Par value

Value assigned a share of stock by the corporate charter when the stock is authorized.