Chapter 11 Accounting

Best Effort- Stock Issuance (pg.512)

In this case, the investment bank agrees to seek as many shares as possible at a set prices, but the corporation bears the risk of any unsold shares.

Legal Capital (pg.507)

Is the minimum amount of contributed capital that must remain in a corporation as a margin of protection for creditors.

Noncumulative (pg.510)

Omitted dividends do not carry forward.

Paid-In Capital (pg.513)

The amount of capital contributed to a corporation by its stockholders in excess of its par value or stated value.

Common Stock (pg.508)

The basic ownership class of capital stock, carrying the right to vote, share in earnings, participate in future share issues, and share in any liquidation proceeds after all more senior claims have been settled. -When only one class of stock is issued, it is called common stock.

Retained Earnings (pg.513)

The earnings or a corporation that have been retained in the corporation (have not been paid out as a dividend) for future corporate use.

Authorized Shares (pg.508)

The maximum number of shares in a class of stock that a corporation may issue.

Preemptive Right (pg.509)

The right of a stockholder to maintain his or her proportionate ownership interest in a corporation by having the right to purchase an appropriate quantity of shares in any new share issues. -Each stockholder of a corporation has a preemptive right to maintain his or her proportionate ownership interest in the corporation. If company issues additional shares of stock, the current owners of that type of capital stock receive the first opportunity to acquire, on a pro rata basis, the new shares. ~In certain situations, management may request stockholders to waive their preemptive right. Ex. A corporation may wish to issue additional shares of capital stock for use to acquire another company.

Dividends (pg.516)

Distribution of assets (usually cash) or stock from a corporation to its stockholders. -Dividends are usually paid in cash but may also be paid as property or additional shares of stock in the firm. **Note that dividends are not considered an expense and do not appear on the income statement, instead they are a direct reduction of retained earnings (contra-equity).**

Disadvantages of the Corporate Form of Organization (pg.506-507)

-Organization Costs ~Creating a corporation is more costly than organizing a proprietorship or partnership. -Taxation ~As separate legal entities, corporations are subject to federal income taxes on any earned income. Stockholders are likewise subject to income taxation on any income received from a corporation as dividends, leading to a situation of double taxation of a corporation's distributed earnings. Usually, corporations are subject to state income taxes in which they are incorporated or are doing business. They may also be subject to real estate, personal property, and franchise taxes. -Regulation and Supervision ~Corporations are subject to greater degrees of regulation and supervision than are proprietorships and partnerships.

Advantages of the Corporate Form of Organization (pg.504-506)

-Separate Legal Entity: ~The stockholders of a corporation, however, are separate and distinct from the corporation. The characteristic contracts with proprietorships and partnerships, which are accounting entities but not legal entities apart from their owners. -Limited Liability: ~The liability of stockholders with respect to a company's business affairs is usually limited to the value of their investment in the corporation. By way of contrast, the owners of proprietorships an partnerships can be held financially responsible, separately and collectively, for any unsatisfied obligations of the business. -Transferability of Ownership: ~Shares in a corporation may be routinely transferred without affecting a company's operations. The corporation merely notes such transfers of ownership in the stockholder records. Although a corporation must have stockholder records to notify stockholders of meetings and to pay dividends, the price at which shares transfer between investors is not recognized in the corporations accounts. -Continuity of Existence ~Because routine transfers of ownership do not affect a corporation's affairs, the corporation is said to have continuity of existence. In a partnership, any change in ownership technically results in a discontinuation of the old partnership and the formation of a new one. -Capital Raising Capability ~The limited liability of stockholders and the ease with which shares of stock may be transferred from one investor to another are attractive features to potential stockholders. These characteristics enhance the ability of the corporation to raise large amounts of capital by issuing shares of stock. There exists a wide spectrum of potential investors.

Dividend Payout Ratio (pg.523)

-The dividend payout ratio measures the percentage of the net income available to common shareholders that is paid out as dividends. = Annual Dividend Per Share ------------------------------------------ Earnings Per Share -Growth companies typically have low dividend payout ratios since they would rather use their cash to fund additional growth, while more mature companies, lacking growth opportunities, tend to have higher dividend payout ratios.

Dividend Yield (pg.522)

-The dividend yield measures the rate of return in cash dividends from an investment in the company's common stock. ~The ratio may be calculated for either common or preferred shares. = Annual Dividend Per Share ------------------------------------------- Market Price Per Share

Preferred Stock (pg.509)

A class of capital stock with priority over common stock in dividend payments and in the distribution of assets in the event of a corporation liquidation.

Classified Common Stock (pg.509)

A company may occasionally issue classified common stock; that is, it may issue more than one class of common stock. Ex. When two classes of common stock are issued, they are often identified as Class A and Class B. -The two classes usually differ in either their respective dividend rights or their respective voting powers. -Usually, classified common stock is issued when the founders of a corporation wish to acquire funds from the public while retaining voting control of the corporation.

Articles of Incorporation (pg.504)

A document prepared by the founders of a corporation that sets forth the structure and purpose of the corporation and specifies regarding the type and quantity of capital stock to be issued.

Cumulative (pg.510)

A feature associated with preferred stock whereby any dividends-in-arrears must be paid before any dividends may be paid on common stock. -Regular dividends to preferred stockholders omitted in the past must be paid in additional to the current year's dividend before any dividend distribution can be made to the common stockholders.

Convertible (pg.511)

A feature associated with preferred stock whereby the preferred stock can be converted into common stock at a specified conversion rate.

Callable (pg.511)

A feature associated with preferred stock whereby the preferred stock can be redeemed by the issuing corporation at a price specified in the stock contract. -The call features makes the preferred stock similar to a bond, since many bonds are callable or have a limited life. Most preferred stocks are callable, with the call or redemption price set slightly above the original preferred stock issuance price.

Participating (pg.511)

A feature associated with preferred stock whereby the preferred stock can share any special dividend distribution with common stock beyond the regular preferred stock dividend rate. -Special Dividend: Occur infrequently and represent the distribution of excess cash that has been accumulated by a business and for which the business has no immediate operational need. (pg.517)

Return on Common Stockholders' Equity (pg.522)

A financial ratio of particular interest to common stockholders is the return on common stockholders' equity. This ratio measures the profitability of the common stockholders' investment on a company. = (Net Income- Preferred Stock Dividends) ------------------------------------------------------------- Average Common Stockholders' Equity -One of the primary measures of overall company performance. -By subtracting preferred dividends from net income, the numerator provides the income available to common stockholders. -The higher the ratio, the higher the profitability of the common stockholders' investment in the corporation.

Statement of Stockholders' Equity (pg.520)

A financial statement presenting information regarding the events that cause a change in stockholders' equity during a period. The statement presents the beginning balance, additions to, deductions form, and the ending balance of stockholders' equity for the period. -Rather than reporting the statement of retained earnings, mock corporations integrate the information regarding retained earnings into a more comprehensive statement called a statement of stockholders' equity. The statement begins with the beginning balances of the various stockholders' equity accounts (1), reports the items causing changes in these accounts (2), and ends with the end-of-period balances (3). *Exhibit 11-4*

Statement of Retained Earnings (pg.520)

A financial statement showing the finical changes that occurred in retained earnings during the accounting period. The statement beings with the retained earning balance as of the beginning of the period (1), then reports the items that caused retained earnings to change during the period (2), and ends with the end-of-period balance in retained earnings (3). *Exhibit 11-3*

Corporation (pg.504)

A legal entity created under the laws of a state or the federal government. The owners of a corporation receive shares of stock as evidence of their ownership interest in the company.

Stated Value (pg.508)

A nominal amount that may be assigned to each share of no-par value stock and accounted for much as if it were a par value.

Underwrite- Stock Issuance (pg.512)

A stock issue by agreeing to sell shares on a firm commitment basis---that is, buying the shares from the corporation and then reselling them to investors. -Under a firm commitment agreement, a corporation does not risk being unable to sell its stock. - The underwriter bears the risk in return for the fees and profits generated by selling the shares to investors at a price higher than it paid to the corporation.

Forward Stock Split (pg.514)

Additional shares of capital stock issued by a corporation to its current stockholders in proportion to their current ownership interests without changing the balances in the related stockholders' equity accounts. A forward stock split increases the number of shares outstanding and reduces proportionately the stock's par value per share.

Stock Dividends (pg.518)

Additional shares of capital stock issued by a corporation to its current stockholders in proportion to their existing ownership interest. -A company may issues stock dividends when it does nt wish to deplete its working capital by paying a cash dividend.

Par Value (pg.507)

An amount specified in the corporate charter (a written document filed with a U.S. state by the founders of the corporation) for each class of stock and imprinted on the face of each stock certificate; often determines the legal capital of a corporation. (Face Value) -The face value of a bond. Par value for a share refers to the stock value stated in the corporate charter. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments.

Stockholders (pg.504)

As owners of a corporation, stockholders are entitled to a voice in the control and management of the company.

Certificates of Capital Stock (pg.504)

Because assets are essential to starting any business, a corporation issues (or sells) certificates of capital stock to obtain the necessary funds to acquire its operating assets.

Treasury Stock (pg.515)

Shares of corporation that have been acquired for purposes other than retiring (canceling) the stock. Treasury stock is recorded at cost and is deducted from stockholders' equity on the balance sheet.

Outstanding Shares (pg.508)

Shares of stock that are currently held by stockholders. -Issued shares that have been issued and remain in the hands of stockholders rather than having been repurchased by the corporation

Issued Shares (pg.508)

Shares of stock that have been sold and issued to stockholders; issued stock may be either outstanding or held in the treasury.

No-Par Value Stock (pg.508)

Stock that does not have a par value -Stock that is issued without the specification of a par value indicated in the company's articles of incorporation or on the stock certificate itself.

Treasury Stock (pg.508)

Whereas those reacquired by a corporation (and not cancelled) are called treasury stock.