Financial Accounting Ch. 10
Resale of treasury stock
Increases assets and equity. No gain or loss involving treasury stock
stock dividend
A proportional distribution by a corporation of its own stock to its stockholders. Total equity is unchanged. Reasons include to continue dividends, but conserve cash, reduce market price of shares. If the stock dividend is less than twenty five percent, record at market value. Greater than twenty five percent record at par value.
Corporate organizers
Called incorporators. They obtain a charter from the state. The charter includes authorization to issue shares of stock. Incorporators pay fees, sign the charter, file documents with the state, and agree to a set if by laws
board of directors
Group elected by the stockholders to set policy for a corporation and to appoint its officers.
rate of return on common stockholders' equity
Net income minus preferred dividends, divided by average common stockholders' equity. A measure of profitability. Also called return on equity
limited liability
No personal obligation of a stockholder for corporation debts. A stockholder can lose no more on an investment in a corporation's stock than the cost of the investment.
issued stock
Number of shares a corporation has issued to its stockholders.
Long term debt
Obligation to repay principal. Interest expense is tax deductible . Obligation to pay dividends at fixed rates and dates
Retirement of treasury stock
Once shares are repurchases neither total assets nor total liabilities are affected. Stock cannot be reissued, cancel stock certificate.
shareholders
Persons or other entities that own stock in a corporation. Also called stockholders
cumulative preferred stock
Preferred stock whose owners must receive all dividends in arrears plus current year dividends before the corporation can pay dividends to the common stockholders.
price-earnings (P/E) ratio
The ratio of the market price of a share of common stock to its earnings per share. Market price of a share of common stock divided by earnings per share of common stock
stockholder's equity
The stockholders' ownership interest in the assets of a corporation.
redeemable preferred stock
A corporation reserves the right to buy an issue of stock back from its shareholders, with the intent to retire the stock. Requires company to redeem stock at a set price .
treasury stock
A corporation's own stock that it has issued and later reacquired. Reasons for treasury stock include to make shares available for employee stock purchase plans, plan to buy low and sell high, avoid takeover , increase earnings per share, and use in share repurchase program.
DuPont Analysis
A detailed approach to measuring rate of return on equity (ROE), calculated as follows: Net profit margin ratio (net income minus preferred dividends/net sales) × Total asset turnover (net sales/average total assets)× Leverage ratio (average total assets/average common stockholders' equity). The first two components of the model comprise return on assets (ROA).
market value of stock
Also called market capitalization. Price for which a person could buy or sell a share of stock. Market price multiplied by number of shares outstanding overall market assessment of the worth of a share of common stock is reflected in the price-earnings ratio
book value per share
Amount of common stockholders' equity on the company's books for each share of its stock.
stated value
An arbitrary amount assigned to no-par stock; similar to par value.
stock split
An increase in the number of issued and outstanding shares of stock coupled with a proportionate reduction in the stock's par value. No accounts affected
par value
Arbitrary amount assigned by a company to a share of its stock.
president
Chief operating officer in charge of managing the day-to-day operations of a corporation.
Common and preferred stock dividends
Common and preferred stock dividends are not tax deductible. Don't have to repay principal amount. Obligation to pay dividends is only after declaration.
bylaws
Constitution for governing a corporation.
double taxation
Corporations pay income taxes on corporate income. Then the stockholders pay personal income tax on the cash dividends that they receive from corporations.
deficit
Debit balance in the Retained Earnings account.
Payment of dividend journal entry
Debit dividend payable credit cash
Declare dividends journal entry
Debit retained earnings credit dividend payable
dividend
Distribution usually cash by a corporation to its stockholders.
chairperson
Elected by a corporation's board of directors, usually the most powerful person in the corporation.
Financing transactions that affect both cash and equity on statement of cash flows
Issuance of stock, treasury stock, dividends
authorized stock
Maximum number of shares a corporation can issue under its charter.
legal capital
Minimum amount of stockholders' equity that a corporation must maintain for the protection of creditors. For corporations with par-value stock, legal capital is the par value of the stock issued.
rate of return on total assets
Net income minus preferred dividends divided by average total assets. This ratio measures a company's success in using its assets to earn income for the persons who finance the business. Also called return on assets.
Redeemable preferred stock
Requires company to redeem stock at a set price
Stockholders' rights
Right to Vote, receive proportionate part of any dividend , receive proportionate share of any asset remaining after corporation pays it's liabilities in liquidation, and maintain one'a proportionate ownership in a corporation
stock
Shares into which the owners' equity of a corporation is divided.
outstanding stock
Stock in the hands of stockholders.
preferred stock
Stock that gives its owners certain advantages, such as the priority to receive dividends before the common stockholders and the priority to receive assets before the common stockholders if the corporation liquidates. Only about nine percent of corporations issue preferred stock .
Corporate structure
Stockholders elect the board of directors, which elects the chairperson of the boards the Chief executive officer and the president chief operating officer, who leads the Vice Presidents , secretary, and chief financial officer. They manage the controller accounting officer and treasurer financial officer.
liquidation value
The amount a corporation must pay a preferred stockholder in the event the company liquidates and goes out of business.
paid-in capital
The amount of stockholders' equity that stockholders have contributed to the corporation. Also called contributed capital
contributed capital
The amount of stockholders' equity that stockholders have contributed to the corporation. Also called paid-in capital.
retained earnings
The amount of stockholders' equity that the corporation has earned through profitable operation of the business and has not given back to stockholders. Profits are redistributed back into the company. Retained earnings are reduced by dividends declared.
initial public offering (IPO)
The first time a corporation issues stock to the public, which causes the number of issued and outstanding shares of stock to increase
market capitalization
The market price of one share of common stock × the total number of common shares outstanding at a particular date.
common stock
The most basic form of capital stock. The common stockholders own a corporation. Journal entry is a debit entry of cash to the number of issued common shares times the issue price per each share of stock. credit entry of common stock equals the number of issued shares of common stock times the par value. Second credit entry is for paid in capital in excess of par common stock , which equals the cash balance minus common stock balance
redemption value
The price a corporation agrees to eventually pay for its redeemable preferred stock, set when the stock is issued
How is treasury stock recorded?
Treasury stock is recorded at cost, not at par value. Debit treasury stock , it is a contra-stockholders' equity account
