Financial Accounting_Chapter 11

Executive Officers

(appointed by the BOD) manage the day-by-day direction of corporation. President is often the chief executive office (CEO) unless one person has the dual role of chairperson of the BOD and CEO, then the president is the chief operation officer.

Rights of Stockholders

- vote at stockholder's meetings - sell or otherwise dispose of their stock - purchase their promotional shares of any common stock later issued - PREEMPTIVE RIGHT - receive dividends, if any - Share equally in any assets remaining after creditors are paid in a liquidation - receive timely financial reports

Cash dividends entry

1) Declaration - Debit Retained Earnings - Credit Dividends Payable 2) Date of Record - NO Journal Entries --> NAMES recorded 3) Payment Date - Debit Dividends Payable - Credit CASH

reasons for a stock dividend

1. to keep the market price of stock affordable 2. to provide evidence of managements confidence that the company is doing well

Stock Certificate

A certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation. Certificates show the company name, stockholder name, number of shares and other crucial information.

Incorporation

A corporation is created by obtaining a charter from a state government. A charter application, signed by prospective stockholders (incorporators or promoters) must be filled with the state and fees must be paid.

privately held corporation

A corporation that has only a few stockholders and whose stock is not available for sale to the general public.

continuous life

A corporation's life continues indefinitely because it is not tied to the physical lives of its owners.

capitalizing retained earnings

A stock dividend affects the components of equity by transferring part of retained earnings to contributed capital accounts

Corporate Form of Organization

An entity created by law + existence is separate from owners + has rights and privileges granted to individuals = Ownership can be privately or publicly held

Ease of capital accumulation

Buying stock is attractive to investors because 1.) stockholders are not liable for the corporation's acts and debts 2.) stocks usually are transferred easily 3.) the life of the corporation is unlimited 4.) stockholders are not corporate agents And enables the corporation to accumulate large amounts of capital.

Par Value Stock

Class of stock assigned a par value by the corporate charter. Printed on stock certificate. In many states, used to establish minimum legal capital.

stock dividend

Corporation's distribution of its own stock to its stockholders without the receipt of any payment. They do not reduce assets or total equity.

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. (legal liability created)

Issuing Par Value Stock at a Premium

Debit cash (#shares * market price) Credit Common Stock (#shares issued * par value) Credit Paid-in Capital in excess of Par value / common stock (for the amount of the premium)

Issuing No-Par Value Stock

Dr. Cash Cr. Common Stock When no-par stock is NOT assigned a state value, the entire amount received becomes legal capital and is record as common stock.

True or false: Growth stocks pay large amounts of cash dividends.

FALSE

Corporation's disadvantages

Governmental regulation: must meet requirements of a state's incorporation laws. Corporate taxation: corporate income is taxed; and income is distributed to shareholders as dividends, it is taxed a second time as personal income. (double taxation)

Board of Directors (BOD)

Individuals elected by stockholders to establish corporate management policies. A board of directors decides, among other issues, if and when dividends will be paid to stockholders. Has final managing authority but it usually limits its actions to setting broad policy

stated value stock

No-par stock that is assigned a stated value per share by the directors; this amount is recorded in the stock account when the stock is issued and becomes legal capital.

Stockholder's/ Shareholder's Equity

Paid-in Capital (contributed capital) - the total amount of cash and other assets received by the corporation from its stockholder in exchange of stocks Retained Earnings-the cumulative net income and losses not distributed as dividends to stockholders.

Non-Participating 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.

Issuing Stock

Provides an inflow of cash to the firm Less financial obligations than issuing debt (dividends not obligatory) Unlike debt, stock never has to be repaid Dilutes ownership interest of existing shareholders shareholders will own less proportionally EPS will be lower unless profitability rises (Remember that investors prefer higher EPS as an indicator of a strong and healthy firm!)

Issuing Stock for Noncash Assets / Issuing Par Value for other assets

Record the transaction at the market value of noncash asset as of the date of the transaction Record par value or stated value of stock issued in stock account Record the amount that market value exceeds par value or stated value of stock in the Paid-in Capital excess account.

Issuing Stated Value Stock

Stated value becdomes legal capital and is credited to a no-par stock account. If stock is issued at an amount in excess of stated value, this excess is credited to Paid-In Capital in excess of stated Value, common stock

small stock dividend

Stock dividend that is 25% or less of a corporation's previously outstanding shares. The market value of the shares to be distributed is capitalized.

Issuing Stock for organizational costs

Stock is issued in exchange for services (from promoters, lawyers, accountants) Record the transaction at the market value of the services received and record par or stated value of shares issued in stock account and any value received above this in Paid-in capital in excess account Dr. Organization Expenses

Common Stock

Term used to describe the total amount paid in by stockholders for the shares they purchase. Also called capital stock issuance of stocks affects only paid-in capital accounts, not retained earnings accounts.

transferable ownership rights

The transfer of shares from one stockholder to another usually has no effect on the corporation or its operations except when this causes a change in the directors who control or manage the corporation.

deficit and cash dividends

a debit (abnormal) balance in retained earnings is called a retained earnings deficit. when cumulative losses and/or dividends are greater than total profits earned in prior years. deducted on the balance sheet

Large stock dividend

a distribution of more than 25% of previously outstanding shares. Only the legally required minimum amount (par or stated value of shares) must be capitalized.

Transfer Agent

assists with purchases and sales of shares by receiving and issuing certificates as necessary

Separate Legal Entity

business which is granted a charter establishing its own rights, privileges and liabilities distinct from those of its members

Outstanding Stock

capital stock that has been issued and is being held by stockholders

No-par value stock

capital stock that has not been assigned a value in the corporate charter

Additional Classes

corporation may issue more than one class of common and/or preferred stock

publicly held corporation

corporation that sells stock on the open market

Organization Expenses

costs to organize a corporation; they include legal fees, promoters' fees, and amounts paid to obtain a charter. Expensed as incurred.

Issuing par value stock at par for cash

debit cash for #shares issued * market price credit common stock for #shares issued * par value

Issuing par value stock at a discount

debit cash for #shares issued * market price debit discount on common stock (a contra to the common stock account (for the amount of the discount) credit common stock for #shares issued * par value

Cash Dividends

distributions of cash to stockholders that reduce retained earnings

Dividends

earnings distributed to stockholders

Classes of Stock - Preferred

gives its owners a priority status over common stockholders in one or more ways.

Registrar

keeps stockholder records and prepares official lists of stockholders for stockholders' meeting and dividend payments.

Stockholders

owners of a corporation. control corporation by electing its board of directors.

preferred stock

priority (or senior status) relative to common stock in (1) dividends and (2) assets in case of liquidation. - usually excludes voting rights. - usually hold the right to dividend distributions before common stockholders. When preferred stock is cumulative and in arrears, the amount in arrears must be distributed to preferred stockholders before any dividends are distributed to common stockholders.

A statement of stockholders' equity lists balances of:

retained earnings cash dividends net income common stock shares

liquidating cash dividend

returns a part of the original investment back to the stockholders Paid-in capital accounts - Dr

Advantages of a corporation

separate legal entity, limited liability of stockholders, transferable ownership rights, continuous life, lack of mutual agency for stockholders, ease of capital accumulation

Basics of Capital Stock

shares issued to obtain capital (owner financing)

Owners

stockholders

limited liability of stockholders

stockholders are liable for neither corporate acts nor corporate debt

Lack of mutual agency for stockholders

stockholders do not have the power to bind the corporation to contracts

stock split

the division of each single share of a company's stock into more than one share

Classes of Stock - Common

the name of stock when all classes have same rights and privileges

market value of stock

the price at which a stock is bought and sold. Influenced by expected future earnings, dividends, growth, and other company and economic events. Current market value of previously issued shares does not impact that corporation's stockholders' equity accounts.

Authorized stock

the total amount of stock that a corporation is authorized to sell as indicated in its charter. Corporation must apply for a change in its charter if it wishes to issue more shares than previously authorized

Accounting for stock dividends

transfer a portion of equity from retained earnings to contributed capital (capitalizing retained earnings)