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zAccounting > Chapter 11 > Flashcards

Chapter 11 Flashcards

1
Q

A corporation has most of the ____________________

A

rights and privileges of a person

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2
Q

Corporation

A

A company organized as a seperate legal entity, with most of the rights and privileges of a person

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3
Q

Two common classifications of corporations include:

A

By purpose

By ownership

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4
Q

Publicly held corporation

A

A corporation that may have thousands of stockholders and whose stock is traded on a national securities market

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5
Q

Privately held corporation

A

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

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6
Q

Seperate Legal Existence

A

Corporate owners (stockholders) do not bind the corporation unless such owners are agents of the corporation

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7
Q

Controller

A

Chief accounting officer

Responsibilities:

  1. Maintain the accounting records
  2. Maintain an adequate system of internal control
  3. Prepare financial statements, tax returns, and internal reports
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8
Q

Treasurer

A

Has custody of the corporation’s funds and is responsible for maintaining the company’s cash position

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9
Q

Managers who are not owners

A

Often compensated based on the performance of the company

May be tempted to exaggerate company performance by inflating income figures

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10
Q

Taxed twice (double taxation)

A

Corporate income is taxed once at the corporate level and again at the individual level

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11
Q

Advantages of a Corporation compared to a sole proprietorship and partnership

A

Seperate legal existence

Limited liability of stockholders

Transferable ownership rights

Ability to acquire capital

Continous life

Corporation management - professional managers

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12
Q

Disadvantages of a corporation compared to a sole proprietorship and partnership

A

Corporation management - seperation of ownership and management

Government regulations

Additional taxes

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13
Q

S corporation

A

Legal treatment as a corporation but tax treatment as a partnership

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14
Q

Charter

A

A document that describes a corporatio’s name and purpose, types of stock and number of shares authorized, names of individuals involved in the formation, and number of shares each individual has agreed to purchase

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15
Q

By-laws

A

Establish the internal rules and procedures for conducting the affairs of the corporation

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16
Q

Corporatioins engaged in interstate commerce

A

Must obtain a liscence

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17
Q

Common stock

A

When a corporation has only one class of stock, it is identified as common stock

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18
Q

Stock certificate

A

Proof of stock ownership is evidenced by a printed or engraved from

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19
Q

Preemptive right

A

Stockholders right to keep the same percentage ownership when new shares of stock are issued

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20
Q

Residual claim

A

Stockholders right to share in assets upon liquidation in proportion to their holdings

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21
Q

Authorized stock

A

The amount of stock that a corporation is authorized to sell as indicated in its charter

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22
Q

Authorization of stock does not ______________________

A

result in a formal accounting entry

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23
Q

U.S and U.K corporations

A

financed through shareholders and bondholders

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24
Q

Germany, France, and Japan corporations

A

Acquire financing mostly from large banks or other financial institutions

Shareholders less important

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25
Q

Issue stock directly

A

issued directly to investors

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26
Q

Issue stock indirectly

A

issue stock to an investment banking firm that specializes in bringing securities to the attention of prospective investors

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27
Q

Par value stock

A

Capital stock that has been assigned a value per share in the corporate charter

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28
Q

Legal capital

A

The amount of capital that must be retained in the business for the protection of corporate creditors

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29
Q

No-par value stock

A

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

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30
Q

Stated value

A

The amount per share assigned by the board of directors to no-par stock

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31
Q

Paid-in capital

A

The amount stockholders paid to the corporation in exchange for shares of ownership

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32
Q

The stockholders’ equity section of a corporation’s balance sheet includes:

A
  1. Paid-in (contributed) capital
  2. Retained earings (earned capital)
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33
Q

Journal entry for issuance of 1,000 shares of $1 par value common stock at par for cash

A

Cash 1,000

Common stock 1,000

34
Q

Treasury Stock

A

A corporation’s own stock that has been reacquired by the corporation and is being held for future use

35
Q

Reasons to acquire Treasury stock

A
  1. To have additonal shares available for use in acquiring other companies
  2. To reduce the number of shares outstanding and thereby increase earnings per share
    p. 580
36
Q

The purchase of treasury stock is generally accounted for by the ___________

A

cost method

37
Q

Mead corporations purchases 4,000 shares of its stock at $8 per share

Journal entry

A

Dr. Treasury Stock 32,000

Cr. Cash 32,000

38
Q

Outstanding stock

A

The number of shares of issued stock that are being held by stockholders

39
Q

Treasury Stock is what?

A

A contra stockholders’ equity account

40
Q

Preferred stock

A

Capital stock that has contractual preferences over common stock in certain areas

41
Q

Preferred stockholders have what right?

A

The right to share in the distribution of corporate income before common stockholders

*receive dividends first

42
Q

Cumulative dividend

A

A feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends

43
Q

Dividends in arrears

A

Preferred dividends that were supposed to be declared but were not declared during a given period

44
Q

Dividend

A

A distribution by a corporation to its stockholders on a pro rata (proportional to ownership) basis

45
Q

Dividends are generally reported ______________

A

quarterly as a dollar amount per share

46
Q

Cash dividend

A

A pro rata (proportional to ownership) distribution of cash to stockholders

47
Q

Declaration date

A

The date the board of directors formally authorizes the dividend and announces it to the public

48
Q

Journal entry on declaration date

A

Dr. Cash Dividends XXX

Cr. Dividends Payable XXX

49
Q

Record date

A

Company determines ownership of the outstanding shares for dividend purposes

*No entry required for the record date*

50
Q

Payment date

A

The date cash dividend payments are made to stockholders

51
Q

Journal entry on payment date

A

Dr. Dividends Payable XXX

Cr. Cash XXX

52
Q

Cumulative effect of the declaration and payment on a cash dividend:

A

Decrease Stockholder’s equity

Decrease Total Assets

53
Q

stock dividend

A

A pro rata (proportional to ownership) distribution of the corporation’s own stock to stockholders

54
Q

A stock dividend results in ___________________

A

a decrease in retained earnings

and an increase in paid-in capital

*DOES NOT DECREASE STOCKHOLDERS EQUITY OF TOTAL ASSETS*

55
Q

small stock dividend

A

less than 20-25% of the corporation’s issued stock

use fair value per share - becayse ut wukk gave kuttke effect on the market price of the shares previously outstanding

56
Q

large stock dividend

A

greater than 20-25% of the corporations stock

use par or stated value per share

57
Q

Another name for stock dividend

A

capitalizing retained earnings

58
Q

Stock dividends effect on stockholder’s equity

A

They change the composition of stockholder’s equity because they transfer a portion of retained earnings to paid-in capital

TOTAL STOCKHOLDERS EQUITY REMAINS THE SAME

Number of shares outstanding increases though

59
Q

Stock split

A

The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share

60
Q

Stock split effect on balances in stockholder’s equity

A

No effect

61
Q

Total paid-in capital effects

A

Stock dividend = increase

Stock split = no change

62
Q

Total retained earnings effects

A

Stock dividend = decrease

stock split = no change

63
Q

Total par value (common stock) effects

A

Stock dividend = increase

stock split = no change

64
Q

Par value per share effects

A

Stock dividend = no change

stock split = decrease

65
Q

Retained earnings

A

Net income that a company retains in the business

66
Q

Deficit

A

A debit balance in retained earnings

67
Q

Retained earnings restrictions

A

Circumstances that make a portion of retained earnings currently unavailable for dividends

Three causes:

  1. Legal
  2. Contractual
  3. Voluntary
68
Q

Capital stock includes:

A

Preferred stock & Common Stock

69
Q

Additional paid-in capital includes

A

The excess of amounts paidin over par or stated value

70
Q

Payout Ratio =

A

Cash Dividends Declared on Common Stock

Net Income

*Measures the percentage of earnings a company distributes in the form of cash dividends to common stockholders*

71
Q

Low payout ratios

A

Companies that have high growth rates because they reinvest most of their net income in the business instead of paying high dividends

payout ratio isnt necessarily bad news

*However, low dividend payments or a cut in dividend payments, might signal that a company has liquidity or solvency problems and is trying to conserve cash

*INVESTIGATE REASON OF LOW DIVIDEND PAYMENTS

72
Q

Return on common stockholders’ equity

A

Net income - Preferred Stock Dividends

Average Common Stockholders’ Equity

*Profitability measure

**shows how many dollars of net income a company earned for each dollar of common stockholders’ equity

***from common stockholders’ viewpoint

73
Q

Bond advantages relative to common stock

A
  1. Stockholder control is not affected - bondholders do not have voting rights, so stockholders (current owners) retain full control of company
  2. Tax xavings result - bond interest is deductible for tax purposes; dividneds on stock are not
  3. Return on common stockholders’ equity may be higher - although bond interest expense reduces net income, return on common stockholders’ equity is often higher under bond financing because no additional shares of common stock are issued
74
Q

If a company wants to increase its return on common stockholders’ equity, ____________________________

A

It can either increase its return on assets or increase its reliance on debt financing

75
Q

In general, as long as the return on assets rate exceeds the rate paid on debt, __________________________

A

a company will increase the return on common stockholders’ equity by the use of debt

76
Q

Major disadvantage of debt

A

debt reduces solvency

77
Q

Journal entry for stock dividend on declaration date

A

Dr. Stock Dividends XXX

Cr. Common Stock Dividends Distributable XXX

Cr. Paid-in Capital in Excess of Par Value XXX

78
Q

Journal entry when issue stock dividend

A

Dr. Common Stock Dividends Distributable XXX

Cr. Common Stock XXX

79
Q

When issuing bonds instead of stock:

A

Income before taxes: lower

Income tax expense: lower

Net income: lower

Common Stockholders’ Equity: lower

Return on common stockholders’ equity: higher

80
Q
A

zAccounting (31 decks)

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