Chapter 11 Flashcards Preview

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Flashcards in Chapter 11 Deck (80):
1

A corporation has most of the ____________________

rights and privileges of a person

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Corporation

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

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Two common classifications of corporations include:

By purpose

By ownership

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Publicly held corporation

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

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Privately held corporation

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

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Seperate Legal Existence

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

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Controller

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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Treasurer

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

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Managers who are not owners

Often compensated based on the performance of the company

May be tempted to exaggerate company performance by inflating income figures

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Taxed twice (double taxation)

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

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Advantages of a Corporation compared to a sole proprietorship and partnership

Seperate legal existence

Limited liability of stockholders

Transferable ownership rights

Ability to acquire capital

Continous life

Corporation management - professional managers

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Disadvantages of a corporation compared to a sole proprietorship and partnership

Corporation management - seperation of ownership and management

Government regulations

Additional taxes

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S corporation

Legal treatment as a corporation but tax treatment as a partnership

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Charter

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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By-laws

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

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Corporatioins engaged in interstate commerce

Must obtain a liscence

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Common stock

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

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Stock certificate

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

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Preemptive right

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

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Residual claim

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

 

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Authorized stock

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

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Authorization of stock does not ______________________

result in a formal accounting entry

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U.S and U.K corporations

financed through shareholders and bondholders

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Germany, France, and Japan corporations

Acquire financing mostly from large banks or other financial institutions

Shareholders less important

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Issue stock directly

issued directly to investors

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Issue stock indirectly

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

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Par value stock

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

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Legal capital

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

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No-par value stock

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

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Stated value

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

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Paid-in capital

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

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

1. Paid-in (contributed) capital

2. Retained earings (earned capital)

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

Cash 1,000

                                Common stock 1,000

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Treasury Stock

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

 

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Reasons to acquire Treasury stock

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

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

cost method

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

Journal entry

Dr. Treasury Stock 32,000

Cr. Cash 32,000

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Outstanding stock

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

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Treasury Stock is what?

A contra stockholders' equity account

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Preferred stock

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

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Preferred stockholders have what right?

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

*receive dividends first

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Cumulative dividend

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

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Dividends in arrears

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

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Dividend

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

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Dividends are generally reported ______________

quarterly as a dollar amount per share

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Cash dividend

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

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Declaration date

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

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Journal entry on declaration date

Dr. Cash Dividends XXX

Cr. Dividends Payable XXX

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Record date

Company determines ownership of the outstanding shares for dividend purposes

*No entry required for the record date*

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Payment date

The date cash dividend payments are made to stockholders

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Journal entry on payment date

Dr. Dividends Payable XXX

Cr. Cash XXX

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

Decrease Stockholder's equity

Decrease Total Assets

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stock dividend

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

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A stock dividend results in ___________________

a decrease in retained earnings

and an increase in paid-in capital

*DOES NOT DECREASE STOCKHOLDERS EQUITY OF TOTAL ASSETS*

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small stock dividend

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

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large stock dividend

greater than 20-25% of the corporations stock

use par or stated value per share

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Another name for stock dividend

capitalizing retained earnings

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Stock dividends effect on stockholder's equity

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

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Stock split

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

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Stock split effect on balances in stockholder's equity

No effect

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Total paid-in capital effects

Stock dividend = increase

Stock split = no change

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Total retained earnings effects

Stock dividend = decrease

stock split = no change

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Total par value (common stock) effects

Stock dividend = increase

stock split = no change

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Par value per share effects

Stock dividend = no change

stock split = decrease

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Retained earnings

Net income that a company retains in the business

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Deficit

A debit balance in retained earnings

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Retained earnings restrictions

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

Three causes:

1. Legal

2. Contractual

3. Voluntary

68

Capital stock includes:

Preferred stock & Common Stock

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Additional paid-in capital includes

The excess of amounts paidin over par or stated value

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Payout Ratio = 

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*

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Low payout ratios

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

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Return on common stockholders' equity

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

Bond advantages relative to common stock

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

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

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

75

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

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

76

Major disadvantage of debt

debt reduces solvency

77

Journal entry for stock dividend on declaration date

Dr. Stock Dividends XXX

Cr. Common Stock Dividends Distributable XXX

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

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Journal entry when issue stock dividend

Dr. Common Stock Dividends Distributable XXX

Cr. Common Stock XXX

79

When issuing bonds instead of stock:

Income before taxes: lower

Income tax expense: lower

Net income: lower

Common Stockholders' Equity: lower

Return on common stockholders' equity: higher

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