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Flashcards in Chapter 11 Powerpoint Deck (83):
1

Classified by Purpose

Not-for-Profit

For Profit

2

Classified by Ownership

Publicly held

Privately held

3

Advantages of a Corporation

Seperate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Continuous Life

Corporate Management

4

Disadvantages of a Corporation

Corporate Management

Government Regulations

Additional Taxes

5

Seperate Legal Existence

Corporation acts under its own name rather than in the name of its stockholders

6

Limited Liability of Stockholders

Limited to their investment

7

Transferable Ownership Rights

Shareholders may sell their stock

8

Ability to Acquire Capital

Corporation can obtain capital through the issuance of stock

9

Continuous Life

Continuance as a going convern is not affected by the withdrawl, death, or incapacity of a stockholder, employee, or officier

10

Disadvnatage: Corporate Management

Seperation of ownership and management prevents owners from having an activite role in managing the company

11

Government Regulations

State laws

SEC laws

Stock exchange requirements

Federal regulations

12

Additional Taxes

Corporations pay income taxes as:

- a sperate legal entity

Stockholders pay taxes on cash dividends

13

Stockholders Rights

1. Vote in election of board of directors and on actions that require stockholder approval

2. Share the corporate earnings through receipt of dividends

3. Keep the same percentage of ownership when new shares of stock are issued (preemptive right)

4. Share in assets upon liquidation in proportion to their holdings (residual claim)

14

Authorized Stock

Charter indicates the amount of stock that a corporation is authorized to sell

Number of authorized shares is often reported in the stockholders' equity section

15

How can a corporation issue common stock?

Directly to investors 

Indirectly thorugh an investment banking firm

16

U.S. securities exchanges

New York Stock Exchange

American Stock Exchange

13 regional exchanges

NASDAQ national market

17

Years ago, par value determined the legal capital per share that a company must _________________________

retain in the business for the protection of corporate creditors

18

Today many states ______________ a par value

do not require

19

_______________ is quite common today

No-par value stock

20

In many states the board of directors assigns a _________________

stated value to no-par shares

21

Par value stocks

Capital stock that has been assigned a value per share

22

Two Primary Sources of Equity

Paid-in Capital

Retained Earnings

23

Paid-in capital

The total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock

24

Retained Earnings

Net income that a corporation retains for future use

25

Primary objectives of accounting for Common Stock

1. Identify the specific sources of paid-in capital

2. Maintain the distinction between paid-in capital and retained earnings

26

Other than consideration received, the issuance of common stock affects only __________________

paid-in capital accounts

27

Journal entry for issuing stock of $1,000

Dr. Cash 1,000

      Cr. Common Stock 1,000

28

Journal entry: issue 1,000 shares of $1 par value stock for cash at $5 per share

Dr. Cash 5,000

Cr. Common Stock 1,000

Cr. Paid-in capital in excess of par value 4,000

29

Treasury stock

Corporation's own stock that it has reacquired from shareholders, but not retired

30

Reasons corporations purchase their outstanding stock:

1. To reissue shares to officers and employees under bonus and stock compensation plans

2. To increase trading of the company's stock in the securities market

3. To have additional shares available for use in acquiring other companies

4. To increase earnings per share

*to eliminate hostile shareholders sometimes

31

Purchase of Treasury Stock

Generally accounted for by the cost method

Debit Treasury Stock for the price paid

Treasury stock is a contra stockholders' equity account, not an asset

Purchase of treasury stock reduces stockholders' equity

32

Journal entry: X company acquires 4,000 shares of its stock at $8 per share

Dr. Treasury stock 32,000

Cr. Cash 32,000

33

Features often associated with preferred stock

Preference as to dividends

Preference as to assets in liquidation

Nonvoting

34

Paid in capital account with preffered stock

Paid-in Capital in Excess of Par Value--Preferred Stock

 

35

Paid in capital account with common stock

Paid-in Capital in Excess of Par Value--Common Stock

36

Preferred Stock Dividend Preferences

Rights to receive dividends before common stockholders

Per share dividend amount is stated as a percentage of the preferred stock's par value or as a specified amount

Cumulative dividend

37

Cumulative dividend

Holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends

38

Preferred Stock Liquidation Preference

Preference on corporate assets if the corporation fails

Preferences may be: for the par value of the shares or for a specified liquidating value

39

Dividends distribution to stockholders

Distribution to stockholders on a pro rata (proportional to ownership) basis

40

Types of Dividends

1. Cash dividends

2. Property dividends

3. Stock dividends

4. Scrip (promissory note)

41

How are Dividends expressed?

1. As a percentage of the par or stated value

2. AS a dollar amount per share

42

For a corporation to pay a cash dividend, it must have:

1. Retained earnings - payments of cash dividends from retained earnings is legal in all states

2. Adequate cash

3. Declaration by the Board of Directors

43

Journal entry: declaration date of dividend

Dr. Cash dividends XXX

Cr. Dividends payable XXX

44

Journal entry on payment date of dividend

Dr. Dividends payable XXX

Cr. Cash XXX

45

Entries for cash dividends are required on the:

Declaration date and the payment date

46

What does the distribution of stock dividends result in?

Results in decrease in retained earnings

Increase in paid-in capital

47

Reasons corporations issue stock dividends

1. Satisfy stockholders' dividend expectations without spending cash

2. Increase the marketability of the corporation's stock

3. Emphasize that a portion of stockholders' equity has been permanently reinvested in the business

48

Retained earnings

Net income that a company retains for use in the business

49

Net income __________ Retained Earnings

increases

50

Net loss _________ Retained Earnings

decreases

51

Retained earnings is part of the ___________________ on the total assets of the corporation

stockholders' claim

52

A debit balance in Retained Earnings is identified as a _____________

deficit

53

Retained Earnigns Restrictions

1. Legal restrictions

2. Contractual restrictions

3. Voluntary restrictions

54

Two classifications of paid-in capital

1. Capital stock

2. Additional paid-in capital

55

Payout ratio

Cash Dividends Declared on Common Stock

Net Income

*Measures the percentage of earnigns a company distributes in the form of cash dividends

56

Return on Common Stockholders' Equity Ratio = 

Net income - Preferred Stock Dividends

Average Common Stockholders' Equity

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

57

Advantages of Bond financing

1. Stockholder control is not affected - bondholders do not have voting rights so current owners (stockholders) retain full control of the company

2. Tax savings result - Bond interest is deductible for tax purposes; dividends on stocks are not

3. Return on common stockholders' equity may be higher -  although bond interest expense reduces net income, no additonal shares of common stock are issued 

58

Why Corporations Invest

1. Corporation may have excess cash

2. To generate earnings from investment income

3. For strateigc reasons

59

Recording Acquisiton of Bonds

Costs includes all expenditures necessary to acquire investments, such as price paid plus brokerage fees

60

Journal entry: X company acquires bonds for $54,000

Dr. Debt Investments 54,000

Cr. Cash 54,000

61

Journal entry for receipt of interest without previous accrual

Dr. Cash XXX

Cr. Interest Revenue XXX

62

Journal entry accruing interest

Dr. Interest Receivable XXX

Cr. Interest Revenue XXX

63

Jouranl entry for receipt of interest after it has been accrued

Dr. Cash XXX

Cr. Interest Receivable XXX

64

Net proceeds

Sales price less brokerage fees

65

Gain on sale of a bond account

Gain on Sale of Investments

66

The accounting depends on the extent of the ______________ over the operating and financial affairs of the issuing corporation

investor's influence

67

0-20% method

Cost method

No significant influence usually exists

68

20-50% method

Equity method

Significant influence usually exists

69

50-100%

Investment Valued on Parent's Books using Cost method or Equity Method

(Investment eliminated in Consolidation)

70

Journal entry for acquiring stock (<20%)

Dr. Stock Investments XXX

Cr. Cash XXX

71

Journal entry for receiving cash dividends (<20%)

Dr. Cash XXX

Cr. Dividend Revenue XXX

72

Adjust each period for (equity method)

The investor's proportionate share of the earnings (losses)

The dividends received by the investor

73

Journal entry: X corporation acquires common stock for 120,000 dollars

Dr. Stock Investments XXX

Cr. Cash XXX

74

Controlling Interest

When one corporation acquires a voting interest of more than 50 percent in another corporation

Investor = parent

Investee = subsidiary

Investment in the subsidiary is reported on the parent's books as a long-term investment

Parent generally prepares consolidated financial statements

75

3 Categories of Securities

Trading Securities

Available-for-Sale Securities

Held-to-Maturity Securities

76

Trading Securities

Companies hold trading securities with the intention of selling them in a short period

Trading means frequent buying and selling

Companies report trading securities at fair value, and report changes from cost as part of net income

77

Available-for-Sale Securities

Companies hold securities with the intent of selling these investments sometime in the future

Can be current assets or long-term assets depending on intent of the management

Reported at fair value, and report changes from cost as a component of the stockholders' equity section

78

Journal entry for adjusting entry of a trading security

Dr. Market Adjustment--Trading XXX

Cr. Unrealized Gain--Income XXX

79

An unrealized loss on equity is reported where?

Deducted from the stockholders' equity section

80

Other Revenue and Gains

Interest Revenue

Dividend Revenue

Gain on Sale of Investments

Unrealized Gain-Income

81

Other Expenses and Losses

Loss on Sale of Investments

Unrealized Loss--Income

82

Show a balance sheet presentation of trading securities fair value of 48,000

Balance Sheet

Current Assets

                    Short-term investments, at fair value 48,000

83