chapter eleven notes

Question 1

separate legal entity (corporations)

Answer 1

own assets, incur liabilities, enter into contracts, sue and be sued

Question 2

governance (corporations)

Answer 2

stockholders (owners of voting shares) elect Board of Directors; Board appoints Presidents (CEO), CFO, etc.

Question 3

stockholders have the right to…

Answer 3

vote and receive dividends (dependent on the type of stock they own)

Question 4

how can you finance a company?

Answer 4

borrowing money

selling ownership

Question 5

what are the advantages of issuing equity?

Answer 5

1. ease of raising capital
2. dividend flexibility
3. return on investment

Question 6

ease of raising capital

Answer 6

ready capital markets to buy/sell; great number of potential investors

Question 7

dividend flexibility

Answer 7

dividends are NOT liabilities until declared by the Board

Question 8

return on investment

Answer 8

ROI is usually higher on stocks than bonds (more attractive to investors)

Question 9

what are the disadvantages of issuing equity?

Answer 9

1. control
2. no tax incentive
3. effective on key ratios

Question 10

control

Answer 10

issuing additional shares of stock dilutes ownership control

Question 11

no tax incentive

Answer 11

dividends are not tax deductible whereas interest expense is tax deductible

Question 12

effect on key ratios

Answer 12

EPS “earnings per share”

Question 13

authorized shares

Answer 13

MAXIMUM number of shares that can be sold to the public

Question 14

issued shares

Answer 14

TOTAL number of shares issued (sold) to the stockholders since formation

Question 15

outstanding shares

Answer 15

number of shares held by OUTSIDE shareholders

Question 16

treasury stock

Answer 16

shares of the company’s own stock that were originally issued (sold) and have now been bought back and are being held by the company

Question 17

treasury stock is a ______ to _____

Answer 17

reduction

SHE

Question 18

how do you solve for outstanding shares?

Answer 18

issued shares-treasury stock

Question 19

par value

Answer 19

1. a nominal value that establishes “legal capital”
2. protests creditors
3. par is usually below anticipated selling price
4. may indicated a “stated value”

Question 20

“legal capital”

Answer 20

the amount of capital that must remain invested in the business
(set in the corporation’s articles of incorporation)

Question 21

how does par value protect creditors?

Answer 21

by limiting the amount of assets than can be distributed to shareholders before liquidation

Question 22

par is usually below anticipated selling price

Answer 22

when selling price exceeds par, the excess is APIC

Question 23

preferred stock

Answer 23

“first dibs” on dividends to preferred shareholders

Question 24

common stock

Answer 24

only class of stock with voting rights

Question 25

additional paid in capital (APIC)

Answer 25

excess of selling price over par value

Question 26

contributed capital

Answer 26

preferred stock common stock additional paid in capital

Question 27

earned capital

Answer 27

retained earnings - increased by net income - decreased by net losses and dividends

Question 28

IPO-Initial Public Offering

Answer 28

the first time a corporation sells stock to the public

Question 29

what is the most famous IPO this century?

Answer 29

Facebook

Question 30

secondary markets

Answer 30

transactions between two investors buying and selling the company's stock (these transactions do not affect the corporations accounting records)

Question 31

employee compensation

Answer 31

stock can also be issued (sold) to employees as part of their compensation package

Question 32

stock options

Answer 32

allow employees to purchase stock from the company at a predetermined, fixed price

Question 33

how do you record an issuance of par value stock?

Answer 33

cash x common stock x APIC-common stock x

Question 34

what are the basic rights of common stockholders?

Answer 34

1. voting rights 2. dividends 3. preemptive right 4. liquidation

Question 35

dividends

Answer 35

right to receive share of corporation earnings as their return on investment

Question 36

preemptive right

Answer 36

right to maintain a proportionate ownership interest when new shares are issued

Question 37

liquidation

Answer 37

right to a proportionate share of assets upon liquidation

Question 38

what are the basic rights of preferred stock?

Answer 38

dividend preference | cumulative preference

Question 39

dividend preference

Answer 39

right to receive a dividend before common stockholders receive anything "dibs"

Question 40

once dividends are declared...

Answer 40

you must keep giving them out

Question 41

all preferred stock is...

Answer 41

outstanding

Question 42

cumulative preference

Answer 42

any unpaid preferred dividends from the past + current year's dividend must be paid in full before common shareholders receive any dividends

Question 43

where do you keep track of cumulative preference?

Answer 43

off books

Question 44

dividends

Answer 44

distribution of earnings to shareholders | usually cash

Question 45

once board declares a dividend, it becomes a

Answer 45

liability

Question 46

what are the requirements of dividends?

Answer 46

sufficient retained earnings and sufficient cash flow

Question 47

what are the three important dates of cash dividends?

Answer 47

1. date of declaration 2. date of record 3. date of payment

Question 48

date of declaration

Answer 48

record the liability (increases current liability)

Question 49

date of record

Answer 49

stockholders as of this date are entitled to receive dividends

Question 50

date of payment

Answer 50

record distribution of cash (decreases current asset)

Question 51

retained earnings are reduced when?

Answer 51

ALWAYS at closing (regardless of if the dividend has been paid yet)

Question 52

issuing new stock increases ________ and reduces ______

Answer 52

``` contributed capital (# of shares issued) retained earnings (no effect on SHE) ```

Question 53

stock dividends decrease _____

Answer 53

retained earnings (DIRECTLY)

Question 54

small stock dividend

Answer 54

less than 20-25%

Question 55

how do you record a small stock dividend?

Answer 55

at current market value of stock

Question 56

what is the purpose of stock dividends?

Answer 56

to issue additional shares of common stock | each stockholder's % of ownership remains the same

Question 57

what is the purpose of stock splits?

Answer 57

1. decrease market price of stock 2. increase number of shares authorized, issued, and outstanding 3. decrease (split) the par value

Question 58

what is the effect of stock splits?

Answer 58

1. no change in value of corporation 2. no change in total SHE 3. no change in retained earnings