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FINANCIAL ACCOUNTING > WEEK 6 > Flashcards

WEEK 6 Flashcards

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1
Q

What is a corporation in financial accounting?

A

A corporation is a legal entity separate and distinct from its owners, with most of the rights and responsibilities of a person.

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2
Q

What responsibilities does a corporation have similar to a person?

A

It must follow laws and pay taxes

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3
Q

How are corporations classified by purpose?

A

They can be:

For-profit: Operate to earn a profit.

Not-for-profit (nonprofit): Operate for purposes other than making a profit, such as charity or education.

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4
Q

How are corporations classified by ownership?

A

They can be:

Publicly held: Shares traded on public stock exchanges; may have thousands of shareholders.

Privately held: Fewer shareholders; shares are not available to the general public.

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5
Q

What is the main difference between a publicly held and privately held corporation?

A

Publicly held corporations offer stock to the general public; privately held corporations do not.

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6
Q

What does separate legal existence mean for a corporation?

A

The corporation acts under its own name, not in the name of its stockholders. It can borrow money and enter contracts in its own name.

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7
Q

What is limited liability in a corporation?

A

Stockholders are only liable for their investment. Creditors can claim only corporate assets, not personal assets of owners.

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8
Q

What are transferable ownership rights?

A

Corporate ownership is through shares of stock, which can be freely transferred between investors.

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9
Q

How can a corporation acquire capital?

A

By issuing stock, allowing it to raise large amounts of capital from many investors.

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10
Q

What does continuous life mean for corporations?

A

Corporations continue to exist regardless of changes in ownership. Their life can be perpetual or limited as per the charter.

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11
Q

Who manages a corporation?

A

Stockholders elect a board of directors, who oversee management. Daily operations are handled by officers.

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12
Q

What are the duties of the controller in a corporation?

A

Maintaining accounting records, ensuring internal controls, and preparing financial statements, tax returns, and internal reports.

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13
Q

What is the role of the treasurer in a corporation?

A

Managing corporate funds and maintaining the company’s cash pos

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14
Q

How are corporations regulated by the government?

A

They are subject to state and federal laws designed to protect stockholders and ensure transparency.

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15
Q

What is a corporate charter?

A

A legal document from the state that authorizes the corporation’s formation and includes its name, purpose, share structure, and founding members.

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16
Q

What does a corporate charter specify?

A

Name and purpose, share structure, names of founders, and number of shares to be purchased.

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17
Q

What is a share certificate?

A

A document that provides proof of stock ownership in a corporation.

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18
Q

What is common stock?

A

The basic form of corporate ownership when only one class of shares exists.

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19
Q

What voting rights do stockholders have?

A

They vote in the election of the board of directors and on major corporate actions.

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20
Q

What financial benefit do stockholders receive from corporate earnings?

A

Dividends

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21
Q

What is the preemptive right of a stockholder?

A

The right to maintain their percentage of ownership when new shares are issued.

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22
Q

What is a residual claim in liquidation?

A

The right of stockholders to receive remaining assets after all liabilities have been settled.

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23
Q

What must a corporation decide before issuing stock?

A

1) How many shares to authorize

2) How to issue the stock (directly or indirectly), and 3) What value to assign to the stock.

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24
Q

What are authorized shares?

A

The maximum number of shares a corporation is legally permitted to sell, as stated in its charter. No accounting entry is made at authorization

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25
How can a corporation issue stock?
- Directly to investors - Indirectly through an investment banking firm (which may underwrite the issue).
26
What happens when shares are traded on the market?
These are transfers between investors and do not affect the corporation’s stockholders’ equity.
27
What is par value stock?
Capital stock with a per-share value assigned by the corporate charter; historically used to protect creditors.
28
Is par value required today?
No, many states no longer require corporations to issue stock with a par value.
29
What is no-par value stock?
Stock that has no assigned value in the corporate charter. The board may assign a stated value for accounting purposes.
30
What are the two parts of stockholders’ equity in a corporation?
1) Share Capital, 2) Retained Earnings.
31
What is share capital?
The total amount of cash and other assets paid in by stockholders in exchange for capital stock.
32
What are retained earnings?
The net income retained by a corporation for future use, rather than distributed as dividends.
33
How is stock recorded if it has no par value and no stated value?
The entire amount is credited to Common Stock.
34
What if no-par stock has a stated value?
Any excess over the stated value is credited to Paid-in Capital in Excess of Stated Value.
35
Can corporations issue stock for services or noncash assets?
Yes, for things like legal services, land, buildings, etc.
36
What accounting principle is used when issuing stock for services or noncash assets?
The historical cost principle — use the fair value of the consideration given or received, whichever is more clearly determinable.
37
What is treasury stock?
A corporation’s own stock that has been issued and later reacquired but not retired.
38
List 3 reasons why companies acquire treasury stock.
1. To reissue to employees under compensation plans 2. To boost stock price by reducing supply 3. To reduce shares outstanding and increase EPS
39
How is treasury stock usually accounted for?
Using the cost method, where the reacquisition cost is debited to Treasury Stock.
40
Why do corporations issue preferred shares?
To appeal to investors seeking priority in earnings and asset distribution.
41
What two priorities do preferred shareholders typically have?
1. Dividends (before common shareholders) 2. Assets upon liquidation
42
What are the requirements to declare a cash dividend?
1. Retained earnings 2. Adequate cash 3. Declared dividend by the board
43
What are the 3 important dates in a dividend?
Declaration date – creates a legal liability Record date – identifies eligible shareholders Payment date – pays the dividend
44
What is the effect of a share dividend?
Decreases retained earnings Increases paid-in capital Does not change ownership percentage
45
If you own 2% of a company and it declares a 10% share dividend, what happens?
You receive 2% of the new shares issued. Your total shares increase, but your ownership percentage stays the same.
46
What is a stock split?
Issuing additional shares to shareholders in proportion to ownership while reducing par value per share.
46
How do share dividends affect stockholders' equity?
They change the composition of stockholders' equity (retained earnings ↓, paid-in capital ↑), but do not change the total.
47
How does a stock split affect total stockholders' equity?
No change in total equity, paid-in capital, or retained earnings; only the number of shares increases and par value decreases.
48
paid-in-capital
is the amount of money that stockholders pay to a corporation in exchange for shares of stock
49
Do companies debit net losses to paid-in capital?
No. Losses are not transferred to paid-in capital. A negative retained earnings balance is called a deficit.
50
What are the three types of retained earnings restrictions?
Legal – Laws (e.g., treasury stock rules) Contractual – Loan covenants Voluntary – Board decisions for specific purposes
51
What does the retained earnings statement show?
The changes in retained earnings during the year (beginning RE, +net income, -dividends, etc.).
52
What are 4 key uses of the Statement of Cash Flows?
Evaluate ability to generate future cash flows Assess ability to pay dividends and obligations Explain difference between net income and cash flow Show cash from investing and financing for decision-making
53
What are the 3 categories of cash flows?
Operating Activities – Day-to-day income-related transactions Investing Activities – Buying/selling assets or investments Financing Activities – Borrowing, stock issuance, dividends
54
What are examples of cash inflows from operating activities?
Sale of goods/services Interest and dividends received
55
Examples of cash inflows from investing?
Sale of property, plant, equipment (PPE) Collection of loans Sale of investments
56
What are examples of cash outflows from operating activities?
Payments to suppliers, wages, taxes, interest
57
Examples of cash outflows from investing?
Purchase of PPE Loans to others Purchase of investments
58
Examples of cash inflows from financing?
Sale of stock Borrowing (bonds/notes)
59
Examples of cash outflows from financing?
Dividends Repaying debt Buying back stock (treasury stock)
60
What 3 sources are used to prepare the Statement of Cash Flows?
Comparative balance sheets Current income statement Additional transaction info
61
What are the 3 steps to prepare a Statement of Cash Flows?
Convert net income to net cash from operations Analyze noncurrent asset/liability changes Reconcile ending cash balance to beginning
62
What is the indirect method?
Starts with net income and adjusts for non-cash items and working capital changes
63
What is the direct method?
Lists specific cash receipts and cash payments
64
Add to net income (indirect method):
Depreciation Loss on asset sale Decrease in current assets Increase in current liabilities
65
Subtract from net income:
Gain on sale Increase in current assets Decrease in current liabilities
66
What happens to a loss on equipment under indirect method?
Add it back to net income
67
What happens to a gain on equipment?
Subtract from net income
68
Are noncash activities reported in the main body of the statement?
No — they are disclosed in a separate schedule or note.
69
formulas

FINANCIAL ACCOUNTING (14 decks)

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