Acc Ch 12

Front 1

Corporation

Back 1

A business unit chartered by the state and legally separate from its owners (stockholders)

Front 2

Corporations dominate the economy in total ______,
Even though sole proprietorships and partnerships outnumber corporations in the U.S. in total ______

Back 2

dollars, number

Front 3

How are new funds/capital raised?

Back 3

by issuing bonds, new common stock, and preferred stock

Front 4

3 Steps of the Articles of Incorporation

Back 4

1. Form the company charter 2. Become a contract between the state and the incorporators 3. Authorize the company to do business as a corporation

Front 5

How does a company do business as a corporation?

Back 5

stockholders elect board of directors--> board of directors elect officers--> officers carry out policies established in articles

Front 6

Authorized Stock

Back 6

Number of shares that the corporation may issue based on the articles of incorporation

Front 7

Outstanding Stock

Back 7

Number of shares held by stockholders

Front 8

Issued Stock

Back 8

Number of shares available to the public

Front 9

Advantages of Incorporation

Back 9

1. Separate legal entity
2. Limited liability
3. Ease of capital generation
4. Ease of transfer of ownership
5. Lack of mutual agency
6. Continuous existence
7. Centralized authority and responsibility
8. Professional management

Front 10

Disadvantages of Incorporation

Back 10

1. Government regulation
2. Taxation
3. Limited liability
4. Separation of ownership and control

Front 11

Share of Stock

Back 11

unit of ownership in a corporation

Front 12

Par Value

Back 12

An arbitrary amount assigned to each share of stock, Usually bears little or no relationship to the market value or book value of shares

Front 13

Legal capital

Back 13

The number of shares issued times the par value; Is the minimum amount that can be reported as contributed capital

Front 14

Initial Public Offering (IPO)

Back 14

Initial offering of capital stock by a company

Front 15

Underwriters are used for IPO. What is an underwriter?

Back 15

Intermediary between the corporation and the investing public; Guarantees the sale of the stock for a fee (Usually less than one percent of the selling price)

Front 16

The corporation records the net proceeds of the offering. How is that calculated?

Back 16

Amount paid by public less underwriter fees and any other direct costs of the offering

Front 17

State incorporation fees, Attorneys’ fees, Cost of printing stock certificates, Accountant fees related to registering the firm’s initial stock. These are examples of

Back 17

Start up fees and organization costs. These are expensed.

Front 18

Equity Financing

Back 18

Using stock to finance a company

Front 19

Advantages of Equity Financing

Back 19

Less risky than financing with bonds (Bonds require interest payments; dividends do not have to be paid unless board of directors declares them), Cash generated by profitable operations can be turned back into the company; Proceeds from common stock issue can be used to maintain or improve debt to equity ratio

Front 20

Disadvantages of Equity Financing

Back 20

Dividends paid on stock are not tax-deductible; Issuance of stock dilutes ownership

Front 21

Dividends

Back 21

Distributions of a corporation’s assets to its stockholders

Front 22

Characteristics of dividends

Back 22

Stockholders receive assets in proportion to their ownership; Dividends are not guaranteed to stockholders; Liquidating dividends, in essence, are a return to the stockholders of part of their contributed capital

Front 23

Who has sole authority to declare dividends?

Back 23

Board of Directors

Front 24

Factors that affect when and how much dividends are paid:

Back 24

earnings; expected volatility of earnings; level of dividends affects cash flows

Front 25

How can stockholders earn return on their investments?

Back 25

Receiving dividends; By selling shares of stock for more than they paid for them

Front 26

Declaration Date

Back 26

Date on which the board of directors formally declares that a dividend will be paid (The Dividends account is debited; Dividends Payable is credited)

Front 27

Record Date

Back 27

Date on which the ownership of the stock is determined (no entry)

Front 28

Date of Payment

Back 28

Date on which the payment is made to stockholders of record (Dividends Payable is debited; Cash is credited)

Front 29

Dividends Yield

Back 29

Used by investors to evaluate the amount of dividends received
(Dividends per share/market price per share) (%)

Front 30

Return on Equity

Back 30

Most important ratio associated with stockholders’ equity; It is a common measure of management’s performance (net income/average stockholder's equity) (%)

Front 31

Treasury Stock

Back 31

Repurchase of a company’s own stock off the open market

Front 32

Price/Earnings (P/E) Ratio

Back 32

A measure of investors’ confidence in a company’s future (market price per share/earnings per share) (times)

Front 33

How do you determine employee's gain when they exercise their right to stock options?

Back 33

gain=market value (right now) - option price (market value when option became available)

Front 34

Stockholder's Equity

Back 34

Represents owners’ claims to a business: Contributed Capital,
Retained Earnings, Treasury Stock

Front 35

Contribution Capital

Back 35

Investments made by stockholders (common or preferred), Provides information about the corporation’s stock

Front 36

Retained Earnings

Back 36

Earnings since inception, less any losses, dividends, or transfers to contributed capital, Earnings reinvested in the corporation, Represent stockholders’ claims to the assets from earnings reinvested in the company

Front 37

Treasury Stock

Back 37

Shares of its own stock that the corporation has bought back on the open market

Front 38

Common Stock

Back 38

The company’s residual equity, carries voting rights

Front 39

Preferred stock

Back 39

Has preference over common stock in one or more ways

Front 40

Relationship of shares

Back 40

Unissued shares = issued shares - authorized shares
Issued shares = outstanding shares + treasury shares

Front 41

Characteristics of Preferred Stock

Back 41

Preference as to dividends; Preference as to assets of the business in liquidation; Convertibility; Callable option

Front 42

Noncumulative preferred stock

Back 42

Receives no dividend if none is declared

Front 43

Cumulative preferred stock

Back 43

Has a fixed dividend that accumulates from year to year

Front 44

Dividends in arrears

Back 44

Dividends not paid in the year they are due;not considered a liability

Front 45

Are not considered a liability because no liability exists until a dividend is declared

Back 45

Preferred stock that can be exchanged for shares of common stock at a ratio stated in the preferred stock contract

Front 46

Preferred stock that can be exchanged for shares of common stock at a ratio stated in the preferred stock contract

Back 46

Stock that may be redeemed or retired at the option of the issuing corporation at a price stated in the preferred stock contract

Front 47

Any amount in excess of par value or stated value received from the issuance of stock is recorded in the _____________ account

Back 47

Additional Paid-in Capital account

Front 48

If stock is issued without a stated value, it is recorded in the _______ account

Back 48

Capital stock

Front 49

Issuance of Stock for Noncash Assets

Back 49

Record the transaction at the fair market value of what the corporation is giving up (stock), If fair market value of the stock cannot be determined, use the fair market value of the assets or services received

Front 50

Issuance of Stock for Noncash Assets

Back 50

Debit asset (start up fees, etc.), credit common stock and additional paid in cash

Front 51

1. To have stock available to distribute to employees through stock option plans 2. To maintain a favorable market for its stock 3. To increase earnings per share 4. To maintain additional shares available for such activities as purchasing other companies 5. To prevent a hostile takeover

Back 51

Reasons a company purchase treasury stock

Front 52

Journal entry of purchase of treasury stock AT cost:

Back 52

Debit treasury stock, credit cash

Front 53

Total stockholders' equity =

Back 53

contributed capital (common stock + additoinal paid in) + Retained Earnings - treasury stock

Front 54

Journal entry of purchase of treasury stock ABOVE cost:

Back 54

Debit Cash for proceeds
Credit Treasury Stock for cost
Credit Paid-in Capital, Treasury Stock for amount over cost

Front 55

When retiring treasury stock, If acquisition price < original contributed capital-->

Back 55

Credit Paid-In Capital, Retirement of Stock

Front 56

When retiring treasury stock, If acquisition price > original contributed capital

Back 56

Debit Retained Earnings