Chapter #10 - Reporting And Understanding Stockholder's Equity

Front 1

What is the journal entry for a small stock divident?

Back 1

See above

Front 2

What is the journal entry for a large stock dividend?

Back 2

See above

Front 3

What is the primary source of financing for a business, and what is it called?

Back 3

A corporation finances its business with equity. The owners’ claims to the assets of the firms are called shareholders-equity or stockholders’ equity.

Front 4

What are the components of the shareholder's equity section of the balance sheet?

Back 4

There are two parts to the shareholders’ equity section –contributed capital and retained earnings.

Front 5

What are the four categories of shares of stock?

Back 5

There four Categories of Shares of stock. They are authorized, issued, outstanding and treasury stock.

Front 6

Define authorized stock.

Back 6

Authorized stock – maximum number of shares of stock a firm is authorized to offer to the public as specified in the corporate charter.

Front 7

Define issued stock.

Back 7

Issued stock – shares of stock that have been offered and sold to stockholders.

Front 8

Define outstanding stock.

Back 8

Outstanding stock – shares of stock that are owned by shareholders rather than by the corporation; issued shares minus treasury shares.

Front 9

Define Treasury stock.

Back 9

Treasury stock – shares of stock that firm has bought back via the stock market. The stock is issued but not outstanding.

Front 10

Define common stock.

Back 10

Common stock is the most common type of capital stock representing ownership in a corporation.

Front 11

What basic rights do common shareholders' have?

Back 11

Common shareholders have five basic rights. Those rights are the right to:
Vote for members of the board of directors.
Share in the corporation’s profits.
Share in any assets left if the corporation has to dissolve.
Acquire more shares when the corporation issues new stock, often referred to as the preemptive right.

Front 12

How is the value of common stock established, and where/when does it show up on the balance sheet?

Back 12

The corporate charter determines a fixed per-share amount called the par value of the stock. Par value is added to the common stock account every time a share is issued.

Front 13

Define paid-in-capital.

Back 13

Any excess over par value received for a share of stock is added to additional paid-in-capital

Front 14

What is preferred stock, and how is it different from common stock?

Back 14

Preferred stock is a second type of capital stock. It is a special type of ownership in a corporation. Preferred stockholders don’t get to vote for the board of directors, but they do get their dividends before the common shareholders

Front 15

What is a distibution to the shareholders called?

Back 15

The distributions shareholders receive from the earnings of the corporation are called dividends.

Front 16

What dates are important to cash dividends?

Back 16

There are three important dates related to cash dividends: These dates are declaration date, record date and payment date.

Front 17

What is the declaration date and how does this date affect the corporation's books?

Back 17

Declaration date – the date on which the board of directors declares a dividend will be paid and announces it to the shareholders. Retained Earnings is debited and Dividends Payable is credited.

Front 18

What is the record date and how does it affect the corporation's books?

Back 18

Record date – this is the date used to determine exactly who will receive the dividends. There is no journal entry on this date.

Front 19

What is the record date and how does it affect the corporation's books?

Back 19

Record date – this is the date used to determine exactly who will receive the dividends. There is no journal entry on this date.

Front 20

Who receives dividends?

Back 20

Dividends must be divided between preferred and common shareholders.

Front 21

What is special about cumulative preferred stock?

Back 21

Cumulative preferred stock – stock whose holders must receive past, unpaid dividends before a company can pay any current dividends to any shareholders.

Front 22

What happens to undeclared and unpaid dividends on cumulative preferred stock?

Back 22

Any dividends owed to holders of cumulative preferred stock from past years but undeclared and unpaid are called dividends in arrears. Dividends in arrears are shown in the notes to the financial statements.

Front 23

Define Treasury Stock.

Back 23

Treasury Stock is the term given to common stock that has been issued and subsequently purchased by the company that issued it.

Front 24

Why would a company buy its own stock?

Back 24

To have stock to distribute to employees for compensation plans.
To return cash to the shareholders in a way that is more flexible for both the firm and the shareholders than paying cash dividends.
To increase the company’s earnings per share.
To reduce the amount of dividends to be paid in the future.
To reduce chances of a hostile takeover.

Front 25

What is a stock dividend?

Back 25

A stock dividend is a company’s distribution of new shares of stock to the company’s current stockholders

Front 26

How does a stock dividend affect the shareholder's ownership in the company?

Back 26

Stock dividends do not increase any shareholder’s percentage of ownership in the company.

Front 27

What happens to the value of a share of stock, and the number of shares issued and outstanding, when you have a stock dividend?

Back 27

Stock splits occur when a corporation increases the number of shares and proportionately decreases the par value. No new shares are issued. The current shares of stock are divided by a specific multiple to increase the number of shares. No journal entries are made.

Front 28

How doe you calculated Retained Earnings?

Back 28

Retained Earnings is the total amount of net income (minus net losses) minus all dividends paid since the company began.

Front 29

What does the term return on equity mean?

Back 29

Return on equity is a measure of income the firm earns for each dollar of investment from the common shareholders.

Front 30

How do you calculate return on equity?

Back 30

It is calculated by subtracting preferred dividends from net income and then dividing by average common shareholders’ equity

Front 31

What is earnings per share?

Back 31

Earnings per share is the per share portion of net income of each common shareholder.

Front 32

How do you caluclate earnings per share?

Back 32

It is calculated by subtracting preferred dividends from net income and then dividing that number by weight average number of share outstanding.

Front 33

What are the two types of earnings per share?

Back 33

There are two numbers shown for earnings per share: They are Basic earnings per share and Diluted earnings per share.

Front 34

How do you arrive at basic earnings per share?

Back 34

Basic earnings per share is a straightforward calculation of earnings divided by the weighted average number of shares outstanding.

Front 35

What does diluted earnings per share mean?

Back 35

Diluted earnings per share is a “what if” calculation. What of all the potential securities that could have been converted into common stock actually had been converted to common stock at year-end?

Front 36

How can the risks of stock ownership be controlled?

Back 36

Minimize the risks of stock ownership by diversifying your investments.
Implement controls that monitor the behaviors and decisions of managements – such as having an independent boards of directors and independent audits.