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78 Cards in this Set

  • Front
  • Back
The special characteristics of the corporate form that affect accounting are:
1. Influence of state corporate law
2. Use of the capital stock or share system
3. Develpoment of a varitey of ownership interests
In many cases states have adopted the principles contained in the ____ prepared by the _______
Model Business Corporate Act
American Bar Association
in the absence of restrictive provisions, each share carries the following rights
1. To share proportionately in profits and losses
2. To share proportionately in management (the right to vote for directors)
3. To share proportionately in corporate assets on liquidation
4. To share proportionately in any new issues of stock of the same class-- called the PREEMPTIVE RIGHT
What is the preemptive right
The right to share proportionately in any new issues of stock of the same class
What is required of the corporation in regards to the share system?
1. Maintain a list or subsidiary ledger of stockholdersas a fuide to dividend payments, issuance of stock rights, voting proxies, and similar privledges.
2. To revise the subsidiary ledger of stockholders periodically, generally in advance of every dividendpayment or stockholders' meeting
3. Specific controlls required by the major stock exchanges
The negotiability of stock certificates is governed by the
Uniform Stock Transfer Act
Uniform Commercial Code
the residual corporate interest that bears the ultimate risks of loss and recieves the benefits of success.
Common Stock
Special classes of stock created that have certain preferential rights are called
Preferred stock
Owner's equity in a corporation is defined as
stockholders equity
sharehlders equity
corporate capital
The negotiability of stock certificates is governed by the
Uniform Stock Transfer Act
Uniform Commercial Code
Owner's Equity in a corporation is defined as
stockholders' equity
shareholders' equity
corporate capital
The following three categories normally appear as part of stockholders' equity
1. Capital Stock
2. Additional paid-in capital
3. Retained earnings
_____ Represents the earned capital of the enterprise
Retained earnings
the toal amount paid i on capital stock-the amount provided by stockholders to the corporation for use in business
Contributed capital
the capital that develps of the business operates profitably
earned capital
Stockholder's equity is the difference between ____ and ____
Assets and liabilites of the enterprise
In issuing a stock the following procedures must be followed
1. The stock ust be authorized by the state
2. shares are offered for sale
3. contracts to sell stock are entered into
Why is stock issued at low par value?
1. The discount is recorded as a debit to additional paid-in capital
2. The original purchaser of the current holder of the shares isssued may be called on to pay in the amount of the discount to prevent creditors from sustaining a loss upon liquitdation of the corporation
shares issued with no per share amount printed on the stock certificate
no par stock
two methods of allocation of proceeds from lummp sum sales
1. the proportional method
2. The incremental method
The proportional method of allocating lump sum sales requires that value is based on percentage of
fair market value
The incremental method of allocating lump sum sales requires that the balance allocated to stock with no established market value by
subtracting the value of stock with determinable value from the lump sum receipt to get the balance allocated
an understated corporated structure (secret reserve) may be created by
issuing stock for understated property or services
excessive deprication or amotization
expensing capital expenditures
excessive writedowns of inventories or receivables
or any other understatements of assets or overstatement of liabilities
when issuing stock direct costs incurred should be reported as a
reduction of the amount paid in
issue costs of stock are considered
an issue cost of financing
management salaries and other indirecto costs related to stock issue should be
expensed as incurred
corporations buy back their own stocks to
provide tax efficient distributions of excess cash to shareholders

to increase earnings per share and return on equity

to provide stock for employee stock compensation contracts

to thwart takeover attempts or to reduce the number of stockholders

to make a market in the stock
when a company borrows money to finance stock repurchases this is called a
leveraged buyout
when a company repurchases treasury stock a ___ occurs in both
reduction assets shareholders equity
treasury stock is essentially the same as
unissued capital stock
purchase of treasury stock can be accounted for in two methods
cost method
par or stated value method
the cost method _____ the ___ account for the reaquisition cost which is a deduction from ____AND ____ on the balance sheet
debiting; treasury stock;paid in capital and retained earnings
***the par or stated value method records all transactions in treasury shares at their ____ and reports the ____ as a deduction from
par value; captial stock
the accounting for the sale of treasury shares when the selling price equals the cost the company records the sale by
debiting cash and crediting treasury stock
THe sale of treasury stock always increases
total assets
stockholders equity
When the selling price of shares of treasury stock exceeds its cost the company ___ the difference to ___
credits Paid-in Capital from treasury stock
WHy isnt a GAIN ON SALE of TREASURY stock credited when treasury stock is sold above cost
1 gains occur when selling assets, treasury stock is not an asset
2 a gain or loss should not be recognized fro mstock transactions with a company's own stockholders
When a company sells treasury stock below its cost it usually __ the excess of the cost over selling price to___
Paid in Capital from treasury stock
after eliminating the credit balance in PIC from Treasury stock, the corporation ___ any excess of cost over selling price to __
debits; retained earnings
preferred stock usually has these features
preference as to dividends
preference as to assets in the event of liquidation
convertible into common stock
callable at the option of the corporation
___ requires that a corporation that fails to pay a dividend in any year it must make it up later
cumulative preferred stock
A participating preferred stock requires that
dividends at the same rates as those paid to common stockholders are paid
convertible preferred stock permits
allows stockholders at any time to convert to common stock at a predetermined ratio
calable preferred stock
permits the corporation to call or redeem outstanding shares on a specific future date at specific prices
to account for preferred stock when issuing
allocate proceeds between the par value fo the preferred stock and additional paid in capital
convertible bonds are recorded as a ___ on the date of issue
corporations consider convertible bonds as a part of
stockholders equity
when excercixing convertible preferred stocks there is a (gain/loss)
there is not recognizable gain or loss, the company uses the BOOK METHOD
companies pay dividends in amounts equal to their legallyl available retained earnings because
to maintain bond covenants with creditors, and to build up protection against loss

to meet state corporation requirements

to finance growth or expansion (reinvesting)

to smooth out dividend payments from year to year to pad lean years

to build up a buffer against possible losses or errors in the calculation of profits
types of dividends
cash dividends
property dividends
liquidating dividends
stock dividends
all dividends except for stock dividends_____
reduce the total stockholders' equity in the corporation
a dividend not based on retained earnings is a
liquidating dividend
the date of declaration is the date
the resolution is approved by the board of directors
when the dividends are payable
date of payment
the date used when all the stockholders are listed
date of record
a declared cash dividend is usually a
current liability
to set up a ledger account that shows the amount of dividends declared during the year, a company might ___ the ___ account instead of retaind earnings, and then ____ at year end
debit; cash dividends declared; closes the account to retained earnings
the usual property dividend is usually in the form of
securities of other companies that the distrubuting company holds
dividends based on other than retained earnings are someitmes described as
liquidating dividends
all dividends, except for ___ dividends ___ the total stockholder' equity in the corporation
stock; reduce
a declared cash dividend is a ______ usually a ____
liability; current liability
to set up a ledger account that shows the amount of dividends declared during the year, companys might ___ the ___ account and then close the account to the ___ account at year end
debit cash dividends declared; retained earnings
property dividends are called
dividends in kind
the usual property dividend is in the form of ___
securities of other companies that the distributing corporation holds as an investment
when declaring a property dividend, the corporation should __- the property it will distribute _____
restate at fair value the property it will distribute; recognizing any gain or loss
dividends based on other than retained earnings are sometimes called
liquidating dividends
any dividend not based on earnings ____ the coporate paid-in capital and to that extent it is a ____
reduces; liquidating dividend
When management wishes to capitalize part of earnings from earned to contributed captial it will issue a
stock dividend
the statement of stockholders equity is frequently presented in this format
balance at the beginning of the period
balance at the end of the period
the rate of return on common stock equity measures
profitablity from the common stockholders viewpoint
return on equity equals
(net income-preferred dividends)/ average common stockholders' equity
the practice of using borrowed money or issuing preferred stock in hopes of obtaining a higher rate of return on the money used is called
trading on the equity
trading on the equity
the practice of using borrowed money or issuing preferred stock in hopes of obtaining a higher rate of return on the money used
the ratio of cash dividends to net income
payout ratio
payout ratio
the ratio of cash dividends to net income
the payout ratio is caluclated by
cash dividends/(net income-preferred dividends)
book value per share of a stock
is the amount each share would receive if the compnay were liquidated on the basis of amounts reported on the balance sheet
book value per share equals
common stockholders equity/outstanding shares