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56 Cards in this Set
- Front
- Back
Corporation
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A business unit chartered by the state and legally separate from its owners (stockholders)
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Corporations dominate the economy in total ______,
Even though sole proprietorships and partnerships outnumber corporations in the U.S. in total ______ |
dollars, number
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How are new funds/capital raised?
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by issuing bonds, new common stock, and preferred stock
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3 Steps of the Articles of Incorporation
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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
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How does a company do business as a corporation?
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stockholders elect board of directors--> board of directors elect officers--> officers carry out policies established in articles
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Authorized Stock
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Number of shares that the corporation may issue based on the articles of incorporation
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Outstanding Stock
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Number of shares held by stockholders
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Issued Stock
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Number of shares available to the public
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Advantages of Incorporation
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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 |
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Disadvantages of Incorporation
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1. Government regulation
2. Taxation 3. Limited liability 4. Separation of ownership and control |
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Share of Stock
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unit of ownership in a corporation
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Par Value
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An arbitrary amount assigned to each share of stock, Usually bears little or no relationship to the market value or book value of shares
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Legal capital
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The number of shares issued times the par value; Is the minimum amount that can be reported as contributed capital
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Initial Public Offering (IPO)
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Initial offering of capital stock by a company
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Underwriters are used for IPO. What is an underwriter?
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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)
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The corporation records the net proceeds of the offering. How is that calculated?
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Amount paid by public less underwriter fees and any other direct costs of the offering
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State incorporation fees, Attorneys’ fees, Cost of printing stock certificates, Accountant fees related to registering the firm’s initial stock. These are examples of
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Start up fees and organization costs. These are expensed.
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Equity Financing
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Using stock to finance a company
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Advantages of Equity Financing
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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
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Disadvantages of Equity Financing
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Dividends paid on stock are not tax-deductible; Issuance of stock dilutes ownership
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Dividends
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Distributions of a corporation’s assets to its stockholders
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Characteristics of dividends
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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
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Who has sole authority to declare dividends?
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Board of Directors
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Factors that affect when and how much dividends are paid:
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earnings; expected volatility of earnings; level of dividends affects cash flows
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How can stockholders earn return on their investments?
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Receiving dividends; By selling shares of stock for more than they paid for them
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Declaration Date
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Date on which the board of directors formally declares that a dividend will be paid (The Dividends account is debited; Dividends Payable is credited)
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Record Date
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Date on which the ownership of the stock is determined (no entry)
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Date of Payment
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Date on which the payment is made to stockholders of record (Dividends Payable is debited; Cash is credited)
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Dividends Yield
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Used by investors to evaluate the amount of dividends received
(Dividends per share/market price per share) (%) |
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Return on Equity
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Most important ratio associated with stockholders’ equity; It is a common measure of management’s performance (net income/average stockholder's equity) (%)
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Treasury Stock
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Repurchase of a company’s own stock off the open market
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Price/Earnings (P/E) Ratio
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A measure of investors’ confidence in a company’s future (market price per share/earnings per share) (times)
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How do you determine employee's gain when they exercise their right to stock options?
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gain=market value (right now) - option price (market value when option became available)
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Stockholder's Equity
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Represents owners’ claims to a business: Contributed Capital,
Retained Earnings, Treasury Stock |
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Contribution Capital
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Investments made by stockholders (common or preferred), Provides information about the corporation’s stock
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Retained Earnings
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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
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Treasury Stock
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Shares of its own stock that the corporation has bought back on the open market
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Common Stock
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The company’s residual equity, carries voting rights
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Preferred stock
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Has preference over common stock in one or more ways
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Relationship of shares
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Unissued shares = issued shares - authorized shares
Issued shares = outstanding shares + treasury shares |
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Characteristics of Preferred Stock
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Preference as to dividends; Preference as to assets of the business in liquidation; Convertibility; Callable option
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Noncumulative preferred stock
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Receives no dividend if none is declared
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Cumulative preferred stock
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Has a fixed dividend that accumulates from year to year
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Dividends in arrears
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Dividends not paid in the year they are due;not considered a liability
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Are not considered a liability because no liability exists until a dividend is declared
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Preferred stock that can be exchanged for shares of common stock at a ratio stated in the preferred stock contract
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Preferred stock that can be exchanged for shares of common stock at a ratio stated in the preferred stock contract
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Stock that may be redeemed or retired at the option of the issuing corporation at a price stated in the preferred stock contract
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Any amount in excess of par value or stated value received from the issuance of stock is recorded in the _____________ account
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Additional Paid-in Capital account
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If stock is issued without a stated value, it is recorded in the _______ account
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Capital stock
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Issuance of Stock for Noncash Assets
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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
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Issuance of Stock for Noncash Assets
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Debit asset (start up fees, etc.), credit common stock and additional paid in cash
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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
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Reasons a company purchase treasury stock
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Journal entry of purchase of treasury stock AT cost:
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Debit treasury stock, credit cash
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Total stockholders' equity =
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contributed capital (common stock + additoinal paid in) + Retained Earnings - treasury stock
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Journal entry of purchase of treasury stock ABOVE cost:
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Debit Cash for proceeds
Credit Treasury Stock for cost Credit Paid-in Capital, Treasury Stock for amount over cost |
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When retiring treasury stock, If acquisition price < original contributed capital-->
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Credit Paid-In Capital, Retirement of Stock
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When retiring treasury stock, If acquisition price > original contributed capital
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Debit Retained Earnings
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