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Questions and Answers
What does authorized stock refer to?
What does authorized stock refer to?
- The number of shares that a corporation has sold to investors
- The shares currently held by shareholders in the market
- The maximum number of shares a corporation can sell as per its charter (correct)
- The total value of shares issued by a corporation
How does a corporation typically issue stock directly?
How does a corporation typically issue stock directly?
- By issuing shares at a discount to attract investors
- By charging investors a commission on the sale
- By hiring a brokerage house to manage the process
- Through advertising its stock issuance to potential buyers (correct)
What is paid-in capital?
What is paid-in capital?
- The total amount received from stockholders for shares (correct)
- The cumulative amount of dividends paid
- The total earnings retained by the company
- Cash generated from operations
What is a common feature of authorized stock in comparison to outstanding stock?
What is a common feature of authorized stock in comparison to outstanding stock?
How is retained earnings primarily generated?
How is retained earnings primarily generated?
What must a corporation do to increase its number of authorized shares?
What must a corporation do to increase its number of authorized shares?
What happens when common stock is issued?
What happens when common stock is issued?
What is the purpose of a brokerage house in stock issuance?
What is the purpose of a brokerage house in stock issuance?
Which of the following describes an accumulated deficit?
Which of the following describes an accumulated deficit?
Which of the following is true regarding outstanding stock?
Which of the following is true regarding outstanding stock?
When common stock with par value is issued at a premium, what does this indicate?
When common stock with par value is issued at a premium, what does this indicate?
Which variable is specifically included in a stock quote's PE ratio?
Which variable is specifically included in a stock quote's PE ratio?
What financial aspects may management consider before selling stock?
What financial aspects may management consider before selling stock?
What do the terms 'Hi' and 'Lo' in a stock quote represent?
What do the terms 'Hi' and 'Lo' in a stock quote represent?
Which scenario would likely prompt current owners to sell their shares?
Which scenario would likely prompt current owners to sell their shares?
What impact does issuing stock have on retained earnings?
What impact does issuing stock have on retained earnings?
What happens when a corporation issues stock at a discount?
What happens when a corporation issues stock at a discount?
Where is the discount on common stock recorded?
Where is the discount on common stock recorded?
What is the accounting treatment for no-par stock issued without a stated value?
What is the accounting treatment for no-par stock issued without a stated value?
If a corporation issues 1,000 shares of no-par stock for $40 each, what is the total cash received?
If a corporation issues 1,000 shares of no-par stock for $40 each, what is the total cash received?
What does a negative retained earnings balance indicate?
What does a negative retained earnings balance indicate?
Which of the following is true about the Discount on Common Stock account?
Which of the following is true about the Discount on Common Stock account?
What does a corporation record when it issues stock at par value?
What does a corporation record when it issues stock at par value?
What is the impact of issuing stock below par value in most states?
What is the impact of issuing stock below par value in most states?
What happens to the par value of shares in a 2-for-1 stock split?
What happens to the par value of shares in a 2-for-1 stock split?
Which of the following statements regarding stock splits is correct?
Which of the following statements regarding stock splits is correct?
How does a 2-for-1 stock split affect the total value of stockholders' equity?
How does a 2-for-1 stock split affect the total value of stockholders' equity?
What is a common effect of stock splits on market value per share?
What is a common effect of stock splits on market value per share?
What change is made to the stock account title after a 2-for-1 stock split for CompTec?
What change is made to the stock account title after a 2-for-1 stock split for CompTec?
Which statement correctly describes the relationship between stock splits and large stock dividends?
Which statement correctly describes the relationship between stock splits and large stock dividends?
Why might a company like Berkshire Hathaway resist a stock split?
Why might a company like Berkshire Hathaway resist a stock split?
What is typically unchanged when a stock split occurs?
What is typically unchanged when a stock split occurs?
What is the total cash dividend declared for 200 outstanding shares at $0.10 per share?
What is the total cash dividend declared for 200 outstanding shares at $0.10 per share?
How many new shares are created when declaring a small stock dividend of 20% on 200 outstanding shares?
How many new shares are created when declaring a small stock dividend of 20% on 200 outstanding shares?
What is the total market value attributed to the small stock dividend declared on March 31?
What is the total market value attributed to the small stock dividend declared on March 31?
What amount is moved from Retained Earnings when declaring a large stock dividend of 40%?
What amount is moved from Retained Earnings when declaring a large stock dividend of 40%?
What is the par value of the new shares distributed from the large stock dividend declared on December 1?
What is the par value of the new shares distributed from the large stock dividend declared on December 1?
In which account is the amount for the cash dividend paid recorded?
In which account is the amount for the cash dividend paid recorded?
What accounts are affected when the cash dividend is paid out?
What accounts are affected when the cash dividend is paid out?
How many shares are outstanding after the large stock dividend is distributed?
How many shares are outstanding after the large stock dividend is distributed?
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Study Notes
Capital Stock
- Capital stock refers to shares issued by a corporation to raise capital.
- Authorized stock is the maximum number of shares a corporation can sell, as stated in its charter.
- Authorized stock often exceeds issued stock, meaning the corporation can issue additional shares in the future.
Stock Issuance
- A corporation can sell stock directly to investors or indirectly via a brokerage house that underwrites the issuance.
- Paid-in capital is the total amount of cash and other assets received by the corporation from its stockholders (shareholders) in exchange for stock.
- Retained earnings represent the cumulative net income not distributed as dividends.
Stock Quotes
- A stock quote shows the stock's high and low prices over the past 52 weeks.
- It includes the company's exchange symbol, dividends paid, dividend yield, price-to-earnings ratio, trading volume, daily high, low, closing price, and price change from the previous day.
Accounting for Common Stock
- Issuing common stock affects only paid-in capital accounts, not retained earnings.
- Par value stock can be issued at par, at a premium (above par), or at a discount (below par).
Issuing Stock at a Discount
- Issuing stock at a discount means selling it for less than par value.
- Most states prohibit stock issuance at a discount.
- If allowed, buyers of discounted stock may be liable to creditors for the discount.
- The discount is recorded as a contra to the common stock account, reducing its par value on the balance sheet.
Issuing No-Par Stock
- No-par stock does not have a stated value.
- Proceeds from issuing no-par stock are recorded directly to the common stock account.
Stock Splits
- A stock split increases the number of shares outstanding while reducing the par value per share.
- It does not affect total equity, just the number of shares and par value.
- The split does not change a shareholder's ownership percentage or the market value of their total holdings.
Cash Dividends
- Cash dividends represent a distribution of earnings to shareholders.
- They reduce retained earnings and are accounted for through common dividend payable.
Stock Dividends
- Stock dividends distribute additional shares of stock to existing shareholders.
- They can be small or large based on the percentage of new shares distributed.
- Small stock dividends (<20-25% of outstanding shares) use the market value of the additional shares to reduce retained earnings.
- Large stock dividends (>20-25%) use the par value of the additional shares to reduce retained earnings.
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