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Questions and Answers
What does 'Charter' indicate in terms of a corporation?
What does 'Charter' indicate in terms of a corporation?
The number of shares of stock that a corporation is authorized to sell.
What is the term for the stock that a corporation can issue directly to investors or indirectly through an investment banking firm?
What is the term for the stock that a corporation can issue directly to investors or indirectly through an investment banking firm?
Issuance of Stock
What are Par and No-Par Value Stocks?
What are Par and No-Par Value Stocks?
Stocks assigned a value per share that determined legal capital per share.
Which of these statements is false?
Which of these statements is false?
What are the two primary sources of equity?
What are the two primary sources of equity?
List four reasons why corporations acquire treasury stock.
List four reasons why corporations acquire treasury stock.
Treasury stock may be repurchased for which of the following reasons?
Treasury stock may be repurchased for which of the following reasons?
What are the types of dividends?
What are the types of dividends?
Entries for cash dividends are required on which of the following dates?
Entries for cash dividends are required on which of the following dates?
Why do corporations issue stock dividends?
Why do corporations issue stock dividends?
Which of these statements about stock dividends is true?
Which of these statements about stock dividends is true?
What are the advantages of bond financing?
What are the advantages of bond financing?
What is the effect of a stock dividend on total paid-in capital?
What is the effect of a stock dividend on total paid-in capital?
What is the effect of a stock split on total retained earnings?
What is the effect of a stock split on total retained earnings?
What is the effect of a stock dividend on total par value (common stock)?
What is the effect of a stock dividend on total par value (common stock)?
What is the effect of a stock split on par value per share?
What is the effect of a stock split on par value per share?
What is the effect of a stock dividend on shares outstanding?
What is the effect of a stock dividend on shares outstanding?
What is the effect of a stock split on total stockholders' equity?
What is the effect of a stock split on total stockholders' equity?
Two common ways to classify corporations are by ______ and by ownership.
Two common ways to classify corporations are by ______ and by ownership.
What are the major characteristics of a corporation?
What are the major characteristics of a corporation?
How do you account for the issuance of common stock?
How do you account for the issuance of common stock?
How do you account for cash dividends?
How do you account for cash dividends?
A _________ is an entity separate and distinct from its owners.
A _________ is an entity separate and distinct from its owners.
What does 'Accumulated Other Comprehensive Income' include?
What does 'Accumulated Other Comprehensive Income' include?
What is authorized stock?
What is authorized stock?
What is a cash dividend?
What is a cash dividend?
What is a charter?
What is a charter?
What is a corporation?
What is a corporation?
What is a cumulative dividend?
What is a cumulative dividend?
When is the declaration date?
When is the declaration date?
What is a deficit in the context of retained earnings?
What is a deficit in the context of retained earnings?
What is a dividend?
What is a dividend?
What are dividends in arrears?
What are dividends in arrears?
What is no-par value stock?
What is no-par value stock?
What are organization costs?
What are organization costs?
What is outstanding stock?
What is outstanding stock?
What is paid-in capital?
What is paid-in capital?
What is par value stock?
What is par value stock?
What is the payment date for dividends?
What is the payment date for dividends?
What is the payout ratio?
What is the payout ratio?
What is preferred stock?
What is preferred stock?
What is a privately held corporation?
What is a privately held corporation?
What is a publicly held corporation?
What is a publicly held corporation?
What is the record date?
What is the record date?
What are retained earnings?
What are retained earnings?
What are retained earnings restrictions?
What are retained earnings restrictions?
What is return on common stockholders' equity (ROE)?
What is return on common stockholders' equity (ROE)?
What is stated value?
What is stated value?
What is a stock dividend?
What is a stock dividend?
What is a stock split?
What is a stock split?
What is treasury stock?
What is treasury stock?
In addition, stockholders must pay taxes on cash dividends, resulting in double taxation.
In addition, stockholders must pay taxes on cash dividends, resulting in double taxation.
One type of corporate form, called an __________, allows for legal treatment as a corporation but tax treatment as a partnership.
One type of corporate form, called an __________, allows for legal treatment as a corporation but tax treatment as a partnership.
Upon receipt of its charter from the state of incorporation, the corporation establishes _________.
Upon receipt of its charter from the state of incorporation, the corporation establishes _________.
Corporations engaged in interstate commerce must also obtain a _______ from each state in which they do business.
Corporations engaged in interstate commerce must also obtain a _______ from each state in which they do business.
Corporations expense organization costs as __________.
Corporations expense organization costs as __________.
When a corporation has only one class of stock, it is __________.
When a corporation has only one class of stock, it is __________.
The charter indicates the amount of stock that a corporation is authorized to sell.
The charter indicates the amount of stock that a corporation is authorized to sell.
The authorization of capital stock does or ______ result in a formal accounting entry?
The authorization of capital stock does or ______ result in a formal accounting entry?
A corporation can issue common stock directly to investors.
A corporation can issue common stock directly to investors.
A corporation can issue stock indirectly through an investment banking firm.
A corporation can issue stock indirectly through an investment banking firm.
In an indirect issue, the investment banking firm may agree to _________ the entire stock issue.
In an indirect issue, the investment banking firm may agree to _________ the entire stock issue.
What factors must be considered when setting the price for a new issue of stock?
What factors must be considered when setting the price for a new issue of stock?
Years ago, par value determined the _______ per share that a company must retain in the business for the protection of corporate creditors.
Years ago, par value determined the _______ per share that a company must retain in the business for the protection of corporate creditors.
Similar to partners in a partnership, stockholders of a corporation have unlimited liability.
Similar to partners in a partnership, stockholders of a corporation have unlimited liability.
It is relatively easy for a corporation to obtain capital through the issuance of stock.
It is relatively easy for a corporation to obtain capital through the issuance of stock.
The separation of ownership and management is an advantage of the corporate form of business.
The separation of ownership and management is an advantage of the corporate form of business.
The journal entry to record the authorization of capital stock includes a credit to the appropriate capital stock account.
The journal entry to record the authorization of capital stock includes a credit to the appropriate capital stock account.
All states require a par value per share for capital stock.
All states require a par value per share for capital stock.
What are the various names for owners' equity?
What are the various names for owners' equity?
What are the two parts of the stockholders' equity section of a corporation's balance sheet?
What are the two parts of the stockholders' equity section of a corporation's balance sheet?
What distinguishes paid-in capital from retained earnings?
What distinguishes paid-in capital from retained earnings?
When a corporation has only one class of stock, it is ________.
When a corporation has only one class of stock, it is ________.
The issuance of common stock affects only __________.
The issuance of common stock affects only __________.
What are the reasons a corporation may acquire treasury stock?
What are the reasons a corporation may acquire treasury stock?
How is the purchase of treasury stock generally accounted for?
How is the purchase of treasury stock generally accounted for?
Under the cost method, companies __________ Treasury Stock by the price paid to reacquire the shares.
Under the cost method, companies __________ Treasury Stock by the price paid to reacquire the shares.
Treasury Stock __________ by the same amount when the company later sells the shares.
Treasury Stock __________ by the same amount when the company later sells the shares.
Once a share has been issued, a subsequent repurchase of that share as treasury stock does not affect its status as 'issued.'
Once a share has been issued, a subsequent repurchase of that share as treasury stock does not affect its status as 'issued.'
What type of account is Treasury Stock?
What type of account is Treasury Stock?
What are the requirements for a corporation to pay cash dividends?
What are the requirements for a corporation to pay cash dividends?
What are the three important dates in connection with dividends?
What are the three important dates in connection with dividends?
The declaration of a _________ commits the corporation to a binding legal obligation.
The declaration of a _________ commits the corporation to a binding legal obligation.
What is the cumulative effect of declaring and paying a cash dividend?
What is the cumulative effect of declaring and paying a cash dividend?
What factors must management consider in deciding how large a dividend to pay?
What factors must management consider in deciding how large a dividend to pay?
Preferred stockholders do not have the right to share in the distribution of corporate income before common stockholders.
Preferred stockholders do not have the right to share in the distribution of corporate income before common stockholders.
A stock dividend results in a ________ in retained earnings and an increase in paid-in capital.
A stock dividend results in a ________ in retained earnings and an increase in paid-in capital.
What are the purposes and benefits of a stock dividend?
What are the purposes and benefits of a stock dividend?
The accounting profession distinguishes between a small stock dividend (less than _________ of the corporation's issued stock) and a large stock dividend (greater than __________).
The accounting profession distinguishes between a small stock dividend (less than _________ of the corporation's issued stock) and a large stock dividend (greater than __________).
How do stock dividends affect stockholders' equity?
How do stock dividends affect stockholders' equity?
A ________ results in a reduction in the par or stated value per share.
A ________ results in a reduction in the par or stated value per share.
A stock split changes the par value per share but does not affect any balances in stockholders' equity.
A stock split changes the par value per share but does not affect any balances in stockholders' equity.
In closing entries, a company debits a net loss to the Retained Earnings account.
In closing entries, a company debits a net loss to the Retained Earnings account.
In the stockholders' equity section of the balance sheet, companies report paid-in capital, retained earnings, accumulated other comprehensive income, and treasury stock.
In the stockholders' equity section of the balance sheet, companies report paid-in capital, retained earnings, accumulated other comprehensive income, and treasury stock.
What classifications are recognized within paid-in capital?
What classifications are recognized within paid-in capital?
In general, as long as the return on assets rate exceeds the rate paid on debt, what happens?
In general, as long as the return on assets rate exceeds the rate paid on debt, what happens?
What is a major disadvantage of debt?
What is a major disadvantage of debt?
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Study Notes
Classification of Corporations
- Corporations can be classified by purpose and ownership.
Major Characteristics of Corporations
- Separate legal existence, limited liability for stockholders, and transferable ownership rights.
- Ability to acquire capital and continuous life.
- Governed by management, subject to government regulations, and face additional taxation.
Accounting for Stock
- Common stock issuance recorded at par value with excess credited to a separate paid-in capital account.
- Treasury stock is recorded using the cost method, debiting Treasury Stock for repurchase price.
Dividends
- Cash dividends entries made on declaration and payment dates; debit Cash Dividends and credit Dividends Payable.
- Preferred stock has priority for dividends and liquidation assets but often lacks voting rights.
- Stock dividends transfer value from retained earnings to paid-in capital; stock splits adjust par value and increase shares without changing total stockholders' equity.
Stock and Corporate Structure
- A corporation is a separate entity from its owners and includes various stock types: common, preferred, and treasury stock.
- Authorized stock: amount a corporation is allowed to sell according to its charter; must maintain legal capital for creditor protection.
Dividend-related Dates
- Three important dates: declaration date (board approves and announces dividend), record date (determines ownership for dividends), and payment date (when cash is distributed).
Types and Impacts of Stock
- Cumulative dividends on preferred stock allow shareholders to receive owed dividends before common shareholders.
- Dividends in arrears are unpaid preferred dividends from prior periods.
- Stock dividends decrease retained earnings while increasing paid-in capital, but total equity remains unchanged.
Organizational Aspects
- Corporations must obtain licenses for interstate commerce.
- Organization costs are expensed as incurred.
- Corporations have by-laws establishing internal rules.
Understanding Equity
- Owners' equity labeled as stockholders' equity or shareholders' equity.
- Two parts of stockholders' equity: paid-in capital (including capital stock and additional paid-in capital) and retained earnings.
Stockholder Rights
- Voting for board members, receiving dividends, preemptive rights on new stocks, and claiming assets during liquidation.
Important Accounting Details
- Cash dividends require retained earnings, adequate cash, and a declaration.
- A stock split changes the par value but does not affect stockholders’ equity balances.
- Lost capital from net losses is debited to retained earnings, not paid-in capital.
Advantages and Disadvantages of Debt
- Debt can enhance return on equity if return on assets exceeds debt cost.
- However, it reduces solvency and adds financial risk.
Alternative Business Structures
- Other forms include limited partnerships, limited liability companies, and S-Corporations, which avoid double taxation with specific shareholder limits.
Dividend Types and Issues
- Different types of dividends: cash, property, stock, and scrip.
- Entering dividends requires tracking at declaration and payment dates only.### Reasons for Issuing Stock Dividends
- Helps corporations meet stockholders' expectations for dividends without using cash resources.
- Increases the marketability of the corporation's stock.
- Indicates that a portion of stockholders' equity has been permanently reinvested in the business.
True Statements about Stock Dividends
- A stock dividend does not reduce a company's cash balance.
- It has no effect on total stockholders' equity.
Advantages of Bond Financing
- Owner control remains unaffected since issuing bonds does not dilute stockholder ownership.
- Interest payments on bonds are tax-deductible, leading to potential tax savings.
- Bonds can enhance the return on common stockholders' equity by leveraging capital.
Stock Dividends vs. Stock Splits
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Total Paid-In Capital:
- Stock Dividend results in an increase.
- Stock Split has no change.
-
Total Retained Earnings:
- Stock Dividend leads to a decrease.
- Stock Split results in no change.
-
Total Par Value of Common Stock:
- Stock Dividend results in an increase.
- Stock Split has no effect.
-
Par Value per Share:
- Stock Dividend shows no change.
- Stock Split results in a decrease.
-
Shares Outstanding:
- Stock Dividend causes an increase in the number of shares.
- Stock Split also results in an increase in shares.
-
Total Stockholders' Equity:
- No change occurs from either a stock dividend or a stock split.
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