Business Chapter 11 Flashcards

Questions and Answers

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?

Issuance of Stock

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?

Legal capital is intended to protect stockholders. Signup and view all the answers

What are the two primary sources of equity?

Treasury stock and paid-in capital. Signup and view all the answers

List four reasons why corporations acquire treasury stock.

<ol> <li>To reissue shares under bonus and stock compensation plans, 2. To enhance the stock's market value, 3. To have additional shares for acquisitions, 4. To increase earnings per share.</li> </ol> Signup and view all the answers

Treasury stock may be repurchased for which of the following reasons?

More than one of the above. Signup and view all the answers

What are the types of dividends?

Cash, property, stock, scrip (promissory note). Signup and view all the answers

Entries for cash dividends are required on which of the following dates?

Declaration date, record date, and payment date. Signup and view all the answers

Why do corporations issue stock dividends?

To satisfy stockholders' dividend expectations without spending cash. Signup and view all the answers

Which of these statements about stock dividends is true?

A stock dividend has no effect on total stockholders' equity. Signup and view all the answers

What are the advantages of bond financing?

<ol> <li>Stockholder control is not affected. 2. Tax savings result. 3. Return on common stockholders' equity may be higher.</li> </ol> Signup and view all the answers

What is the effect of a stock dividend on total paid-in capital?

Increase. Signup and view all the answers

What is the effect of a stock split on total retained earnings?

No change. Signup and view all the answers

What is the effect of a stock dividend on total par value (common stock)?

Increase. Signup and view all the answers

What is the effect of a stock split on par value per share?

Decrease. Signup and view all the answers

What is the effect of a stock dividend on shares outstanding?

Increase. Signup and view all the answers

What is the effect of a stock split on total stockholders' equity?

No change. Signup and view all the answers

Two common ways to classify corporations are by ______ and by ownership.

purpose Signup and view all the answers

What are the major characteristics of a corporation?

Separate legal existence, limited liability of stockholders, transferable ownership rights, ability to acquire capital, continuous life, corporation management, government regulations, and additional taxes. Signup and view all the answers

How do you account for the issuance of common stock?

Credit the par value of the shares to Common Stock and record the portion above par value in a separate paid-in capital account. Signup and view all the answers

How do you account for cash dividends?

Debit Cash Dividends and credit Dividends Payable at the declaration date. Signup and view all the answers

A _________ is an entity separate and distinct from its owners.

corporation Signup and view all the answers

What does 'Accumulated Other Comprehensive Income' include?

It includes the cumulative amount of all previous items reported as other comprehensive income. Signup and view all the answers

What is authorized stock?

The amount of stock that a corporation is authorized to sell as indicated in its charter. Signup and view all the answers

What is a cash dividend?

A pro rata distribution of cash to stockholders. Signup and view all the answers

What is a charter?

A document that describes a corporation's name and purpose, stock types, share numbers, and involved individuals. Signup and view all the answers

What is a corporation?

A company organized as a separate legal entity with most of the rights and privileges of a person. Signup and view all the answers

What is a cumulative dividend?

A feature of preferred stock entitling stockholders to receive current and unpaid prior-year dividends before common stockholders. Signup and view all the answers

When is the declaration date?

The date the board of directors formally authorizes the dividend and announces it to stockholders. Signup and view all the answers

What is a deficit in the context of retained earnings?

A debit balance in Retained Earnings. Signup and view all the answers

What is a dividend?

A distribution by a corporation to its stockholders on a pro rata basis. Signup and view all the answers

What are dividends in arrears?

Preferred dividends that were supposed to be declared but were not declared during a given period. Signup and view all the answers

What is no-par value stock?

Capital stock that has not been assigned a value in the corporate charter. Signup and view all the answers

What are organization costs?

Costs incurred in the formation of a corporation, including legal and state fees and promotional expenditures. Signup and view all the answers

What is outstanding stock?

Capital stock that has been issued and is being held by stockholders. Signup and view all the answers

What is paid-in capital?

The amount stockholders paid in to the corporation in exchange for shares of ownership. Signup and view all the answers

What is par value stock?

Capital stock that has been assigned a value per share in the corporate charter. Signup and view all the answers

What is the payment date for dividends?

The date cash dividend payments are made to stockholders. Signup and view all the answers

What is the payout ratio?

A measure of the percentage of earnings a company distributes in the form of cash dividends to common stockholders. Signup and view all the answers

What is preferred stock?

Capital stock that has contractual preferences over common stock in certain areas. Signup and view all the answers

What is a privately held corporation?

A corporation that has only a few stockholders and whose stock is not available for sale to the general public. Signup and view all the answers

What is a publicly held corporation?

A corporation that may have thousands of stockholders and whose stock is traded on a national securities market. Signup and view all the answers

What is the record date?

The date when the company determines ownership of outstanding shares for dividend purposes. Signup and view all the answers

What are retained earnings?

Net income that a company retains in the business. Signup and view all the answers

What are retained earnings restrictions?

Circumstances that make a portion of retained earnings currently unavailable for dividends. Signup and view all the answers

What is return on common stockholders' equity (ROE)?

A measure of profitability from the stockholders' point of view; computed by dividing net income minus preferred dividends by average common stockholders' equity. Signup and view all the answers

What is stated value?

The amount per share assigned by the board of directors to no-par stock. Signup and view all the answers

What is a stock dividend?

A pro rata distribution of the corporation's own stock to stockholders. Signup and view all the answers

What is a stock split?

The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share. Signup and view all the answers

What is treasury stock?

A corporation's own stock that has been reacquired by the corporation and is being held for future use. Signup and view all the answers

In addition, stockholders must pay taxes on cash dividends, resulting in double taxation.

True Signup and view all the answers

One type of corporate form, called an __________, allows for legal treatment as a corporation but tax treatment as a partnership.

S corporation Signup and view all the answers

Upon receipt of its charter from the state of incorporation, the corporation establishes _________.

by-laws Signup and view all the answers

Corporations engaged in interstate commerce must also obtain a _______ from each state in which they do business.

license Signup and view all the answers

Corporations expense organization costs as __________.

incurred Signup and view all the answers

When a corporation has only one class of stock, it is __________.

common stock Signup and view all the answers

The charter indicates the amount of stock that a corporation is authorized to sell.

Signup and view all the answers

The authorization of capital stock does or ______ result in a formal accounting entry?

does not Signup and view all the answers

A corporation can issue common stock directly to investors.

True Signup and view all the answers

A corporation can issue stock indirectly through an investment banking firm.

True Signup and view all the answers

In an indirect issue, the investment banking firm may agree to _________ the entire stock issue.

underwrite Signup and view all the answers

What factors must be considered when setting the price for a new issue of stock?

Anticipated future earnings, expected dividend rate per share, current financial position, current state of the economy, and current state of the securities market. Signup and view all the answers

Years ago, par value determined the _______ per share that a company must retain in the business for the protection of corporate creditors.

legal capital Signup and view all the answers

Similar to partners in a partnership, stockholders of a corporation have unlimited liability.

False Signup and view all the answers

It is relatively easy for a corporation to obtain capital through the issuance of stock.

True Signup and view all the answers

The separation of ownership and management is an advantage of the corporate form of business.

False Signup and view all the answers

The journal entry to record the authorization of capital stock includes a credit to the appropriate capital stock account.

False Signup and view all the answers

All states require a par value per share for capital stock.

False Signup and view all the answers

What are the various names for owners' equity?

Stockholders' equity, shareholders' equity, or corporate capital. Signup and view all the answers

What are the two parts of the stockholders' equity section of a corporation's balance sheet?

Paid-in (contributed) capital and retained earnings (earned capital). Signup and view all the answers

What distinguishes paid-in capital from retained earnings?

Paid-in capital originates from stock issuance, while retained earnings are accumulated profits. Signup and view all the answers

When a corporation has only one class of stock, it is ________.

common stock Signup and view all the answers

The issuance of common stock affects only __________.

paid-in capital accounts Signup and view all the answers

What are the reasons a corporation may acquire treasury stock?

To reissue for compensation plans, increase trading activity, acquire other companies, reduce outstanding shares, or eliminate hostile shareholders. Signup and view all the answers

How is the purchase of treasury stock generally accounted for?

By the cost method. Signup and view all the answers

Under the cost method, companies __________ Treasury Stock by the price paid to reacquire the shares.

increase (debit) Signup and view all the answers

Treasury Stock __________ by the same amount when the company later sells the shares.

decreases Signup and view all the answers

Once a share has been issued, a subsequent repurchase of that share as treasury stock does not affect its status as 'issued.'

True Signup and view all the answers

What type of account is Treasury Stock?

Contra stockholders' equity. Signup and view all the answers

What are the requirements for a corporation to pay cash dividends?

Retained earnings, adequate cash, and declared dividends. Signup and view all the answers

What are the three important dates in connection with dividends?

The declaration date, the record date, and the payment date. Signup and view all the answers

The declaration of a _________ commits the corporation to a binding legal obligation.

cash dividend Signup and view all the answers

What is the cumulative effect of declaring and paying a cash dividend?

It decreases both stockholders' equity and total assets. Signup and view all the answers

What factors must management consider in deciding how large a dividend to pay?

The size of retained earnings, available cash, expected near-term cash needs, growth opportunities, and sustainable dividend levels. Signup and view all the answers

Preferred stockholders do not have the right to share in the distribution of corporate income before common stockholders.

False Signup and view all the answers

A stock dividend results in a ________ in retained earnings and an increase in paid-in capital.

decrease Signup and view all the answers

What are the purposes and benefits of a stock dividend?

To satisfy stockholders' expectations, increase marketability by lowering price per share, and show permanent reinvestment of earnings. Signup and view all the answers

The accounting profession distinguishes between a small stock dividend (less than _ of the corporation's issued stock) and a large stock dividend (greater than __).

20%-25% / 20%-25% Signup and view all the answers

How do stock dividends affect stockholders' equity?

They change the composition by transferring retained earnings to paid-in capital, with total equity remaining the same. Signup and view all the answers

A ________ results in a reduction in the par or stated value per share.

stock split Signup and view all the answers

A stock split changes the par value per share but does not affect any balances in stockholders' equity.

True Signup and view all the answers

In closing entries, a company debits a net loss to the Retained Earnings account.

True Signup and view all the answers

In the stockholders' equity section of the balance sheet, companies report paid-in capital, retained earnings, accumulated other comprehensive income, and treasury stock.

True Signup and view all the answers

What classifications are recognized within paid-in capital?

Capital stock and additional paid-in capital. Signup and view all the answers

In general, as long as the return on assets rate exceeds the rate paid on debt, what happens?

A company will increase the return on common stockholders' equity by the use of debt. Signup and view all the answers

What is a major disadvantage of debt?

Debt reduces solvency. Signup and view all the answers

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.

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

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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Enhance your understanding of corporate structures with these flashcards from Chapter 11. These cards cover key terms and characteristics related to corporations, making it easier to grasp fundamental business concepts. Test your knowledge and prepare effectively for your assessments.