Common Stockholder Rights and Concepts
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Questions and Answers

Which of the following are rights of a common stockholder? (Select all that apply)

  • Share in corporate earnings (correct)
  • Receive fixed dividends
  • Vote in election of board of directors (correct)
  • Keep the same percentage ownership when new shares are issued (correct)

    • What is a preemptive right?

    The right to keep the same percentage ownership when new shares are issued.

    What is a residual claim?

    The right to share in assets upon liquidation in proportion to holdings.

    What is authorized stock?

    <p>The maximum amount of stock a corporation is allowed to sell as per its charter.</p> Signup and view all the answers

    What is issued stock?

    <p>The number of shares transferred to stockholders in exchange for cash, assets, or services.</p> Signup and view all the answers

    What is outstanding stock?

    <p>The number of shares of issued stock that are being held by stockholders.</p> Signup and view all the answers

    What is par value?

    <p>The dollar amount stated on the face of a share; direct value of common stock.</p> Signup and view all the answers

    What is no-par value stock?

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

    What is paid-in capital?

    <p>The amount stockholders paid to the corporation in exchange for shares.</p> Signup and view all the answers

    What is treasury stock?

    <p>A corporation's own stock that has been reacquired and is held for future use.</p> Signup and view all the answers

    What are some reasons for a corporation to acquire treasury stock? (Select all that apply)

    <p>To have shares available for acquisitions</p> Signup and view all the answers

    What are retained earnings?

    <p>Earned capital held for future use in the business.</p> Signup and view all the answers

    What is a cash dividend?

    <p>A pro rata distribution of cash to stockholders.</p> Signup and view all the answers

    What must be present to pay cash dividends?

    <p>Positive retained earnings, adequate cash, and declared dividends.</p> Signup and view all the answers

    What is the declaration date?

    <p>The date the board of directors formally authorizes a cash dividend.</p> Signup and view all the answers

    What is the record date?

    <p>The date that determines ownership of outstanding shares for dividend purposes.</p> Signup and view all the answers

    What is the payment date?

    <p>The date when the company makes cash dividend payments to stockholders.</p> Signup and view all the answers

    Study Notes

    Common Stockholder Rights

    • Common stockholders have the right to vote in board elections and on major corporate decisions.
    • Common stockholders receive a share of corporate earnings as dividends.
    • Preemptive rights allow stockholders to maintain their ownership percentage during new stock issuances.
    • Stockholders share in asset distribution upon liquidation based on their ownership proportion (residual claim).

    Preemptive Right

    • Enables stockholders to retain their percentage ownership when new shares are issued.

    Residual Claim

    • Stockholders are entitled to assets after all other creditor claims are settled during liquidation.

    Authorized Stock

    • The maximum amount of stock a corporation can legally sell, as specified in the corporate charter.

    Issued Stock

    • Represents shares transferred to stockholders in return for cash, assets, or services.

    Outstanding Stock

    • Refers to the number of shares of issued stock currently held by stockholders.

    Par Value - Common Stock

    • Assigned value per share defined in the corporate charter, often arbitrary and not indicative of market value.

    Par Value

    • The nominal dollar amount marked on the face of a share, representing the direct value of common stock.

    No-Par Value Stock

    • Stock that lacks a stated value in the corporate charter; the board assigns a value to no-par shares.
    • The total amount that stockholders have paid for their ownership shares in the corporation.

    Accounting for Issuance of Common Stock

    • Common stock issuance affects only paid-in capital accounts; par value is credited to common stock, with excess or deficit recorded separately.

    Treasury Stock

    • Stock reacquired by the corporation, held for future use, and represents shares that were fully paid for prior to repurchase.

    Reasons for Treasury Stock Reacquisition

    • To reissue shares as part of employee compensation plans.
    • To boost trading activity of company stock.
    • To have stock available for mergers or acquisitions.
    • To reduce outstanding shares, enhancing earnings per share.

    Treasury Stock Under Cost Method

    • Treasury stock value increases (debited) by the cost to reacquire; decreases upon resale at the same amount.

    Retained Earnings

    • Accumulated earned capital set aside for future business ventures.

    Preferred Stock

    • A type of capital stock with rights that take precedence over common stock, particularly regarding dividends and asset claims during liquidation.

    Preferred Stock Characteristics

    • Preferred stockholders typically lack voting rights.
    • May exist as par value or no-par value shares.

    Dividend

    • A pro rata distribution from a corporation to its stockholders, which can be in cash or stock form.

    Pro Rata

    • Percentage-based distribution; owning 10% of shares leads to receiving 10% of the dividend.

    Cash Dividend

    • A cash distribution paid to stockholders on a pro rata basis.

    Requirements for Paying Cash Dividends

    • Positive retained earnings must exist.
    • The corporation must have sufficient cash.
    • Dividends must be declared by the board to become a legal liability.

    Declaration Date

    • The date the board authorizes a cash dividend, creating a binding legal obligation to pay.

    Record Date

    • The date when the company identifies shareholders eligible to receive dividends; no accounting entry is made.

    Payment Date

    • The date cash dividends are disbursed to stockholders on record.

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    Description

    Explore the essential rights of common stockholders, including voting rights, dividend entitlements, and preemptive rights. This quiz also covers critical concepts such as authorized, issued, and outstanding stock, as well as residual claims in liquidation. Test your knowledge on stockholder principles and corporate finance.

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