Questions and Answers
Which of the following are rights of a common stockholder? (Select all that apply)
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?
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What is issued stock?
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What is outstanding stock?
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What is par value?
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What is no-par value stock?
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What is paid-in capital?
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What is treasury stock?
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What are some reasons for a corporation to acquire treasury stock? (Select all that apply)
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What are retained earnings?
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What is a cash dividend?
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What must be present to pay cash dividends?
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What is the declaration date?
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What is the record date?
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What is the payment date?
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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.
Paid-In Capital
- 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.
