Corporate Finance Concepts Quiz

Questions and Answers

What is Additional Paid-in Capital?

The total amount paid in on capital stock

Cash distributions to stockholders

Excess over par value paid in by stockholders (correct)

The ownership interest in a corporation

What are cash dividends?

Pro rata distributions of cash to stockholders.

What is common stock?

The basic ownership interest in a corporation.

What is contributed (paid-in) capital?

The total amount paid in on capital stock by stockholders. Signup and view all the answers

What is the cost method?

A method of accounting for treasury stock. Signup and view all the answers

What are dividends in arrears?

Dividends on cumulative preferred stock that were not declared. Signup and view all the answers

What is a leveraged buyout (LBO)?

A transaction where a company borrows money to repurchase all outstanding stock. Signup and view all the answers

What are liquidating dividends?

Dividends based on amounts other than retained earnings. Signup and view all the answers

What is no-par stock?

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

What is Paid-in Capital in Excess of Par?

Excess over par value paid in by stockholders. Signup and view all the answers

What is the par (stated) value method?

A method of accounting for treasury stock transactions at their par value. Signup and view all the answers

What is residual interest?

The difference between a company's assets and liabilities. Signup and view all the answers

What are retained earnings?

The earned capital of the company from profitable operations. Signup and view all the answers

What is the statement of stockholders' equity?

A basic financial statement reporting changes in equity accounts. Signup and view all the answers

What is a stock split?

The issuance of additional shares by dividing existing shares. Signup and view all the answers

What is treasury stock?

Shares reacquired by the issuing company. Signup and view all the answers

What is stockholders' (owners') equity?

The ownership claim on a company's total assets. Signup and view all the answers

What is convertible preferred stock?

Preferred stock that allows exchange for common stock at a predetermined ratio. Signup and view all the answers

What are property dividends?

Dividends payable in assets other than cash. Signup and view all the answers

What is preferred stock?

A special class of stock with certain preferences. Signup and view all the answers

Study Notes

Capital Concepts

Additional Paid-in Capital: Refers to the excess amount paid over the par value of shares by stockholders, integrated into the corporation's paid-in capital.
Contributed (Paid-in) Capital: Total funds raised from stockholders for capital stock, combining par value and additional paid-in capital.
Common Stock: Represents basic ownership in a corporation, providing voting rights and bearing the risk of loss or gain through dividends or stock sales.

Dividend Types

Cash Dividends: Distributions of cash to stockholders, declared by the board, recognized as a liability until payment is made.
Dividend in Arrears: Unpaid dividends on cumulative preferred stock that must be settled before common stock dividends can be issued.
Liquidating Dividends: Paid from sources other than retained earnings, indicating a return of investment rather than profits.

Stock Transactions and Management

Treasury Stock: Shares the company reacquires, recorded as a deduction from total capital. Managed typically via cost or par-value accounting methods.
Leveraged Buyout (LBO): Investment strategy involving borrowing funds to buy back a company's stock, eliminating public ownership.
Stock Split: Process of increasing the number of shares outstanding by splitting existing shares, aimed at reducing market prices for improved investor access.

Preferred and No-Par Stock

Preferred Stock: Offers specific advantages like priority on dividends and assets in liquidation, differentiated by features like convertibility and callable options.
No-Par Stock: Shares without assigned par value, eliminating potential liabilities from issuing stock below par.

Financial Statements

Statement of Stockholders' Equity: Details changes in stockholders' equity accounts over a reporting period, showing beginning and ending balances.
Retained Earnings: Accumulated profits not distributed as dividends, reflecting the company's earned capital.

Ownership Interests

Residual Interest: The stake of stockholders represented by the difference between a company’s total assets and its liabilities, highlighting their claim on remaining assets.
Stockholders' (Owners') Equity: Represents total ownership claims, consisting of contributions and retained earnings, documented on the balance sheet.

Accounting Methods

Cost Method: Approach for treasury stock where shares are recorded at reacquisition costs, reflected as a deduction on the balance sheet.
Par (Stated) Value Method: Alternative accounting for treasury shares, recording transactions at par value and affecting only capital stock reporting.

Particular Stock Characteristics

Convertible Preferred Stock: Allows conversion into common stock, enabling participation in equity growth while enjoying preferential dividends.
Property Dividends: Non-cash distributions treated at fair value, with the company recognizing gains or losses relative to carrying value.

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Description

Test your knowledge on key corporate finance concepts including capital types, dividend classifications, and stock management. This quiz covers essential definitions and principles that are crucial for understanding corporate financial structures.