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  • Accumulated deficit

    A debit balance in retained earnings

    Additional paid-in capital

    The portion of the cash proceeds above par value

    Angel investors

    Wealthy individuals in the business community willing to risk investment funds on a promising business venture

    Articles of incorporation

    Describes the nature of the firm's business activities, the shares to be issued, and the composition of the initial board of directors

    Authorized stock

    The total number of shares available to sell, stated in the company's articles of incorporation

    Convertible

    Shares can be exchanged for common stock

    Cumulative

    Shares receive priority for future dividends, if dividends are not paid in a given year

    Declaration date

    The day on which the board of directors declares the cash dividend to be paid

    Dividends

    Distributions by a corporation to its stockholders

    Dividends in arrears

    Unpaid dividends on cumulative preferred stock

    Double taxation

    A corporation pays income taxes on its earnings, and when dividends are distributed to stockholders, the stockholders pay taxes a second time on the corporate dividends they receive.

    Earnings per share

    Measures the net income earned per share on common stock

    Growth stocks

    Stocks that tend to have higher price-earnings ratios and are expected to have a higher future earnings

    Initial public offering

    The first time a corporation issues stock to the public

    Issued stock

    The number of shares sold to investors. Includes treasury shares

    Limited liability

    Stockholders in a corporation can lose no more than the amount they invested in the company

    Model Business Corporation Act

    Serves as a guide to states in the development of their corporate statutes

    Mutual agency

    Individual partners each have power to bing the partnership to a contract

    No-par value stock

    Common stock that has not been assigned a par value

    Organization chart

    Traces the line of authority for a typical corporation

    Outstanding stock

    The number of shares held by investors (excludes treasury shares)

    Paid-in capital

    The amount stockholders have invested in the company

    Par value

    The legal capital assigned per share of stock

    Payment date

    The date of the actual cash distribution of dividends

    Preferred stock

    Stock with preference over common stock in the payment of dividends and the distribution of assets

    Price-earnings ratio

    The stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis

    Publicly held corporation

    Allows investment by the general public and is regulated by the Securities and Exchange Commission

    Privately held corporation

    Does not allow investment by the general public and normally has fewer stockholders

    Record date

    A specific date on which the company will determine the registered owners of stock and, therefore, who will receive the dividend

    Redeemable

    Shares can be returned to the corporation at a fixed price

    Retained earnings

    Represents all net income, less all dividends, since the company began

    Return on equity

    Net income divided by average stockholders' equity. Measures the income generated per dollar of equity

    Return on the market value of equity

    Net income divided by the market value of equity

    S corporation

    Allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership

    Stated value

    The legal capital assigned per share to no-par stock

    Statement of stockholders' equity

    Summarizes the changes in the balance in each stockholders' equity account over a period of time

    Stock dividends

    Additional shares of a company's own stock given to stockholders

    Stock split

    A large stock dividend that includes a reduction in the par or stated value per share

    Treasury stock

    A corporation's own stock that it has reacquired

    Value stocks

    Stocks that tend to have lower price-earnings ratios and are priced low in relation to current earnings

    Venture capital firms

    Provide additional financing, often in the millions, for a percentage ownership in the company

    What are the primary advantages of a corporate form of business?

    Lack of mutual agency
    Limited Liability
    Ability to raise capital

    What are the primary Disadvantages of a corporate form of business?

    Double Taxation
    Paperwork

    _____ means that each individual partner in a partnership has the power to bind the business to a contract.

    Mutual agency
    Preemptive right
    Moral hazard
    Seasoned

    Mutual Agency

    Companies usually rely on angel investors and venture capital firms following an initial public offering.

    True
    False

    False. IPO is usually the last stage of equity financing. Dividens have to exceed 20 million first

    What is a preemptive right?

    Right to vote on matters that come before the stockholders, including the election of corporate directors

    Right to share in profits when the company declares dividends

    Right that allows a stockholder to maintain his or her percentage share of ownership when new shares are issued.

    Right to share in the distribution of assets if the company is liquidated

    Right that allows a stockholder to maintain his or her percentage share of ownership when new shares are issued.

    Shares actually sold, which includes treasury stock

    Issued Stock

    Total number of shares available to sell

    Authorized Stock

    Shares held by investors

    Outstanding Stock

    The market value of a stock is determined by the par value of the common stock.

    True
    False

    False, Par value has no relationship to the market value of the common stock.

    Dreams, Inc., issues 10,000 shares of $0.01 par value common stock at $10 per share. What is the amount of Additional Paid-In Capital recorded by the company?

    $99,900
    $100
    $99,000
    $1,000

    99900, We credit Additional Paid-In Capital for the portion of the cash proceeds above par value

    Dana Corporation issues 1,000 shares of $1 stated value common stock at $20 per share. What is the amount of Common Stock recorded by the company?

    $20,000
    $19,000
    $1,000
    $100

    1000, Note that stated value is treated in the same manner as par value. The company credits the Common Stock account for stated value.

    If no-par value stock is issued, the corporation debits Cash and credits Common Stock.

    True
    False

    True, If no-par value stock is issued, the corporation debits Cash and credits Common Stock.

    Because they have voting rights, common stockholders receive priority over preferred stockholders in the distribution of assets in the event the corporation is dissolved.

    True
    False

    False, Preferred stockholders receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved.

    Innovative Media issues 1,000 shares of 8 percent, $50 par value preferred stock for $60 per share. Which of the following will be recorded at the time of the issue?

    a credit to Additional Paid-In Capital for $10,000
    a debit to Cash for $50,000
    a credit to Preferred Stock for $10,000
    a credit to Preferred Stock for $60,000

    a credit to Additional Paid-In Capital for $10,000

    Note that Preferred Stock is credited for par value, and the difference between this and cash proceeds is credited to Additional Paid-In Capital.

    An investor is analyzing the relative risk of different investment options in a company. Which of the following usually poses the highest amount of risk?

    Preferred stock
    Bonds
    Common stock

    Common stock has the highest amount of risk, followed by preferred stock, and finally bonds.

    Lego, Inc., issues 10,000 shares of 8 percent, $100 par value cumulative preferred stock for $110 per share at the beginning of 2011. It did not pay any dividends in 2011. In December 2012, it declares total dividends of $200,000. The company issued common stock in 2008. How much will the preferred stockholders of Lego receive as dividends?

    $200,000
    $160,000
    $80,000
    $40,000

    160000, Note that the preferred stock is cumulative.

    Marine Corporation issues 10,000 shares of 10 percent, $100 par value noncumulative preferred stock for $110 per share at the beginning of 2011. It did not pay any dividends in 2011 and 2012. In December 2013, it declares total dividends of $250,000. The company issued common stock in 2009. How much will the common stockholders of Marine Corporation receive as dividends for the year?

    $150,000
    $250,000
    $50,000
    $100,000

    150000, Note that the preferred stock is noncumulative. So, preferred stockholders receive only their annual share of dividends. The remaining amount will be distributed to common stockholders.

    Almond Corporation repurchases 10,000 shares of its own $1 par value common stock at $10 per share. It will record this transaction with a debit to...

    Treasury stock, When a corporation repurchases its own stock, it debits Treasury Stock

    When a corporation repurchases its own stock, it debits Treasury Stock at ...

    cost
    par value

    We record treasury stock at its cost

    Delta Corporation repurchases 10,000 shares of its own $0.01 par value common stock at $10 per share. It later reissues the 10,000 shares of treasury stock for $12. The entry to record this transaction will involve what to Additional Paid-In Capital?

    Debit
    Credit

    Credit

    By repurchasing shares of its own stock for $10 per share and reselling them for $12 per share, Delta experienced an increase in additional paid-in capital. This is reflected in the entry as a credit to the Additional Paid-in Capital account.

    Marina Inc repurchases 1 million shares of its own $1 par value common stock at $70 per share. It later reissues the 1 million shares of treasury stock for $75. We record the $5 difference per share as a what?

    Gain in the income statement
    Credit to Additional Paid-in Capital

    Credit to Additional Paid-in Capital

    Note that this is not the sale of an investment in another company.

    Which of the following dates associated with dividends do not require an entry to be recorded?

    Payment date
    Record date
    Declaration date

    Record Date

    No entry is required on the record date. This is the specific date on which the company will determine the registered owners of stock and therefore who will receive the dividend.

    If losses exceed income since the company began, Retained Earnings will have a credit balance.

    True
    False

    False, If losses exceed income since the company began, Retained Earnings will have a debit balance.

    On the date of declaration of the dividend, we _____.

    debit Dividends
    debit Dividends Payable
    credit Cash
    credit Retained Earnings

    debit Dividends

    The declaration of a cash dividend creates a binding legal obligation for the company declaring the dividend. On that date, we increase Dividends, a temporary account that is closed into Retained Earnings at the end of each period, and increase the liability account, Dividends Payable.

    What is the net effect of a dividend declaration and payment?

    reduction in both liabilities and assets
    reduction in both stockholders' equity and assets
    increase in both liabilities and stockholders' equity
    increase in liabilities and decrease in stockholders' equity

    reduction in both stockholders' equity and assets

    The net effect is a reduction in both retained earnings (stockholders' equity) and cash (asset).

    Total assets, total liabilities, and total stockholders' equity do not change as a result of a stock dividend, whether large or small.

    True
    False

    True

    The Stock Dividends account is a temporary stockholders' equity account that is closed into ______.

    Retained Earnings
    Common Stock
    Dividends
    Net Income

    Retained Earnings

    The market value of Kennedy Corporation's common stock is $100 per share when it declares a 20 percent dividend on its 10,000 shares outstanding of $1 par value common stock. The entry to record this small stock dividend involves a _____.

    debit to Stock Dividends for $2,000
    credit to Common Stock for $200,000
    credit to Additional Paid-In Capital for $198,000
    debit to Cash for $200,000

    credit to Additional Paid-In Capital for $198,000

    The entry involves a debit Stock Dividends for $200,000, a credit to Common Stock for $2,000, and a credit to Additional Paid-In Capital for the $198,000 difference.

    Why do most companies report a 100 percent stock distribution as a stock split to be recorded as a stock dividend?

    to avoid changing the par value per share
    to increase stock prices
    to boost earnings per share and other key ratios
    to avoid recording a transaction

    to avoid changing the par value per share

    To avoid changing the par value per share, most companies report a 100 percent stock distribution as a stock split to be recorded as a stock dividend.

    All of the following accounts are directly or indirectly affected by a large stock dividend except _____.

    Retained Earnings
    Additional Paid-In Capital
    Common Stock
    Stock Dividends

    Additional Paid-In Capital

    We account for a large stock dividend with a debit to Stock Dividends and a credit to Common Stock. Stock Dividends is a temporary stockholders' equity account that is closed into Retained Earnings.

    The statement of stockholders' equity summarizes the changes in the balance in each stockholders' equity account ..

    over a period of time
    at a point in time

    over a period of time

    when a company uses a portion of the company's earnings to buy back treasury shares. This action does what to stockholders' equity?

    increases or decreases

    Decreases

    Think of how treasury stock is represented in the stockholders' equity section of the balance sheet.

    What account increases from the sale of treasury stock for more than its original cost?

    Common Stock
    Additional paid-in capital

    The Additional Paid-in Capital account increases from the sale of treasury stock for more than its original cost.

    What presents the balance of each equity account at a point in time?

    Stockholders Equity Section of the balance sheet
    Statement of Stockholders Equity

    The stockholders' equity section of the balance sheet shows the balance in each equity account at a point in time.

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