Corporations: Organization, Stock Transactions, and Dividends

Flashcards about Corporations: Organization, Stock Transactions, and Dividends

What is a corporation?

A legal entity, distinct and separate from the individuals who create and operate it.

Who are stockholders or shareholders?

They own the corporation and can buy and sell stock without affecting the corporation’s operations or continued existence.

What is limited liability in a corporation?

Creditors usually may not go beyond the assets of the corporation to satisfy their claims, limiting financial loss to the amount invested.

What are the advantages of the corporate form?

Separate legal existence, continuous life, raising large amounts of capital, easily transferable ownership rights, limited liability.

What are the disadvantages of the corporate form?

Owner separate from management, double taxation of dividends, regulatory costs.

What is the first step in forming a corporation?

Filing an application of incorporation with the state.

What costs may be incurred in organizing a corporation?

Legal fees, taxes, state incorporation fees, license fees, and promotional costs.

What are the two main sources of stockholders’ equity?

Paid-in capital (or contributed capital) and retained earnings.

What does authorized stock mean?

The number of shares of stock that a corporation is authorized to issue is stated in its charter.

What does issued stock mean?

The shares issued to the stockholders.

What is outstanding stock?

Stock remaining in the hands of stockholders.

What is par value?

A dollar amount assigned to each share of stock.

What are the major rights that accompany ownership of a share of stock?

The right to vote, share in distributions of earnings, and share in assets upon liquidation.

What is common stock?

When only one class of stock is issued.

What is preferred stock?

A stock with various preference rights such as a preference to dividends.

What is Cumulative preferred stock?

Have a right to receive regular dividends that were not declared (paid) in prior years.

What happens when the payment of dividends is authorized by the corporation’s board of directors?

The directors are said to have declared a dividend.

When stock is issued at a premium, what are the journal entries?

Cash is debited for the amount received; Common Stock or Preferred Stock is credited for the par amount; Paid-In Capital in Excess of Par is credited for the excess amount.

When no-par stock is issued, what are the journal entries?

Cash is debited and Common Stock is credited for the proceeds.

When a board of directors declares a cash dividend, what does it authorize?

It authorizes the distribution of cash to stockholders.

What is the date of declaration?

The date the board of directors formally authorizes the payment of the dividend.

What is the date of record?

The date the corporation uses to determine which stockholders will receive the dividend.

What is the date of payment?

The date the corporation will pay the dividend to the stockholders who owned the stock on the date of record.

What is a stock dividend?

A distribution of shares of stock to stockholders, normally declared only on common stock and issued to common stockholders.

What is a stock split?

Reduces the par or stated value of its common stock and issues a proportionate number of additional shares.

What is a major objective of a stock split?

To reduce the market price per share of the stock.

What is treasury stock?

Stock that a corporation has issued and then reacquired.

Why might a corporation reacquire (purchase) its own stock?

To provide shares for resale to employees, to reissue as bonuses to employees, or to support the market price of the stock.

What information should be included in Reporting Stockholders’ Equity?

Changes in retained earnings and paid-in capital may be reported in separate statements or notes to the financial statements.

What is a discretionary restriction of retained earnings?

A corporation’s board of directors may restrict retained earnings voluntarily.

how is a prior period adjustment reported?

The correction of the error is reported as an adjustment to the beginning balance of retained earnings.

How is a statement of stockholders' equity prepared?

A statement of stockholders’ equity is prepared in a columnar format where each column is a major stockholders’ equity classification. Changes in each classification are then described in the left-hand column.

What is a ratio used for analyzing profitability.

Earnings per common share (EPS), or sometimes basic earnings per share.