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What is Contributed Capital?
amount stockholders have invested in the company
What is Retained Earnings?
amount og earnings the company has kept or retained
What is Treasury Stock?
company’s own issued stock that it has repurchased
What is Accumulated Other Comprehensive Income?
accumulated of components of other comprehensive income (ie. unrealized gains/losses)
What are the different forms of a business?
Sole Proprietorship, General Partnership, C Corporation, S Corporation
What are the characteristics of a Sole Proprietorship?
1 owner
Owner contributes all funds
Existence terminates if business ceases or if owner dies
Owner has full control of management and operations
Unlimited liability
Taxes once (owner responsible)
What are the characteristics of a General Partnership?
Min. 2 general partners
Partners contribute capital
Dissolves upon partner death/withdrawal
Each partner has an equal voice unless otherwise arranged
Unlimited liability
Taxes once (partners responsible)
What are the characteristics of a C Corporation?
1-2 owners (depends)
Sell stock to raise capital
Perpetual as a separate legal entity
Board, officers, annual meetings, and annual reporting required
Shareholders not personally liable for debts
Taxed twice (corporation and shareholders)
What are the characteristics of a S Corporation?
Same as C Corp, but no more than 100 members/shareholders allowed
Sell stock to raise capital
Perpetual as a separate legal entity
Board, officers, annual meetings, and annual reporting required
Shareholders not personally liable for debts
Taxed once (owners responsible)
What are the Advantages of Corporations?
Limited Liability
Greater ability to raise capital and transfer ownership
What are the Disadvantages of Corporations?
Additional taxes
More paperwork imposed by federal and state governments and by securities regulators
What are the Owners Rights?
Right to vote
Right to receive dividends
Right to share in the distribution of assets if the company is dissolved
How do corporations first raise money?
By selling stock to the founders of the business, friends, and family
How do corporations grow?
By seeking investments from Angel Investors and Venture Capital Firms
What are Angel Investors?
wealthy investors
What are Venture Capital Firms?
provide additional funding and business expertise
What is an Initial Public Offering (IPO)?
the first time a corporation issues stock to the general public
What is the equity financing for a seed/startup stage company?
Personal, Equity Capital, Loans, Grants, Crowdfunding
What is the equity financing for an early stage company?
Equity Capital, Loans, Grants, Crowdfunding
What is the equity financing for a Growth stage company?
Equity Capital, Loans, Mezzanine Funding
What is the equity financing for an Exit stage company?
Cash Out Strategy
What are the types of common stock?
Authorized
Issued
Outstanding
Treasury
What is Authortized Stock?
Shares available to sell (= issued + unissued)
What is Issued Stock?
Shared actually sold ( = outstanding + treasury)
What is Outstanding Stock?
Shares issued and held by investors
What is Treasury Stock?
Shares issued and repurchased by the company
What is Par Value?
the legal capital per share that is set when the corporation is first established and is unrelated to “value”
If par value stock is issued, what does the corporation increase?
Cash
Common Stock at the par value per share
Additional paid-in capital for the portion above par
If no-par value stock is issued, what does the corporation increase?
Cash
Common stock
What is the Market Value per Share equal to?
the current share price
In most cases, what will happen to the market value per share?
It will far exceed the par value
What is No-Par Value Stock?
Common stock that has not been assigned a par value
How is preferred stock “preferred” over common stock?
First rights to a specified amount of dividends
Preference over common stockholders in the distribution of assets
If preferred stock is issued, what increases?
Cash
Preferred stock
Additional Paid-In Capital
What is the preferred dividend per share equal to?
par value x the dividend rate
Why do some corporations issue preferred stock?
To attract wider investment
The factor of voting rights is most aligned with which financing alternative?
Common Stock
The factor of risk to investor is most aligned with which financing alternative?
Common Stock (pref. stock is middle)
The factor of expected return to investor is most aligned with which financing alternative?
Common Stock (pref. stock is middle)
The factor of preference for dividends/interest is most aligned with which financing alternative?
Bonds (pref. stock is middle)
The factor of preference in distribution of assets is most aligned with which financing alternative?
Bonds (pref. stock is middle)
The factor of tax deductibility of payments is most aligned with which financing alternative?
Bonds
Is preferred stock considered debt or equity?
Preferred stock has some similarities to long-term debt (bonds) and some similarities to equity
What kind of account is treasury stock?
contra-equity account
Why do companies buy back their own stock?
To boost underpriced stock
To distribute surplus cash without paying dividends
To boost earnings per share
To satisfy employee stock ownership plans
Is the purchase of treasury stock like an investment in another company?
No, an equity investment is the purchase of stock in another corporation, but treasury stock is the purchase of a corporation’s own stock
What happens if treasury stock is sold for more than the company paid to buy it back?
Credit APIC = Increase SE
What happens if treasury stock is sold for less than the company paid to buy it back?
Debit APIC = Decrease SE
What is the normal balance of Retained Earnings?
Credit
How does the balance of Retained Earnings become negative (debit)?
If losses > income
If dividends paid > profits
What is a negative balance in retained earnings called?
an Accumulated Deficit
What is the equation for Retained Earnings?
Beg. RE + NI - Divdends = End. RE
What are Cash Dividends?
distributions by a corporation to its stockholders
What kind of changes in cash dividends provide useful information?
Change in quarterly or annual dividends
What is an increase in cash dividends often perceived as?
Good news
What is the timeline of a dividend?
Declaration Date
Ex-Date
Date of Record
Pay Date
What is a Declaration Date?
the date on which the board of directors announces the next dividend to be paid
What is the Ex-Date and Date of Record?
The date on which the company looks at its records to determine who the stockholders of the company are
What is the Pay Date?
Date of the actual distribution of dividends
What happens when you declare cash dividends?
Decreases Retained Earnings
Increases Dividends Payable
What happens when you pay cash dividends?
Decreases Dividends Payable
Decreases Cash
What are Stock Dividends and Stock splits?
Additional shares of stock distributed by corporations to stockholders rather than cash
Why are large stock dividends and stock splits decalred?
Due to the effect they have on stock prices
Why do companies do stock splits?
When they think the share price is too high for most people
What is Return on Equity?
Measures the ability of management to generate earnings from the resources that owners provide
What is the formula for Return on Equity?
Net Income / Average Stockholders’ Equity
What is Dividend Yield?
Measures how much a company pays out in dividends relative to its share price
What is the formula for Dividend Yield?
Dividends per Share / Stock Price
What is Earnings per Share?
Measures net income earned per share of common stock
What is the formula for Earnings per Share?
Net Income - Dividends on Preferred Stock / Average Share of Common Stock Outstanding
What is the Price-Earnings Ratio?
Indicates how the stock is trading relative to current earnings
What is the formula for the Price-Earnings Ratio?
Stock Price / Earnings per Share
Note
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