Chapter 11: Stockholders' Equity

Simple to become an owner. Ownership can be transferred. Limited liability.

Advantages of corporate ownership:

separate legal entity

Because a corporation is a ________, it can own assets, incur liabilities, sue/be sued, and be entered into contracts.

articles of incorporation

You must submit an application to the state government to create a corporation. When a corporation is approved, the issues the ________, which holds information about the company.

Stockholder benefits

Voting rights, dividends, residual claims, and preemptive rights are all.....

Voting rights

________ let stockholders vote on important issues.

dividends

Stockholders have the right to receive ________ when declared by the board of directors.

liquidation rights

Residual claims are also known as ________.

Residual claims

________ say that if a corporation goes bankrupt, stockholders share any remaining assets after creditors are paid.

Preemptive rights

________ means that existing stockholders have the first chance to purchase newly issued stock before it is issued to the public.

Equity financing

________ is issuing new stock to investors.

Debt financing

________ is borrowing money from lenders.

advantages of equity financing

Equity does not have to be repaid and dividends are optional are both _________.

advantages of debt financing

Interest on debt is tax deductible and debt does not change shareholder control are both examples of ________.

Contributed capital Retained earnings Treasury stock Accumulated other comprehensive income or loss

The four elements of stockholders' equity:

Common Stock and Additional Paid in Capital

Contributed capital consists of ________.

Additional Paid in Capital

APIC stands for ________. It is the amount collected over par.

Contributed capital

________ is what capital the company receives from investors when they sell stock to them.

Retained earnings

________ represents earned capital.

Treasury stock

________ consists of shares that were issued, but the company bought back. It is a permanent, contra account to Common Stock/APIC with a debit balance and reduces stockholders' equity.

Accumulated other comprehensive income or loss

Recorded unrealized gains and losses that cause temporary changes in the value of assets and liabilities of the company.

authorized shares

The max number of shares that can be issued are called ________.

Issued shares

________ are permanently for the stockholder unless they sell them for another company or they are bought back.

Unissued shares

________ are shares that have not been traded.

Outstanding shares

________ are owned by stockholders.

can't get dividends

Outstanding shares are the only shares that ________.

Par value

________ is assigned to each share of stock that is authorized. Usually is a small number ($0.03). Some state require it.

market price

Par value is not the same as _________, which is the value of what shares can sell for to the public.

No-par value stock

________ does not have a determined price.

no APIC

If they is no par in the equation, there is ________.

initial public offering (IPO)

The first time a corporation's stock is available

seasoned new issue

When new stock is issued to the public, this is called ________.

Debit Cash Credit Common Stock Credit Additional Paid in Capital

The journal entry for issuing stock at par value.

journal entry

A corporation not need a ________ when there is an interaction between two investors.

purpose of repurchases

The ________ can include making a company believe the stock is worth getting, buying back shares to reissue them at a higher price, buying back shares to reissue them to employees, and lastly to reduce the number of outstanding shares.

cost

When issued shares are bought back, it is recorded at ________.

no voting or dividend rights

Treasury stock has no _______.

Stock transactions

_________ are only found on the balance sheet.

Debit Treasury Stock Credit Cash

Journal entry for reacquiring stock:

Debit Cash Credit Treasury Stock Credit APIC

Journal entry for reissued stock:

gains or losses

Stock transactions never generate ________.

growth investment

________ is buying stock that pay a small amount of dividends or no dividends at all.

Income investments

________ are from common stock that do pay dividends.

retained earnings and cash

Before a dividend is declared, a company must have enough ________.

Declared by a board of directors Not legally required. Liabilities once declared. Not an expense.

Dividends are.....

declaration date

The ________ is the day when the Board of Directors decide to issue a cash dividend and the liability is established.

Debit Dividends Credit Dividends Payable

The journal entry for the declaration of a dividend.

date of record

The ________ is an administrative responsibility, so there is no journal entry.

date of payment

The ________ reduces the liability and cash.

Debit Dividends Payable Credit Cash

The journal entry for the date of payment:

year end

The ________ is when the temporary accounts are closed to Retained Earnings.

Debit Retained Earnings Credit Dividends

The journal entry for year end/closing accounts:

Equation to calculate Outstanding shares:

Preferred stock

________ is given to a special group of investors, but can be bought back.

Redemption

________ means the preferred stock is retired, which results in the issuance being reversed.

Debit Preferred Stock Debit APIC Credit Cash

Journal entry for redemption:

current dividend preference

A ________ states that preferred dividends must be paid before paying dividends to stockholders.

cumulative dividend preference

A ________ states if a current dividend is not paid yet, the unpaid amount amount has to be paid before other common dividends.

Dividends in arrears

________ regard cumulative preferred stock that has not been paid yet. They are not on the balance sheet.

Retained Earnings

________ are the collective earnings of a company.

accumulated deficit

The negative balance of Retained Earnings is called ________.

Earnings Per Share (EPS)

________ provides information on the profit earned from common stock that is outstanding.

Equation for calculating Earnings Per Share:

Return on Equity (ROE)

________ reports a company's return to stockholders.

Equation for calculating Return on Equity:

Price/Earnings (P/E) Ratio

The ________ is a measure of the value that investors place on a company's common stock. A higher ratio predicts strong future performances.

Equation for calculating the Price/Earnings Ratio: