Accounting for Corporations: Stock, Dividends, and Earnings Analysis

What is a corporation?

An entity created by law that exists separately from its owners.

What are the two types of corporations based on ownership?

Privately Held and Publicly Held.

What is one advantage of a corporation?

Limited liability for its owners.

What is a disadvantage of corporations?

Subject to governmental regulation and corporate taxation.

What rights do stockholders have?

Vote at meetings, sell stock, purchase additional shares, receive dividends, and share in remaining assets upon liquidation.

What is a stock certificate?

Proof that a stockholder has purchased shares of stock.

What does authorized stock refer to?

The number of shares that a corporation's charter allows it to sell.

What is the difference between par value and market price of stock?

Par value is an arbitrary amount assigned to each share, while market price is the amount the stock sells for in the market.

What is the definition of issued stock?

The total amount of stock sold to stockholders.

What is a cash dividend?

A return to investors that affects the stock's market value.

What are the three important dates for cash dividends?

Date of Declaration, Date of Record, and Date of Payment.

What happens on the date of declaration for cash dividends?

A liability for the dividend is recorded.

What is a stock dividend?

A distribution of a corporation's own shares to stockholders without payment.

What is the purpose of a stock dividend?

To keep the market price affordable and show management's confidence.

What is a small stock dividend?

A distribution that is less than 25% of the previously outstanding shares.

What is the price-earnings ratio?

A measure used to analyze a company's earnings relative to its stock price.

What is the dividend yield?

A financial ratio that shows how much a company pays out in dividends relative to its stock price.

What does it mean to issue stock for noncash assets?

Issuing stock in exchange for assets other than cash, such as land.

What is treasury stock?

Stock that has been repurchased by the corporation.

What is the significance of outstanding stock?

It refers to issued stock that is currently held by stockholders.

What is the role of stockholders in a corporation?

They provide capital and have rights to vote and receive dividends.

How is capital accumulated in a corporation?

Through the issuance of stock and retained earnings.

What is the impact of corporate taxation?

It reduces the overall profitability of the corporation.

What is the continuous life characteristic of a corporation?

The corporation continues to exist independently of its owners' status.

What does 'no mutual agency for stockholders' mean?

Stockholders do not have the authority to bind the corporation to contracts.

What are the financial implications of cash dividends?

They require sufficient retained earnings and cash to be paid.

What is the purpose of recording stock transactions?

To maintain accurate financial records and reflect changes in ownership.

What does it mean to issue stock at a premium?

Selling stock for more than its par value.

What is stated value stock?

Stock that has an assigned value but does not have a par value.

What is a large stock dividend?

A distribution of more than 25% of the previously outstanding shares.

How do you record a small stock dividend?

Record the dividend at the market value of the stock on the declaration date.

What is the par value of Quest's stock in the small stock dividend example?

$10 par value.

What percentage stock dividend did Quest declare on December 31?

10% stock dividend.

What was the market price of Quest's stock at the time of the small stock dividend declaration?

$15 per share.

When will the stock from the small stock dividend be distributed to stockholders?

On January 20.

What is the par value of Quest's stock in the large stock dividend example?

$1 par value.

What percentage stock dividend did Quest declare on December 31 for the large stock dividend?

30% stock dividend.

What is a stock split?

A distribution of additional shares of stock to stockholders according to their percent ownership.

What is the effect of a stock split on total stockholders' equity?

It does not change total stockholders' equity.

Why might a corporation acquire its own stock?

To raise money, avoid a takeover, reissue as compensation, or maintain a strong market.

What happens to treasury stock on the balance sheet?

It is shown as a reduction in total stockholders' equity.

What was the purchase price of Cyber, Inc.'s treasury stock?

$11.50 per share.

What happens when treasury stock is sold at cost?

The sale does not affect total stockholders' equity.

What happens when treasury stock is sold above cost?

The excess over cost increases additional paid-in capital.

What happens when treasury stock is sold below cost?

The difference reduces retained earnings.

What is retained earnings?

The total cumulative amount of reported net income less any net losses and dividends declared.

What are prior period adjustments?

Corrections of material errors in past financial statements affecting retained earnings.

What is the statement of stockholders' equity?

A more inclusive statement than the statement of retained earnings.

What is earnings per share (EPS)?

A widely cited accounting statistic indicating the portion of a company's profit allocated to each outstanding share.

What does the price-earnings ratio indicate?

The stock market's expectations for a company's future growth in earnings and dividends.

What is dividend yield?

The annual amount of cash dividends distributed to common stockholders relative to the stock's market price.

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