Chapter 13 Accounting for Corporations

Corporate advantages

Separate legal entity, limited liability, transferable ownership, continuous life, no mutual agency for shareholders, and easier capital accumulation.

Corporate disadvantages

More government regulation and corporate income taxes.

Issuing common stock above par

When market value > par value

Issuing stated value common stock

When market value > stated value

Appropriated retained earning

Retained earnings separately reported to inform stockholders of funding needs.

Authorized Stock

Total amount of stock that a corporation’s charter authorizes it to issues.

Basic earnings per share

Net Income less any preferred dividends and then divided by weighted-average common shares outstanding.

Capital stock

General term referring to a corporation stock used in obtaining capital (owners financing)

Cash Dividend

Corporation’s distribution of cash to its owners.

Change in an accounting estimate

results from new information, subsequent developments, or improved judgement that impacts current and future periods.

Common stock

Corporation’s basic ownership share; also generically called capital stock

Corporation

Business that is a separate legal entity under state or federal laws; its owners are referred to as shareholders or stockholders.

Cumulative preferred stock

Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid.

Date of declaration

Date the directors vote to pay a dividend

Date of payment

Date the corporation makes the dividend payment

Date of record

Date the directors specify for identifying stockholders to receive dividend

Diluted earnings per share

Earnings per share calculation that requires dilutive securities be added to the denominator of the basic EPS calculation

Discount on stock

Difference between the par value of stock and its issue price when issued at a price below par value

Dividends in arrears

Unpaid dividend on cumulative preferred stock; must be paid before any regular dividends on preferred stock and before any dividends on common stock.

Dividend yield

Ratio of the annual amount of cash dividends distributed to common shareholders relative to the common stock’s market value (price).

Earnings per share

Amount of income earned by each share of a company’s outstanding common stock; also called net income per share

Financial leverage

Amount of debt that an entity uses to fund its asset; goal is to earn a higher return on equity by paying dividends on preferred stock or interest on debt at a rate lower than return earned with the assets from issuing preferred stock or debt.

Large stock dividend

Stock dividend that is more than 25% of the previously outstanding shares

Market value per share

Price at which stock is bought or sold

Minimum legal capital

Amount of assets defined by law that stockholders must (potentially) invest in a corporation; usually defined as par value of the stock; intended to protect creditiors

Noncumulative preferred stock

Preferred stock on which the right to receive dividends is lost for any period when dividends are not declared.

No-par value stock

Stock class that has not been assigned a par (or stated) value by the corporate charter

Organization expenses (costs)

Costs such as legal fees and promoter fees to bring an entity into existence.

Paid in capital

Total amount of cash and other assets received from stockholders in exchanges for stock also called contributed capital

Paid in capital in excess of par value

Amount received from issuance of stock that is in excess of the stock’s par value