Business Organizations and Corporate Accounting Review

A set of flashcards covering the major forms of business organizations, corporate formation, accounting for stock, dividends, and financing sources based on the lecture transcript.

What are the three major forms of business organizations described in the lecture?

Sole proprietorship, partnership, and corporation.

What are the primary characteristics of a sole proprietorship?

It is owned by one person, easy to form, and the owner has full control but unlimited liability.

How is a partnership defined and what is the liability status for owners?

It is owned by two or more people who share control and profits; owners have unlimited liability unless it is a limited partnership.

What defines a corporation in terms of legal status and liability?

A corporation is a separate legal entity owned by shareholders with limited liability, and it is more complex to form.

What process is required to form a sole proprietorship?

They are formed easily by starting a business; no formal legal process is required.

What is the purpose of a partnership agreement and is it legally required?

It outlines roles, profit sharing, and responsibilities, and while strongly recommended, it is not legally required for formation.

What does the phrase 'separate legal entity' mean and which organization type does it apply to?

It means the business is legally separate from its owners and applies to corporations.

What is the purpose of the articles of incorporation?

They officially create the corporation and provide details like the company name, purpose, number of shares, and registered agent.

What function does a stock certificate serve?

It serves as proof of ownership in a corporation.

What event prompted Congress to pass the Securities Act of 1933 and the Securities Exchange Act of 1934?

The stock market crash of 1929.

What is the overarching purpose of the Securities Act of 1933 and the Securities Exchange Act of 1934?

To protect investors and ensure fair and transparent financial reporting.

What are the advantages of the corporate form of business organization?

Limited liability, easier to raise capital, and continuous existence.

What are the disadvantages of the corporate form of business organization?

Double taxation, complex regulations, and higher costs.

What is a limited liability company (LLC)?

An LLC combines features of partnerships and corporations, offering limited liability and flexible taxation.

How does double taxation apply to corporations?

Corporate income is taxed at the corporate level and again when distributed to shareholders as dividends.

What is the difference between contributed capital and retained earnings?

Contributed capital is money invested by shareholders, while retained earnings are accumulated profits kept in the business.

How do the equity structures of a sole proprietorship, partnership, and corporation compare?

All represent owner claims, but a sole proprietorship has one owner account, partnerships have multiple capital accounts, and corporations use stock and retained earnings.

Why do corporations find it easier to raise large amounts of capital than partnerships?

Corporations can issue stock to many investors.

What is 'legal capital' in the context of a corporation?

The minimum amount of equity that must be maintained, which is usually the par value of issued shares.

Define 'par value' and 'stated value' of stock.

Par value is the nominal value assigned to stock; stated value is the assigned value for no-par stock.

What are market value and book value of stock?

Market value is the price at which stock trades in the market; book value is the equity per share based on accounting records.

What is the difference between authorized shares and issued stock?

Authorized shares are the maximum a company can issue; issued stock refers to shares that have actually been sold.

What is the difference between outstanding stock and treasury stock?

Outstanding stock is issued shares still held by investors; treasury stock is the company’s own stock that has been repurchased.

What are the distinct characteristics of common stock and preferred stock?

Common stock provides basic ownership with voting rights; preferred stock gives priority in dividends and liquidation.

How do dividends function in a corporation?

Dividends are distributions of earnings to shareholders.

What is the difference between cumulative and noncumulative preferred stock?

Cumulative preferred stock accumulates unpaid dividends from year to year; noncumulative does not.

What is no-par stock and how is it recorded?

Stock without a par value; it is recorded in accounting records at the amount received.

If Best Co. has 1,000 shares of $100 par value, 10 percent, cumulative preferred stock, what is the dividend per share?

$$\$10$$

If Best Co. has 1,000 shares of $100 par, 10 percent cumulative preferred stock with dividends two years in arrears, what total amount must be paid before common shareholders receive dividends?

$$1,000 \times \$10 \times 2 = \$20,000$$

If Best Co. issued 10,000 shares of $20 par value common stock for $30 per share, what amount is credited to the Common Stock account?

$$\$200,000$$

If Best Co. issued 10,000 shares of $20 par value common stock for $30 per share, what is the total amount of cash received?

$$\$300,000$$

Why might a company choose to repurchase its own stock?

To increase stock value, reduce shares outstanding, or return cash to shareholders.

What effect does the purchase of treasury stock have on a company's equity?

It decreases total equity.

If Day Company repurchased 1,000 shares for $30 and sold them for $35, what is the gain and where is it reported?

The gain is $\$5,000$ and it is reported as an increase in equity (not income).

What type of account is treasury stock?

A contra-equity account.

What are the three important dates related to corporate dividends and their functions?

The declaration date creates the liability, the record date determines eligible shareholders, and the payment date is when cash is paid.

What is the difference between a stock dividend and a stock split?

A stock dividend distributes additional shares; a stock split increases the number of shares and reduces the par value.

Why would a company distribute a stock dividend instead of a cash dividend?

To conserve cash while rewarding shareholders.

What is the primary reason a company would declare a stock split?

To lower the market price per share and make the stock more affordable.

If Best Co. has 10,000 shares of $20 par value common stock and declares a 5-for-1 split, what are the new shares and par value?

Shares: $50,000$; Par value: $\$4$

Does appropriating retained earnings mean a company sets aside cash?

No, it only restricts retained earnings on paper; no cash is set aside.

What is the largest source of financing for most U.S. businesses?

Retained earnings.

What is the difference between equity financing and debt financing?

Equity financing is raising money by selling ownership; debt financing is borrowing money that must be repaid.

What is the difference between a widely held corporation and a closely held corporation?

A widely held corporation has shares owned by many investors; a closely held corporation is owned by a small group.