ACCT201: Test 4 Review

What is a corporation?

an entity created by law that is separate from its owners, and has most of the rights and privileges granted to individuals

What are the two types of corporations?

1. Publicly Held

2. Privately Held

What are the advantages of a corporation?

1. separate legal entity

2. limited liability of stockholders

3. transferable ownership rights

4. continuous life

5. lack of mutual agency for stockholders

6. ease of capital accumulation

What are the disadvantages of a corporation?

1. governmental regulation

2. corporate taxation

What does the issuance of stock affect?

the issuance of stock only affects paid-in capital accounts, not retained earnings

How can par value be issued (3 ways)?

1. at par

2. at a premium (above par)

3. at a discount (below par)

What can stock be exchanged for?

cash or noncash assets

what is the entry for issuance of par value stock at par?

dr. cash

cr. common stock, at par

What is the entry for issuance of par value stock at a premium?

dr. cash

cr. common stock, at par

cr. paid-in capital in excess of par

What is the entry for issuance of par value stock at a discount?

dr. cash

dr. discount on common stock

cr. common stock, at par

what is the entry for issuance of no-par value stock?

dr. cash

cr. common stock, no par value

**we use the amount that the corporation receives

What happens when a no-par stock is issued?

It is assigned a stated value, and its stated value become legal capital and is credited to a stated value stock accounting

What should stock issued for non-cash assets be recorded at?

It should be recorded at the market value of either the stock or noncash asset, whichever is more clearly determinable

What is a dividend?

a corporation's distribution of assets to its owners

What is a stock split?

a stock split is the distribution of additional shares of stock to stockholders according to their percent ownership

What is preferred stock?

preferred stock has special rights that give priority over common stock in one or more areas

What is cumulative preferred stock?

has the right to be paid both the current and dividends in arrear (all prior period's unpaid dividends) before any dividend is paid to common stockholders

What is noncumulative preferred stock?

does not confer right to prior period's unpaid dividends if they were not declared in prior periods

What is treasury stock?

is a corporations own stock that it reacquired but still holds

What is earnings per share?

the amount of income earned per each share of a company's outstanding common stock

What is the basic earnings per share formula?

(net income-preferred dividends)/weight-average common shares outstanding

What is the purpose of the statement of cash flows?

to report cash receipts and disbursements during a period

What are the three classifications of cash flows?

1. operating

2. investing

3. financing

What does the statement of cash flows explain ( in terms of cash flows)?

explains the difference between the beginning and ending balances of cash and cash equivalents

What two criteria must cash equivalents satisfy?

1. be readily convertible to a known amount of cash

2. be sufficiently close to its maturity date so its market value is unaffected by interest rates

What does operating activities entail?

includes transactions and events that determine net income

What are some examples of operating activities cash inflows?

1. cash sales

2. collections on credit sales

3. receipts of dividends and interest

4. sale of trading securities

5. settlements of lawsuits

What are some examples of operating activities cash outflows?

1. payments to suppliers for goods and services

2. employees for wages

3. lenders for interest

4. government for taxes

5. charities

6. purchase of trading securities

What are investing activities?

include transactions and events that affect long-term assets

What are financing activities?

include transactions and events that affect long-term liabilities and equity

What are noncash investing and financing activities?

these activities do not affect cash receipts or payments

What is the direct method for the statement of cash flows?

separately lists each major item of operating cash receipts and each major item of operating cash payments

What is the indirect method for the statement of cash flows?

reports net income and the necessary adjustments to reconcile net income to net cash provided (used) by operating activity

What are the three adjustments to net income under the indirect method for statement of cash flows?

1. to reflect changes in non-cash current assets and current liabilities related to operating activities

2. to income statement items involving operating activities that do not affect cash inflows or outflows

3. to eliminate gains and losses resulting from investing and financing activities (not part of operating activities)

Do we add or subtract: decrease in noncash current assets to adjust net income for the indirect method?

we add back to net income for decrease in noncash assets

Do we add or subtract: increase in noncash current assets to adjust net income for the indirect method?

we subtract back to net income for increase in noncash assets

Do we add or subtract: increase in current liabilities to adjust net income for the indirect method?

we add back to net income for increase in current liability

Do we add or subtract: decrease in current liability to adjust net income for the indirect method?

we subtract back to net income for decrease in current liability

Do we add or subtract: depreciation, depletion, amortization to adjust net income for the indirect method?

we add back any depreciation, depletion, amortization back to net income

Do we add or subtract: losses from disposal of long-term assets and retirement of debt to adjust net income for the indirect method?

we add back any losses from disposal of long-term assets and retirement of debt to net income

Do we add or subtract: gains from disposal of long-term assets and retirement of debt to adjust net income for the indirect method?

we subtract any gains from disposal of long-term assets and retirement of debt to net income

What is the purpose of cash flow on total assets ratio?

reflects actual cash flows and is not affected by accounting income recognition and measurement

-helps business decision makers estimate the amount and timing of cash flows when planning and analyzing operating activities

What is the formula for cash flow on total assets ratio?

cash flow from operations/average total assets