ACCT201 Heller Fall 2024 Final vocab

Authorized stock

Number of shares that a corporation is authorized to sell

Charter

Document when corporation is created with terms and conditions

Corporation

A business as a legal entity separate and distinct from its owners

No-par value stock

Capital stock that has not been assigned a value in the corporate charter.

Organization costs

Costs incurred in the formation of a corporation.

Outstanding stock

Capital stock that has been issued and is being held by stockholders.

Paid-in capital

Amount of cash/capital from stockholders TO corporation when they buy shares

Par value stock

Capital stock that has been assigned a value per share in the corporate charter.

Preferred stock

• Capital stock that has some preferences over common stock.

• Dividends will be fixed

• No voting rights

Privately held corporation

A corporation that has only a few stockholders and whose stock is not available for sale to the general public.

Publicly held corporation

A corporation that may have thousands of stockholders and whose stock is regularly traded on a national securities exchange.

Retained earnings

Net income that the corporation retains for future use.

Stated value

The amount per share assigned by the board of directors to no-par value stock.

Treasury stock(contra capital account)

A corporation's own stock that has been issued and bogught back fro a number of reasons:

1. Future distribution to key employees

2. Reduces # of shares outstanding(and increase earnings per share)

3. Has shares to acquire another company

4. Prevent a hostile takeover(51%)

5. Shares bought back @market price resold for profit

Prior period adjustment

The correction of an error in previously issued financial statements.

Cumulative dividend

A feature of preferred stock entitling the stockholder to receive current-year and any unpaid prior-year dividends before common stockholders are paid dividends.

Payout ratio

The percentage of earnings a company distributes in the form of cash dividends to common stockholders and is computed as cash dividends declared on common stock divided by net income.

Earnings per share (EPS)

The net income earned by each share of outstanding common stock.

Deficit

A debit balance in retained earnings.

Declaration date

The date the board of directors formally declares (authorizes) a dividend and announces it to stockholders.

Book value per share

The equity a common stockholder has in the net assets of the corporation from owning one share of stock.

= Total Stockholder’s Equity / # of shares outstanding

Liquidating dividend

A dividend declared out of paid-in capital.

Payment date

The date dividends are transferred to stockholders.

Retained earnings

Net income that a company retains in the business.

Record date

The date when ownership of outstanding shares is determined for dividend purposes.

Stockholders' equity statement

A statement that shows the changes in each stockholders‘ equity account and in total stockholders‘ equity during the year.

Retained earnings statement

A statement that shows the changes in retained earnings during the year.

Retained earnings restrictions

Circumstances that make a portion of retained earnings currently unavailable for dividends.

Stock dividend

When the corporation pays cash to its stockholders on a quarterly or annual basis

Stock split

The issuance of additional shares of stock to stockholders according to their percentage ownership. It is accompanied by a reduction in the par or stated value per share.

Debenture bonds/unsecured bonds

Bonds issued against the general credit of the borrower.

Companies with good credit ratings often use these

Bonds

• A form of interest-bearing notes payable issued by corporations, universities, and governmental entities.

• Interest payments made throughout its term

• Full value gets paid back when it reaches maturity

Bond indenture

A legal document that sets forth the terms of the bond issue.

Bond certificate

Certificate of bond ownership which has

• name of the issuer, the face value of the bonds

• the contractual interest rate

• maturity date of the bonds.

Convertible bonds

Changing from putting $ into business into stock

Bondholder receives interest up until conversion

Bondholders can benefit if market price goes up

Discount (on a bond)

The difference between the face value of a bond and its selling price, when the bond is sold for less than its face value.

Contractual interest rate(coupon rate)

Interest you earn on bond

Callable bonds

Bonds that can be bought back(“called back” before maturity by the issuer

Sinking fund bond

Bonds secured by specific assets set aside to redeem them.

Mortgage bond

A bond secured by real estate.

Mortgage notes payable

A long-term note secured by a mortgage that pledges title to specific assets as security for a loan.

Times interest earned

(Net income + net expense) / interest expense

Effective interest rate

Rate established when bonds are issued that maintains a constant value for interest expense as a percentage of bond carrying value in each interest period.

Face value

Amount of principal due at the maturity date of the bond.

Straight line method of amortization

FOR MORTGAGE Allocates the same amount to interest expense in each interest period.

Maturity date

The date on which the final payment on the bond is due from the bond issuer to the investor.

Long term liabilities

Obligations expected to be paid more than one year in the future.

Premium (on a bond)

The difference between the selling price and the face value of a bond, when the bond is sold for more than its face value.

Market interest rate

The rate investors demand for loaning funds to the corporation.

Secured bonds

Bonds that have specific assets of the issuer pledged as collateral.

Time value of money

The relationship between time and money. A dollar received today is worth more than a dollar promised at some time in the future.

Unsecured bonds

Bonds issued against the general credit of the borrower. Also called debenture bonds.

Consolidated financial statements

Financial statements that present the assets and liabilities controlled by the parent company and the total revenues and expenses of the subsidiary companies.

Available-for-sale securities

Securities that are held with the intent of selling them sometime in the future.

Controlling interest

Ownership of more than 50% of the common stock of another entity.

Parent company

A company that owns more than 50% of the common stock of another entity.

**Mark-to-market*

Method of accounting that requires that some investments be adjusted to their fair value at the end of each period.

Stock investments

Investments in the capital stock of corporations.

Equity method

Common stock is initially recorded at cost, and the investment account is then adjusted annually to show the investor's equity in the investee.

Investment portfolio

A group of stocks and/or debt securities in different corporations held for investment purposes.

Fair value

Price of a security being sold in a normal market.

Cost method

The investment in common stock is recorded at cost and revenue is recognized only when cash dividends are received.

Debt investments

Investments in government and corporation bonds.

Long-term investments

Investments that are not intended to convert into cash within the next year or operating cycle, whichever is longer.

Trading securities

Securities bought and held primarily for sale in the near term to generate income on short-term price differences.

Subsidiary (affiliated) company

A company in which more than 50% of its stock is owned by another company.

Short-term investments (marketable securities)

Investments that are readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer.

Held to maturity securities

Debt securities that the investor has the intent and ability to hold to maturity.

Statement of cash flows

A basic financial statement that provides information about the cash receipts, cash payments, and net change in cash during a period, resulting from operating, investing, and financing activities.

Free cash flow

Net cash provided by operating activities adjusted for capital expenditures and cash dividends paid.

When a corporation issues bonds,

it is borrowing money

When a person buys a bond,

they are lending money

Indenture

Written agreement between investor and investee

Sinking fund(trustee)

Sets money aside each year stays untouched(30 years, 1/30th each year)

If the market rate is 6% and the coupon rate is 6%, then

(same)

then the bond is trading at par

If the market rate is 8% and the coupon rate is 6%, then

(market>coupon)

the bond is trading below par—> at a discount

because you pay less for the bond, you sell it for less, it lost some its value if you sell it below par

If the market rate is 6% and the coupon rate is 8%, then

(market<coupon)

The bond is trading above par —>premium

you can sell it for more

Par $

$1000

When interest rates increase, bond

bond prices decrease

2 ways to make $ off of bonds

1. Interest income

2. When interest rates decrease

For short-term needs of money

Government bonds, interest paid every six months(semi-annually)

For long-term needs of money

1. Stocks(ways to get$: capital gains(buy low sell high) + dividends)

2. Bonds $: interest income, int rates down, capital gains($1000)

When a company owns less than 20% of another company

Insignificant

When a company owns 20-50% of another company

Significant(non controlling)

Procedure for 20-50% ownership

1. Record Purchase

2. ownership % x Net income/loss

3. Ownership % x total dividends issued

When a company owns >50% of another company

Parent company has Controlling interest

goes in consolidated financial statements

Trading bonds

Bonds sold within 90 days

Debit: Fair value adjustment trading**

Credit: Unrealized gain or loss - income

mark-to-mark accounting

Available-for-sale bonds

Bonds intended to be sold within next year or when bond matures

Bodns held to maturity

Do nothing at present time

When reporting stocks: adjustments

Only when:

1. under 20% ownership

2. Intent to sell short-term

Gains are

are credits

Losses are

are debits

Cash flow always needs a ____ and a ____

Source, use

Cash flow is a _______ sheet

comparative balance

Stockholder’s equity cash flow example

You, a shareholder, buy stock. The company’s stockholders’ equity increases, but their sue of cash decreases. Is a source of cash to shareholders.

When an asset decreases, it is a _______ of cash

source of cash

When liabilities increase, are they are a source of cash or use of cash?

source of cash

The why: Imagine your Accounts Payable increase from $20,000 in 2023 to $40,000 in 2024. Your cash initially increased, making it a source of cash to be included in the Cash Flows Statement

When net income increases, is it a source or use of cash?

Source of cash(good)

When net loss increases, is it a source or use of cash?

Use of cash(bad)

Cash flow from Operating Activities

Net income/loss

+depreciation expense

change in these from year to year - Current assets(3) and current liabilities(A/P)