Accounting for Corporations: Key Concepts and Ratios

Corporations

an entity created by law that is separate from its owners (stockholders)

Separate legal Entity

same rights and duties as a person

Limited Liability of Stockholders

limited to investment

Ownership Rights are transferable

through stock sale

Continuous Life

not tied to owners lives

Lack of Mutual Agency

do not have the power to bind corporation

Ease of Capital Accumulation

easier to raise large amounts of capital

Government Regulation

must meet state laws

Corporate Taxation

subject to double taxation on the same earnings

Organizing a Corporation

File a charter application with the state

Organization Expenses

include legal fees, promoters fees, amounts paid to get charter

Rights of Stockholders

Vote at stockholders' meetings

Preemptive Right

protects proportionate interest in purchasing additional shares

Authorized Stock

Total amount of stock a corporation may sell.

Market Value Per Share

The price at which a stock is bought or sold.

Common Stock

When all classes have the same rights and privileges.

Preferred Stock

Gives its owners priority status over common stockholders.

Par Value

Establishes the minimum legal capital for the corporation stated in its charter.

No-Par Value Stock

Not assigned per share.

Stated Value Stock

No-par stock that is assigned a value per share by the directors.

Stockholders' Equity

Contributed capital and retained earnings.

Issuing Par Value Stock

Credit Common Stock only for the par value amount.

Issuing No-Par Value Stock

Entire amount is legal capital.

Issuing Stated Value Stock

Stated value treated similar to par value.

Issuing Stock for Noncash Assets

Record assets received at fair market value when received.

Dividend Preference

Cumulative has a right to be paid unpaid prior years dividends first.

Cumulative Dividends

Has a right to be paid unpaid prior years dividends first (dividends in arrears).

Non-Cumulative Dividends

Has no right to prior unpaid dividends.

Participating Dividends

Gives owners right to share in dividends above a stated amount.

Nonparticipating Dividends

Dividends are limited each year to a maximum amount.

Convertible Preferred Stock

Can be exchanged for common stock at a specified rate.

Callable Preferred Stock

Gives the issuing corporation the right to retire stock at specified future dates and prices.

Cash Dividends

Reduces Cash and Retained Earnings by equal amounts.

Date of Declaration

Date directors vote to pay a dividend (creates a liability).

Date of Record

Date specified for identifying stockholders (no journal entry).

Date of Payment

Date stockholders receive payment.

Deficit

An abnormal (debit) balance for Retained Earnings, not allowed to pay cash dividends.

Small Stock Dividend

Distribution of 25% or less of the previously outstanding shares, recorded at market value.

Large Stock Dividend

Distribution of more than 25% of the previously outstanding shares, recorded at par value.

Stock Splits

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

Treasury Stock

Are a corporation's reacquired shares.

Treasury Stock Impact

Reduces the corporation's assets and S/H Equity by equal amounts.

Contra Equity Account

Is subtracted from Contributed Capital and Retained Earnings on the B/S.

Purchase of Treasury Stock

Record at the cost paid for the shares.

Reissuing Treasury Stock

Can be at the price paid for them, above cost, or below.

Sale Below Cost of Treasury Stock

First debit any excess to Paid in Capital, Treasury Stock until that balance is gone and then debit to Retained Earnings for any excess.

Gain or Loss on Treasury Stock

No gain or loss is ever reported on the sale of Treasury Stock.

Statement of Retained Earnings

Is the total cumulative amount of reported net income less any net losses and dividends declared since the company started operating.

Restricted Retained Earnings

Amount of Retained Earnings that are not available for dividends, usually by statute or contract.

Appropriated Retained Earnings

Amount voluntarily restricted from paying dividends on.

Prior Period Adjustments

Are corrections of material errors made in prior periods including arithmetical mistakes, using unacceptable accounting principles, and ignoring relevant facts.

Prior Period Adjustments Reporting

Reported in the Statement of Retained Earnings as an adjustment to the beginning balance.

Change in Accounting Estimates

No adjustment is made to prior periods, only current and future periods - NOT an error.

Earnings Per Share (EPS)

Is the amount earned by each share of a company's outstanding common stock.

Basic EPS Formula

EPS = (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding.

Weighted Average Common Shares Outstanding

Must figure the fraction of the year the shares of stock were outstanding to get a weighted average.

Book Value Per Share

Is the shareholders' recorded claim on the net assets (equity) of a corporation on a per share basis.

Book Value Per Share Calculation

Book Value Per Share = S/H Equity Applicable to Common Share / Number of Common Shares Outstanding.

Book Value Per Preferred Share Calculation

Book Value Per Preferred Share = S/H Equity Applicable to Preferred Shares / Number of Preferred Shares Outstanding.

Dividend Yield

Tells the annual amount of cash dividends distributed to common shareholders relative to the stock's market value.

Dividend Yield Formula

Dividend Yield = Annual Cash Dividends Per Share / Market Value Per Share.

Price Earnings Ratio (P/E) Ratio

Reveals information about the stock market's expectations for a company's future growth in earnings, dividends, and opportunities.

P/E Ratio Formula

PE Ratio = Market Value per Share / Earnings Per Share.