Chp. 11: Stockholders' Equity

Owners of common stock usually enjoy a number of benefits:

voting rights, dividends, residual claim, and preemptive rights.

Stockholders’ Benefits (Residual Claim): If the company ceases operations, stockholders share in any:

assets remaining after creditors have been paid.

Stockholders’ Benefits (Preemptive Rights): To retain their ownership percentages, existing stockholders may be given:

the first chance to buy newly issued stock before it is offered to others.

Whenever a company needs a large amount of long-term financing, its executives will decide whether to obtain it by issuing new stock to investors (called _________) or borrowing money from lenders (________).

equity financing; debt financing

Another name for contributed capital is:

paid-in capital

treasury stock

shares that a company buys back

Outstanding Shares

Shares that are currently held by stockholders (not the corporation itself)

Issued Shares

Shares of stock that have been distributed by the corporation.

Authorized Shares

The maximum number of shares of capital stock of a corporation that can be issued, as specified in the charter.

Par Value

An insignificant value per share of capital stock specified in the charter.

Repurchasing Stock: A corporation may want to repurchase its stock from existing stockholders to send a:

signal to investors that the company itself believes its own stock is worth acquiring.

Repurchasing Stock: A corporation may want to repurchase its stock from existing stockholders to obtain shares that can be:

reissued as payment for purchases of other companies.

Repurchasing Stock: A corporation may want to repurchase its stock from existing stockholders to obtain shares to:

reissue employees as part of employee stock purchase plans.

Repurchasing Stock: A corporation may want to repurchase its stock from existing stockholders to reduce:

the number of outstanding shares to increase per-share measures of earnings and stock value.

The three most important dates as it relates to dividends:

declaration date, date of record, and date of payment.

Declaration Date (of a Dividend)

The date on which the board of directors officially approves a dividend.

What effects does the declaration date of a dividend have on the financial accounts?

a liability is immediately incurred (Dividends Payable)

Although they eventually reduce Retained Earnings, dividends are not an expense and they do not:

affect net income of the current year. Rather, they are a distribution of prior profits.

Dividend Record Date

The date on which the corporation prepares the list of current stockholders as shown on its records dividends can be paid only to the stockholders who can own stock on that date.

Dividend Payment Date

The date on which a cash dividend is paid to the stockholders of record.

The term dividend, when used alone with no adjectives, implies a cash dividend. However, some dividends are not paid in cash but in:

additional shares of stock.

Stock Dividend

A dividend that distributes additional shares of a corporation’s own stock.

A large stock dividend (more than 25 percent of the company’s outstanding stock) is recorded at _______; thus, the decrease in Retained Earnings equals the increase in the Common Stock account.

par value

A small stock dividend (less than 25 percent of the company’s outstanding stock) is recorded at ______. Thus, the decrease in Retained Earnings (at market value) is greater than the increase in the Common Stock account (at par value), so the excess of market value over par value is recorded as Additional Paid-In Capital.

market value