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Chapter 11: Stockholders' Equity

Terms in this set (31)

Common Stockholder Right
1. vote in election of board of directors at annual meeting and on actions that require stockholder approval
2. share the corporate earnings through receipt of dividends
3. keep the same percentage ownership when new shares of stock are issued (preemptive right)
4. share in assets upon liquidation in proportion to their holdings (residual claim)
preemptive right
keep the same percentage ownership when new shares are issued
residual claim
- share in assets upon liquidation in proportion to their holding
- owners are paid with assets that remain after all other claims have been paid ... after creditors
authorized stock
maximum amount of stock a corporation is allowed to sell as authorized by corporate charter
issued stock
the number of shares transferred to stockholders in exchange for cash, assets, or services rendered
outstanding stock
number of shares of issued stock that are being held by stockholders
par value - common stock
- capital stock that has been assigned a value per share in the corporate charter
- usually chosen in order to satisfy state law requirements
- rather arbitrary (and small) number
- not related to market value
par value
dollar amount stated on face of share; direct value of common stock
no-par value stock
- capital stock that has not been assigned a value in the corporate charter
- board of directors assign a stated value to the no-par shares
paid-in capital
the amount stockholders paid to the corporation in exchange for shares of ownership
accounting for issuance of common stock
- issuance of common stock affects only paid-in capital accounts
- when the issuance of common stock for cash is recorded, the par value of the shares is credited to common stock
- the portion of the proceeds above or below par value is recorded in a separate paid-in capital account
treasury stock
- a corporation's own stock that has been reacquired by the corporation and is being held for future use
- has been issued and fully paid for
reasons for treasury stock
1. to reissue the shares to officers and employees under bonus and stock compensation plans
2. to increase trading of company's stock in the securities market
3. to have additional shares available for use in acquiring other companies
4. to reduce the number of shares outstanding and thereby increase earnings per share
treasury stock under cost method
- companies increase (debit) treasury stock by the price paid to reacquire the shares
- treasury stock decreases by the same amount when the company later sells the shares
retained earnings
earned capital held for future use in the business
acquires
key word for treasury stock
preferred stock
capital stock that has contractual provisions that give it preference or priority over common stock in certain areas in relation to dividends and assets in the event of liquidation
preferred stock characteristics
- preferred stockholders do not have voting rights
- preferred stock may have either a par value or no-par value
dividend
- a distribution by a corporation to its stockholders on a pro rata basis
- forms: cash and stock
pro rata
if you own 10 % of the common shares, you will receive 10 % of the dividend
cash dividend
a pro rata distribution of cash to stockholders
3 things to pay cash dividends
1. retained earnings (positive)
2. adequate cash
3. declared dividends (dividends are not a liability until they are declared)
declaration date
the board of directors formally authorizes the cash dividend and announces it to stockholders; commits the corporation to a binding legal obligation that cannot be rescinded
record date
- the company determines ownership of the outstanding shares for dividend purposes
- no entry necessary because it only determines who will receive the dividends...doesn't effect assets
payment date
the company makes cash dividend payments to the stockholders on record
stock dividend
- pro rata distribution of the corporation's own stock to stockholders
- whereas cash dividends are paid in cash, stock dividends are paid in stock
- brings no economic benefit to investors (your % ownership will not change)
why issue a stock dividend?
- to satisfy stockholders' dividend expectations without spending cash
- to reduce stock price to increase marketability
stock split
the issuance of additional shares of stock to stockholders accompanied by a (1) reduction in the par or stated value and (2) an increase in number of shares
Yes, accumulated deficit is a debit balance in retained earnings and is reported as a deduction in the stockholders' equity section of the BS
Can retained earnings be negative?
return on common stockholders' equity ratio
(net income - preferred stock dividends) / (average common stockholders' equity)

- measures the profitability from the stockholders' point of view
charter
a document that describes the name and purpose of the corporation, the names of the individuals that formed the company, and the number of shares that these individuals agreed to purchase
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