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Accounting ch 11 Equity Outline & Study Guide Connect

by: Katie Mulliken

Accounting ch 11 Equity Outline & Study Guide Connect ACCT2101

Marketplace > University of Georgia > Accounting > ACCT2101 > Accounting ch 11 Equity Outline Study Guide Connect
Katie Mulliken
GPA 3.91

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Accounting chapter 11 Reporting & Analyzing Equity -McGraw Hill Online Connect Textbook full outline and study guide
Intro to Accounting 1
Class Notes
Accounting, accounting chapter 11, equity
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This 5 page Class Notes was uploaded by Katie Mulliken on Wednesday April 13, 2016. The Class Notes belongs to ACCT2101 at University of Georgia taught by Bhandarkar in Spring 2016. Since its upload, it has received 6 views. For similar materials see Intro to Accounting 1 in Accounting at University of Georgia.


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Date Created: 04/13/16
Chapter 11 – Reporting & Analyzing Equity Corporation Firm that’s a separate legal entity under state/federal law (owner = shareholder/stockholder) o Privately Corporations don’t offer stock for sale & usually only has a few stockholders o Public Corporations offer stock for public sale in stock market & has many stockholders Advantages of Corporations  Separate legal entity from its owners (due to the business entity assumption)  Limited liability of stockholders – stockholders aren’t liable for corporate debt  Continuous life – bc not tied to the physical life of its owners it’s assumed to go forever  Lack of mutual agency for stockholders – corporations act through agents (officers)  Ease of capital accumulation – stocks are transferred easily & so its appealing to buy Disadvantages of Corporations  Government regulation – corporation must meet certain requirements  Corporate taxation – corporations are subject to double taxation Incorporation of a company includes granting a charter & owners buying company stock Organization Expenses – costs necessary to get a corporation up & running (legal fees, promoters’ fees, and amounts paid to obtain a charter (debit to organization expenses) Bylaws – guidelines governing the behavior of corporate employees Rights of Common Stockholders – vote at stockholder meetings (or register proxy votes)  Sell or otherwise dispose of their stock  Preemptive Right to purchase their proportional share of any common stock issued l8r  To receive the same divided on each common share of the corporation  Share any assets remaining after creditors & preferred stockholders are paid when (if) the corporation is liquidated  The right to receive timely financial reports Capital Stock – general term referring to any shares issued to shareholders to obtain capital  Authorized Stock – # of shares that a corporation’s charter allows it to issue/sell  Issuing (selling) Stock – can be sold directly (stock) or indirectly (investment banker)  Outstanding Stock – issued stock that has been bought and is held by stockholders  Market Value per Share – price at what the stock is bought & sold. Expected future earnings, dividends, growth all influence the market value  Par Value Stock – stock that is assigned a Par Value which is an amount assigned per share by the corporation in its charter o Minimum Legal Capital – some states make min. legal capital of stock making the least amount that stock buyers must contribute/future pay to the corporation  No-Par Value Stock – stock not assigned a value per share by the corporate charter o Advantage: can be issued at any price without the possibility of a minimum legal  Stated Value Stock – no-par stock to which the directors assign a ‘stated’ value per share. Stated value per share becomes the minimum legal capital per share in this case  Stockholders Equity – (a corporation’s equity) Stockholders equity consists of: 1) Paid-in/contributed capital – total amount of cash and other assets received from stockholders in exchange for a corporation’s stock 2) Retained earnings – cumulative net income (and loss) not distributed as dividends Premium on Stock – occurs when a corporation sells its stock for more than par/stated value  The premium is called Paid-in-Capital in excess of par value – reported as equity Discount on Stock – occurs when a corporation sells its stock for less than par/stated value  Difference between issue price & par price is debited to Discount on Common Stock Dividend (liability of corporation) payment involved 3 important dates:  Date of Declaration – the date the directors vote to declare and pay a dividend  Date of Record – future date specified by the directors for identifying those stockholders listed in the corporation’s record to receive dividends  Date of Payment – date when the corporation makes payment Retained Earnings Deficit – debit (abnormal) balance in Retained Earnings; occurs when cumulative losses & dividends exceed cumulative income Liquidating Cash Dividend – distribution of assets that returns part of the original investment to stockholders; allows cash dividends to paid by deduced from contributed capital acct Stock Dividend – distribution of added shares of a corporation’s own stock to its stockholders w/o the receipt of any payment in return declared by a corporation’s directors (NOT reduce assets/equity, but transfers a portion of equity from retained earnings to contributed capital)  Reasons of Stock Dividends: 1) Directors use stock dividends to keep the market price of stocks affordable 2) To give evidence of management confidence that the company is doing well  Accounting for stock dividends: o Capitalizing retained earnings – a stock dividend affects the components of equity by transferring part of retained earnings to contributed capital accounts o Small Stock Dividend – distribution of 25% of less of previously outstanding shares  Recorded by capitalizing retained earnings for amount of share market value o Large Stick Dividend – distribution of over 25% of previously outstanding shares  Large stock dividend is recorded by capitalizing retained earnings for min amount required by state law governing the corporation o Balance sheet changes 3 ways when a stock dividend is declared: 1. Amount of equity attributed to common stock increases 2. Paid-in capital in excess of par increases by excess of market value over par value 3. Retained earnings decrease, reflecting the transfer of amounts to both common stock and paid-in capital in excess of par Stock Split – distribution of additional shares to stockholders according to their % ownership  When this happens, outstanding shares are ‘called in’ & more than 1 new share is issued in exchange for each old share  Stock splits reduce the par or stated value per share (reason is same as dividends)  Reverse Stock Split – opposite of a stock split, increases both market value per share and the par or stated value per share with a split ration less than 1-1 Preferred Stock – stock with priority status or rights over common stockholders in one or more ways, such as paying dividends or distributing assets but carries many of the same rights  Preferred stockholders are allocated their dividends before any common stockholder  Reasons to issue Preferred Stock: o To raise capital without sacrificing control o To boost the return earned by common stockholders o To increase return to common stockholders is an example of Financial Leverage Cumulative Preferred Stock – preferred stock where undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid  Dividend in Arrears – unpaid dividend on cumulative preferred stock; must be paid before any regular dividends on preferred stock & common stock Noncumulative Preferred Stock – right to receive dividends is lost for any period when dividends not declared Nonparticipating Preferred Stock – Dividends are limited to a maximum amount each year Participating Preferred Stock – allows preferred stockholders to share w common stock-holders in any dividends paid in excess of % or dollar amount stated on the preferred stock Convertible Preferred Stock – has option to exchange it for common stock at specified rate$ Callable Preferred Stock – the issuing corporation has option to retire (purchase this stock) by paying the call price + any dividends in arrears. Amount paid to call & retire is Call Prices Corporations acquire shares of their own stock for several reasons: 1. To use their shares to acquire another corporation 2. To purchase shares to avoid a hostile takeover of the company 3. To reissue them to employees as compensation 4. To maintain a strong market for their stock or to show management confidence Treasury Stock – corporation’s own stock that is reacquired and still holds (stock buyback)  Similar to Unissued Stock bc neither are assets, ‘ receive dividends, & ‘ allow vote rights  Corporations can resell treasury stock less than par w/o having the buyers incur liability  Purchasing treasury stock reduces assets & equity by equal amounts Restricted Retained Earnings – retained earnings not available for dividends bc legal limits Appropriated Retained Earnings – voluntary transfer of amounts from Retained Earnings to Appropriated Retained Earnings to inform uses of special activities requiring funds Prior Period Adjustments – corrections of material errors in prior period financial statements Closing: 1) close credit balances in revenue accounts to Income Summary 2) Close debit balances in expense accounts to Income summary 3) Close Income Summary to Retained Earnings


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