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corporation ownership can be:
-publicly held
-privately held
advantages of corporations:
-separate legal entity
-limited liability of stockholders
-transferable ownership rights
-continuous life
-lack of mutual agency for stockholders
-ease of capital accumulation
disadvantages of corporations:
-governmental regulation
-corporate taxation
the system by which companies are directed and controlled
Corporate Governance
Corporate Organization:
-board of directors
-President, VP, and other officers
-employees of corporation
rights of stockholders:
-vote @ stockholder’s meeting (or proxy vote online)
-sell stock
-purchase additional stock
-receive dividends, if any
-share equally in any assets remaining after creditors are paid in a liquidation
an arbitrary amount assigned to each share of stock when authorized
Par value
the amount that each share of stock will sell for in the market
Market value
classes of stock:
-par value
-no-par value
-stated value
to pay a cash divided, corporation must have:
1. a sufficient balance in retained earnings
2. the cash necessary to pay the dividend
3 important dates for cash dividends:
1. date of declaration
2. date of record
3. date of payment
a distribution of a corporation’s own shares to its stockholders without receiving any payment in return
Stock Dividends
Why choose a stock dividend?
-can be used to keep the market price on the stock affordable
-can provide evidence of management’s confidence that the company is doing well
small stock distribution is:
less than or equal to 25% of the previously outstanding shares
large stock distribution is:
greater than 25% of the previously outstanding shares
a distribution of additional shares of stock to stockholders according to their percent ownership
Stock Splits
must be paid before dividends may be paid on common stock (normal case)
Dividends in arrears
represents shares of a company’s own stock that has been acquired
Treasury Stock
A corporation might acquire its own stock to:
1. use its shares to buy other companies
2. avoid a hostile takeover
3. reissue to employees as compensation
4. support the market price
the total cumulative amount of reported net income less any net losses and dividends declared since the company started operating
Retained Earnings
most states restrict the amount of treasury stock purchases to the amount of retained earnings
Legal Restriction
loan agreements can include restrictions on paying dividends below a certain amount of retained earnings
Contractual Restriction
the right to purchase common stock at a fixed price over a specified period of time. As the stock’s price rises above the fixed option price, the value of the option increases
Stock Options
stock options are given to employees to motivate them to:
-focus on company performance
-take a long-run perspective
-remain with the company
corrections of material errors in past years’ financial statements that result in a change in the beginning balance of retained earnings
Prior Period Adjustments
The statement of cash flows includes the following 3 sections:
1) operating activities
2) investing activities
3)financing activties
examples of noncash investing and financing activities:
-retirement of debt by issuing equity stock
-conversion of preferred stock to common stock
-lease of assets in a capital lease transaction
-purchase of long-term assets by issuing a note or bond
-exchange of noncash assets for other noncash assets
-purchase of noncash assets by issuing equity or debt
distributions of cash or other resources by a business to its stockholders are called:
increases in equity from a company’s sales of products or services are:
the excess of revenues over expenses
Net Income
unearned revenue is reported in the financial statements as:
a liability on the balance sheet
a balance sheet lists:
-the types and amount of assets, liabilities, and equity of a business as of a specific date
which of the following accounts are permanent (real) accounts?
a. salaries expense
b. fees earned
c. interest revenue
d. accounts payable
e. office supplies expense
d. accounts payable
when expenses exceed revenues, the resulting change in equity is:
net loss
incurred but unpaid expenses that are recorded during the adjusting process with a debit to an expense and a credit to liability are:
accrued expenses
adjusting entries affect:
both income statement and balance sheet accounts
an account linked with another account that has an opposite normal balance and is subtracted from the balance of the related account is a(n):
contra account
a method of estimating bad debts expense that involves a detailed examination of outstanding accounts and the length of time past due is the:
aging of accounts receivable method
sales returns:
refer to merchandise that customers return to the seller after the sale
the inventory valuation method that tends to smooth out erratic changes in costs is:
Weighted average
a promissory note:
is a written promise to pay a specified amount of money at a certain date
an income statement that includes cost of goods sold as another expense and shows only one subtotal for total expenses is:
single-step income statement
the inventory turnover ratio is calculated as:
cost of goods sold divided by average merchandise inventory
FUTA taxes are:
unemployment taxes
plant assets are defined as:
tangible assets that have a useful life of more than one accounting period and are used in the operation of a business
the relevant factors in computing depreciation do not include:
market value
a potential obligation that depends on a future event arising from a past transaction or event
Contingent liablity
the total cost of an asset less its accumulated depreciation is called:
book value
which of the following statements is true?

a. bonds do not have to be repaid
b. interest on bonds is tax deductible
c. bonds always increase return on equity
d. dividends to stockholders are tax deductible

b. interest on bonds is tax deductible
accounts payable are:
amounts owed to suppliers for products and/or services purchased on credit
FICA taxes include:
social security and medicare taxes
obligations to be paid within one year or the company’s operating cycle, whichever is longer, are:
Current liabilities
a bond is issued at par value when:
the market rate of interest is the same as the contract rate of interest
a disadvantage of bond financing is:
bonds pay periodic interest and the repayment of par value at maturity
obligations not expected to be paid within the longer of one year of the company’s operating cycle are reported as:
long-term liabilities
a bond sells at a discount when the:
contract rate is below the market rate
extraordinary repairs:
extend the useful life of an asset beyond its original estimate
the useful life of a plant asset is:
the length of time is productively used in a company’s operations

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