ACC 290 Week 3 Complete Work
Resource: Ch. 4 of Financial Accounting
Complete Chapter 4: Questions # 2, 3, 4; Brief Exercises BE4-2, BE4-12, BE4-14 and BE4-15 and Exercise E4-5
Resource: Chapter 3 and Chapter 4 of Financial Accounting
Complete Chapter 3: Problem 3-5A and Chapter 4: Exercises E4-3 and E4-15.
- Why does a company choose to form as a corporation? What are the steps required to become a corporation? What are the advantages and disadvantages of the corporate form of doing business?
A company forms into a corporation to become a separate legal entity from their shareholders. An advantage of corporations is that if a corporation faces bankruptcy, its shareholders are not liable for its debts other than the realized value of its assets. Also, a corporation may raise a large amount of capital through the issuance of equity and debt. Disadvantages of incorporation include the loss of flexibility of business operations due to binding regulations, and addition of expenses such as annual audits, shareholders’ meetings, etc. The steps of incorporation in the US include filing of the articles of incorporation, paying registration fees, and the filing of corporate bylaws.
- Why is preferred stock referred to as preferred? What are some of the features added to preferred stock that make it more attractive to investors? Would you select preferred stock or common stock as an investment? Why?
Preferred stocks are referred to “preferred” because of their preferred position to common shares. Preferred shares occupy a position between a company’s creditors and a company’s common shareholders. In the case of a bankruptcy, preferred shareholders have claim on a company’s assets before common shareholders. Also, preferred shares have regularly paid dividends, though it is not guaranteed. Their dividends must be paid first if the company decides to declare dividends to common shareholders. Preferred shares have evolved to be more attractive to investors through added features such as the cumulative feature, the callable feature, the convertible feature, and many more. I would personally prefer to invest in common shares because my daily expenses do not depend on cash flows generated by my investment portfolio and therefore I seek a greater potential capital gain.
- What are the different types of dividends corporations may issue? When should a corporation pay dividends? Do you prefer a stock dividend or a cash dividend? Why?
A corporation may choose to issue either cash dividends or stock dividends. A dividend is the amount of earnings paid to shareholders aside from a company’s retained earnings. A cash dividend is paid in cash while a stock dividend is paid in additional shares of the company. Dividends are usually paid annually, semi-annually, or quarterly to raise investors’ confidence. I prefer to be paid a cash dividend rather than a stock dividend because both are taxed the same way. If a stock dividend is received, I would be taxed the same amount as a cash dividend, except without receiving any cash.
- Why do corporations buy back their own stock? What does it tell you about the corporation? What effect does the purchase have on the price of a company’s stock?
Companies repurchase their own stocks to gain controlling interest of the company and to prove the trustworthiness of their operations by indicating that the company has excess cash available. The company reduces the number of shares outstanding and may boost their earnings per share. They may also repurchase shares to give out to employees as part of their incentive plans or repurchase stocks to build up their resources for acquisitions. Repurchasing stocks shows that the company is financially able and a buyback stock program results in an increase in the price of the stock due to the fact that there are fewer outstanding shares.
- Chen, Inc. purchases 1,000 shares of its own previously issued $5 per common stock for $12,000. Assuming the shares are held in the treasury, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?
Treasury stock is a stock which has been repurchased by the issuing corporation. Purchasing treasury stocks decreases assets. It reduces stockholder’s equity because cash or other assets are swapped for treasury stock. Thus, the number of shares outstanding is reduced. Corporations can effectively increase its return on equity by purchasing its own stock and stimulate trade. This however, will not change net income. The paid-in capital account is reduced in the balance sheet.
- The treasury stock purchased in the above question was resold by Chen, Inc. for $15,000. What effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?
This is somewhat the same is DQ5. What I would say is that it effects all in a negative way except total paid in capital. It seems that stock is purchases companies are taking a risk on themselves. By the stocks being in treasury shareholders don’t have the benefits of voting or dividends. Assets and equity will decrease because of purchasing from the company on common stock. Total paid in capital will not be affected and will be added on the balance sheet under the total stockholders’ equity.
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