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Accounting 122
Exam 2: Ch. 10: LT Liabilities and Ch. 11: Corporate Reporting and Analysis
| Term | Definition |
|---|---|
| bond | written promise to pay the bond’s par (or face) value and interest at a stated contract rate; often issued in denominations of $1,000 |
| par value of a bond | amount the bond issuer agrees to pay at maturity and the amount on which cash interest payments are based; also called face amount or face value of a bond |
| maturity date | the stated future date in which the face value is paid |
| advantages of bonds | 1. Bonds do not affect owner control 2. Interest on bonds is tax deductible 3. Bonds can increase return on equity |
| financial leverage | earning a higher returned on borrowed funds than it pays in interest on those funds increases its return on equity; trading on the equity |
| disadvantages of bonds | 1. Bonds can decrease return on equity 2. Bonds require payment of both periodic interest and the par value at maturity |
| bond indenture | contract between the bond issuer and the bondholders; identifies the parties’ rights and obligations |
| bond certificate | document containing bond specifics such as issuer’s name, bond par value, contract interest rate, and maturity date |
| par bonds | bonds issued at par value |
| discount bonds | bond issuances below par |
| contract rate | interest rate specified in a bond indenture (or note); multiplied by the par value to determine the interest paid each period; also called coupon rate, stated rate, or nominal rate |
| market rate | interest rate that borrowers are willing to pay and lenders are willing to accept for a specific lending agreement given the borrowers’ risk level |
| bond price determinations | contract rate > market rate - premium contract rate = market rate - par contract rate < market rate - discount |
| discount on bonds payable | difference between a bond’s par value and its lower issue price or carrying value; occurs when the contract rate is less than the market rate |
| carrying (book) value of bonds | net amount at which bonds are reported on the balance sheet; equals the par value of the bonds less any unamortized discount or plus any unamortized premium; also called carrying amount or book value |
| straight-line bond amortization | method allocating an equal amount of bond interest expense to each period of the bond life |
| premium bonds | bond issuances above par |
| premium on bonds | difference between a bond’s par value and its higher carrying value; occurs when the contract rate is higher than the market rate; also called bond premium |
| two ways to retire bonds before maturity | 1. exercise a call option; callable bonds plus a call premium 2. open market purchase |
| discount on bonds payable | contra-liability account; normal debit balance; thus increase a Dr, decrease a Cr; BS; permanent |
| convertible bonds | bonds that bondholders can exchange for a set number of the issuer’s shares |
| installment note | liability requiring a series of periodic payments to the lender. |
| mortgage | legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrower’s assets identified in the mortgage |
| mortgage contract | describes the mortgage terms |
| mortgage notes | pledge title to specific assets as security of the note; ex. homes and plant assets |
| secured bonds | bonds that have specific assets of the issuer pledged as collateral |
| unsecured bonds | bonds backed only by the issuer’s credit standing; almost always riskier than secured bonds; also called debentures |
| term bonds (and notes) | bonds scheduled for payment (maturity) at a single specified date |
| serial bonds (and notes) | bonds consisting of separate amounts that mature at different dates |
| sinking fund bonds | bonds that require the issuer to make deposits to a separate account; bondholders are repaid at maturity from that account |
| registered bonds | bonds owned by investors whose names and addresses are recorded by the issuer; interest payments are made to the registered owners |
| bearer bonds | bonds made payable to whoever holds them (the bearer); also called unregistered bonds |
| coupon bonds | bonds with interest coupons attached to their certificates; bondholders detach coupons when they mature and present them to a bank or broker for collection |
| callable bonds (and notes) | bonds that give the issuer the option to retire them at a stated amount prior to maturity |
| debt-to-equity ratio | defined as total liabilities divided by total equity; shows the proportion of a company financed by nonowners (creditors) in comparison with that financed by owners |
| effective interest method | Allocates interest expense over the bond life to yield a constant rate of interest |
| effective interest method (calculation) | interest expense for a period is found by multiplying the balance of the liability at the beginning of the period by the bond market rate at issuance; also called interest method |
| lease | contract specifying the rental of property |
| finance leases | long-term lease where the lessee receives substantially all remaining benefits of the asset (one or more of five criteria must be met); a finance lease is similar to the financing of an asset purchase |
| operating lease | short-term (or cancelable) lease in which the lessor retains risks and rewards of ownership |
| short-term leases | lease with a term of 12 months or less that does not have a long-term purchase option; the lessee records such lease payments as expenses |
| pension plan | contractual agreement between an employer and its employees for the employer to provide benefits to employees after they retire; expensed when incurred |
| plan administrator | invests the payments in pension assets and makes benefit payments to pension recipients |
| pension recipients | retired employees |
| defined benefit plans | give workers defined future benefits; the employer’s contributions vary, depending on assumptions about future pension assets and liabilities |
| underfunded plan | a pension liability is reported when the accumulated benefit obligation is more than the plan assets |
| plan assets | refer to the market value of pension assets |
| overfunded plan | a pension asset is reported when the accumulated benefit obligation is less than the plan assets |
| other postretirement benefits | refer to non-pension benefits such as health care and life insurance benefits |
| corporation | business that is a separate legal entity under state or federal laws; its owners are referred to as shareholders or stockholders |
| privately held corporation | does not offer its stock for public sale and usually has few stockholders |
| publicly held corporation | offers its stock for public sale and can have thousands of stockholders |
| public sale | selling and trading stock on an organized stock market |
| corporate advantages | separate legal entity limited liability transferable ownership rights continuous life no mutual agency for stockholders easier capital accumulation |
| separate legal entity | a corporation has many of the same rights, duties, and responsibilities as a person; it takes actions through its agents, who are its officers and managers |
| limited liability | stockholders are not liable for corporate actions or debt |
| transferable ownership rights | transfer of shares from one stockholder to another has no direct effect on operations except when it causes a change in directors who oversee the corporation |
| continuous life | a corporation life is indefinite because its is not tied to the physical lives of its owners. |
| no mutual agency for stockholders | stockholders who are not officers and managers, cannot bind the corporation to contracts |
| easier capital accumulation | buying stock is attractive to investors because of the advantages above, which helps corporations collect large sums of money |
| corporate disadvantages | government regulation corporate taxation |
| government regulation | a corporation must follow a state's incorporation laws |
| corporate taxation | corporations pay many of the same taxes as proprietorships and partnerships plus additional taxes |
| double taxation | corporate income is usually taxed a second time as part of stockholders' personal income when they receive cash dividends |
| organization expenses | costs such as legal fees and promoter fees to bring an entity into existence |
| board of directors | elected by stockholders to control the corporation |
| proxy | legal document giving a stockholder’s agent the power to exercise the stockholder’s voting rights |
| common stock | corporation’s basic ownership share; also generically called capital stock |
| preemptive right | stockholders’ right to maintain their proportionate interest in a corporation with any additional shares issued |
| registrar | keeps a list of stockholders for stockholder meetings and dividends payments |
| transfer agent | assists with purchases and sales of shares |
| capital stock | general term referring to a corporation’s stock used in obtaining capital (owner financing |
| authorized stock | total amount of stock that a corporation’s charter authorizes it to issue |
| outstanding stock | stock held by stockholders |
| direct sell | offers its stock to buyers |
| indirect sell | corporation pays a brokerage house (investment banker) to sell its stock |
| underwritten stock | bought stock from investors and resold to investors |
| market value per share | price at which stock is bought or sold |
| par value stock | class of stock assigned a par value by the corporate charter |
| par value | value assigned a share of stock by the corporate charter when the stock is authorized |
| minimum legal capital | amount of assets defined by law that stockholders must (potentially) invest in a corporation; usually defined as par value of the stock; intended to protect creditors |
| no-par value stock | stock class that has not been assigned a par (or stated) value by the corporate charter |
| stated value stock | no-par stock assigned a stated value per share; this amount is recorded in the stock account when the stock is issued |
| stockholders' equity | a corporation’s equity; also called shareholders’ equity or corporate capital |
| paid-in capital | total amount of cash and other assets received from stockholders in exchange for stock; also called contributed capital |
| retained earnings | cumulative income less cumulative losses and dividends |
| premium on stock | difference between the par value of stock and its issue price when issued at a price above par; also called contributed capital in excess of par value |
| paid-in capital in excess of par value | amount received from issuance of stock that is in excess of the stock's par value |
| discount on stock | difference between the par value of stock and its issue price when issued at a price below par price |
| date of declaration | date the directors vote to pay a dividend |
| date of record | date the directors specify for identifying stockholders to receive dividends |
| date of payment | date the corporation makes the dividend payment |
| retained earnings deficit | debit (abnormal) balance in Retained Earnings; occurs when cumulative losses and dividends exceed cumulative income; also called accumulated deficit |
| liquidating cash dividend | distribution of assets that returns part of the original investment to stockholders; deducted from contributed capital accounts |
| stock dividend | corporation’s distribution of its own stock to its stockholders without the receipt of any payment. |
| small stock dividend | stock dividend that is 25% or less of a corporation’s previously outstanding shares |
| large stock dividend | stock dividend that is more than 25% of the previously outstanding shares |
| stock split | occurs when a corporation calls in its stock and replaces each share with more than one new share; decreases both the market value per share and any par or stated value per share |
| reverse stock split | occurs when a corporation calls in its stock and replaces each share with less than one new share; increases both market value per share and any par or stated value per share |
| preferred stock | stock with a priority status over common stockholders in one or more ways, such as paying dividends or distributing assets |
| cumulative preferred stock | preferred stock on which 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 and before any dividends on common stock |
| noncumulative preferred stock | preferred stock on which the right to receive dividends is lost for any period when dividends are not declared |
| nonparticipating preferred stock | preferred stock on which dividends are limited to a maximum amount each year |
| participating preferred stock | preferred stock that shares with common stockholders any dividends paid in excess of the percent stated on preferred stock |
| financial leverage | amount of debt that an entity uses to fund its assets; goal is to earn a higher return on equity by paying dividends on preferred stock |
| financial leverage | or interest on debt at a rate lower than the return earned with the assets from issuing preferred stock or debt; also called trading on the equity |
| reasons for buying back their own stock for several reasons | (1) to use their shares to acquire another corporation (2) to avoid a takeover of the company (3) to give them to employees as compensation (4) to maintain a strong market for their stock or to show confidence in the current price |
| treasury stock | corporation’s own stock that it reacquired and still holds |
| restricted retained earnings | retained earnings not available for dividends because of legal or contractual limitations |
| appropriated retained earnings | retained earnings separately reported to inform stockholders of funding needs |
| prior period adjustment | correction of an error in a prior year that is reported in the statement of retained earnings (or statement of stockholders’ equity) net of any income tax effects |
| changes in accounting estimates | change in an accounting estimate that results from new information, subsequent developments, or improved judgment that impacts current and future periods |
| statement of stockholders' equity | financial statement that lists the beginning and ending balances of each major equity account and describes all changes in those accounts |
| earnings per share (EPS) | amount of income earned by each share of a company’s outstanding common stock; also called net income per share |
| basic earnings per share | net income less any preferred dividends and then divided by weighted-average common shares outstanding |
| price-earnings (PE) ratio | ratio of a company’s current market value per share to its earnings per share; also called price-to-earnings |
| dividend yield | ratio of the annual amount of cash dividends distributed to common shareholders relative to the common stock’s market value (price |
| book value per common share | recorded amount of equity applicable to common shares divided by the number of common shares outstanding |
Created by:
ryanriggs18
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