ACC 290 WEEK 3 COMPLETE WORK
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ACC 290 WEEK 3 COMPLETE WORK
Week 3
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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