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Exam 2 2


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Entries for cash dividends are required on the
declaration date and the payment date
Because the stock dividend is considered small,
the market value, not the par value is assigned to the shares
All but one of the following is reported in a retained earnings statement
sales of treasury stock above cost
A prior period adjustment is
a correction of an error that is made directly to retained earnings
In the stockholders' equity section, Common Stock Dividends Distributable is reported as an
addition to capital stock
Corporation income statements may be the same as the income statements for unincorporated companies except for
income tax expense
The return on common stockholders' equity is defined as
Income available to common stockholders divided by average common stockholders' equity
In reporting discontinued operations, the income statement should show in a special section
Both gains/losses on the disposal of the discontinued segment and gains/losses from operations of the discontinued segment
The Rand Corporation has income before taxes of $400,000 and an extraordinary loss of $100,000. If the income tax rate is 25% on all items, the income statement should show income before extraordinary items and extraordinary items, respectively, of
Income before extraordinary items will be $300,000 [$400,000 - ($400,000 * .25)] and the extraordinary item will be $75,000 [$100,000 - ($100,000 * .25)].
The income statement for Nadeen, Inc. shows income before income taxes $700,000, income tax expense $210,000, and net income $490,000. If Nadeen has 100,000 shares of common stock outstanding throughout the year, earnings per share is:
Earnings per share is net income ($700,000 - $210,000) less preferred dividends ($0) divided by the common shares outstanding throughout the year (100,000). [($700,000-$210,000) - ($0)]/100,000 = 4.90
Small stock dividend
Less than 20-25%
Large stock dividend
Greater than 20-25%
Extraordinary Items
Unusual in Nature and Infrequent in Occurrence
Diff. b/t paid in cap. and retained earnings
pic - total amount of cash and other assets paid in to the corp. by stockholders in exchange for capital stock

re - net income that is retained in a corp.
Significance of legal capital in accounting for capital stock transactions.
Par Value - Par Value
No-Par value w/ stated value - Stated Value
No-Par value w/o stated value - Entire Proceeds
Rights of cumulative preferred stockholders to dividends
Preferred stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends.
Unlike a cash dividend,
a stock dividend does not decrease total stockholders' equity or total assets.
When a stock dividend is declared,
total stockholders' equity remains the same.
When a cash dividend is declared,
total stockholders' equity and total assets decreases.
To pay a cash dividend, you must have
In order to pay dividends, you must have
Retained Earnings
Non-typical Items
1) Discontinued Operations
2) Extraordinary Items
3) Changes in Accounting Principles
Changes in accounting principle should not be used
to artificially improve the reported performance or financial position of the corp.
Changes in accounting principle should result in
financial statements that are more informative for statement users.
A stock split results in a
reduction in the par or stated value per share.
For small stock dividends, the accounting profession recommends that the directors
assign the fair market value per share.

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