Question

1/1/17 Co issues 5000 shares of $5 par value CS for $10/shr. Journalize

           

2/1/17 Co purchases back 500 shrs of stock it issued in Jan. Co paid $12/shr. Journalize

           

3/1/17 Co sold 125 shrs from the February repurchase. These shares were sold at $13/shr. Journalize

3/15/17 Co sells 125 shrs from Feb repurchase. These shares sold at $10/shr. Journalize.

           

4/2/17 Co declares $0.50 cash div on outstanding shares. Journalize both declaration 4/2/17 and payment 4/15/17.

           

5/1/17 Co declares 10% stk div on outstanding shares. Recall that CS has a $5 Par Value. Current stock price is $15. Journalize just the declaration.

           

Journalize the distribution of stock dividend

           

What factors into the decision to pay or not pay cash dividends?

For the year ended December 31, 2008 SSS reports net income of $200,000. During the year the following occurred:

• Depreciation expense was $6000
• Accounts Receivable decreased $2000
• Inventory increased $3000
• SSS sold some used equipment for $7000, cost was $9000, Acc Dep was $3000
• Prepaid expenses decreased $2000
• Accounts Payable increased $4000
• SSS bought new equipment for $5,000
• SSS redeemed $5,000 of Bonds
• SSS issued $25,000 of common stock and paid dividends of $1000. $10,000 of the Stock Issued was exchanged for equipment.

1. Show calculations for Net Cash Provided (Used) from Operating Activities:

2. Show calculations for Net Cash Provided (Used) from Investing Activities

  

     C) Show calculations for Net Cash Provided (Used) from Financing Activities

4. What was the total increase (or decrease) in cash for SSS over the year?

What are the characteristics of a Corporation?

What is Treasury Stock?

Answer 1

Particulars	Amount($)	Amount($)
A. Cash Flow from Operating Activity
Net Income Before Tax as per Income Statement	200000
Add: Depreciation	6000
Less: Gain on Sale of PPE	-1000
Changes in Current Asset/Liability
Decrease in Account Receivable	2000
Increase in Inventory	-3000
Decrease in Prepaid Expense	2000
Increase in Account Payable	4000	210000
B. Cash Flow from Investing Activity
Purchase of Equipment	-5000
Sale of Equipment	7000	2000
C. Cash Flow from Financing Activity
Sale Proceed from issue of shares (25000-10000)	15000
Payment of Bond	-5000
Dividend Paid	-1000	9000
Net Cash Flow during the Year(A)+(B)+(C)		221000

Characteristic of a Corporation

• Separate Legal Entity: A corporation is considered to be an entirely separate operating and legal entity. It means owners and corporation are considered two separate owners. It operates separately from its owners, and has many of the rights and responsibilities of a person. Corporation has its own identification number.
• Limited liability for owners: Any liabilities/payments incurred by a corporation are not transferred to its shareholders or owners. Instead, anyone trying to enforce a liability can only file a suit against the corporation for satisfaction.
• Ownership: Ownership in a corporation is based on the number of shares owned by each shareholder. Purchase or selling of these shares results in change in ownership of a corporation to a different investor. A public company that has its shares listed on an public stock exchange have thousands of owners.
• Cascading of Taxes/Double taxation liability: A corporation pays income tax on its profits. If it also pays a dividend to its shareholders, the shareholders had also to pay income tax on the dividends received from the corporation. This constitutes cascading of taxes/double taxation of the earnings of the corporation.
• Distribution of Profits: A corporation pays its investors by proposing dividends to them from the profit earned. This differs from the distributions made from a partnership (share of profits) or sole proprietorship (Profits) to pay their owners.
• Raising of Fund: It is easier for a corporation to issue debt and equity, since it is not constrained by the financial investors of a few owners. A corporation can issue shares to new investors, and larger entities can issue bonds to obtain a significant amount of debt financing.

Treasury Stock

A treasury stock is also termed as reacquired stock. It is stock which is bought back by the company which results in reducing the amount of outstanding stock on the open market i.e. Stock Exchange. It can also be said that buying back of own shares which were issued earlier. Treasury stock is often referred as form of reserved stock kept aside to raise further funds for future expansions. Companies can also use treasury stock to pay for an investment or acquisition of competing businesses instead of hard cash. This will save the outflow of money from the company. These shares can also be reissued to existing shareholders in form of right shares to reduce dilution.

Factors influencing to pay or not dividends:

· Financial Position of the company is strong or weak

· Shareholders/Investors expectation for dividend

· Industry Pattern on declaration of Dividend

· Future Expansion of business is going to be carried out or not

· Previous trend of dividend paid

· Amount of profit earned during the year or target growth in business achieved or not