Acct Ch 8

rights of common stockholders

1) buy and sell stock 2) share in the distribution of profits 3) share in the distribution of corporate assets in case of liquidation 4) vote on significant matters 5) participate in the election of directors

Preferences Granted to preferred stockholders

1) preference as to assets. Preferred stockholders must be paid the liquidation value before any assets are distributed to common stockholders. However, preferred stockholder claims still fall behind creditor claims. 2) preference as to dividends. Right to receive dividends before common stockholders. The amount of the preferred divident is normally stated on the stock certificate.

SEC

Securities and Exchange Commission Congress gave SEC the legal authority to establish accounting principles for corporations that are registered on the exchanges. However, the SEC has generally deferred its rule-making authority to private sector accounting bodies such as the Financial Accounting Standards Board, effectively allowing the accounting profession to regulate itself.

Why choose corporation status with double taxation?

The concept of limited liability... because the corporation is legally separate from its owners, creditors cannot claim owner's personal assets as payment for the company's debts. Also, plaintiffs must sue the corporation, not its owners. the maximum amount owners can lose is the amount they have invested in the company in contrast, partnerships and proprietorships are personally liable for actions taken in the name of their companies

Sarbanes-Oxley Act of 2002

adopted to address the concern of self-regulation and the usefulness of audits. created the five-member Public Company Accounting Oversight Board with the authority to set and enforce auditing, attestation, quality control, and ethics standards for auditors of public companies. can imposed disciplinary and remedial sanctions for violations of its rules, securities laws, and professional auditing and accounting standards

Common Stock

all corporations issue common stock. Common stockholders bear the highest risk of losing their investment if a co. is forced to liquidate. Also reap greatest rewards when co. prospers

Issued stock

authorized stock that has been sold to the public

CEOs and entrenched management

chief executive officer is usually a member of the board of directors and is frequently influential in choosing other board members. the CEO is also in a position to reward loyal board members. as a result, board members may be reluctant to fire the CEO or other top executives even if the individuals are performing poorly. Corporations under such conditions are said to be experiencing entrenched management

Presentation of Equity in Partnerships

contributed capital and retained earnings are combined. However, there is a separate capital account maintained for each partner in the business to reflect each partner's ownership interest. Shows amount of the partner's contributed capital plus proportionate share of RE on balance sheet. for the capital statement, distributions are called withdrawals

Dividends in arrears

cumulative dividends that have not been paid are called this.

stock certificates

evidence of ownership interest in a corporation ownership of corporations can be transferred easily by exchanging stock certificates

Book value per share

is calculated by dividing total stockholder's equity (assets - liabilities) by the number of shares of stock owned by investors book value per share differs from market value per share because equity is measured in historical dollars and market value reflects investors' estimates of a company's current value.

Preferred stock

issued in addition to commons stock. holders of preferred stock receive certain privileges relative to holders of common stock. For special privilege in some areas, they give up rights in other areas. Preferred stockholders usually have no voting rights and the amount of their dividends is usually limited

Treasury stock

issued stock bought back from the public it is still considered issued stock, but it is no longer outstanding

Cumulative Dividends

most preferred stock have these dividends. if a corporation is unable to pay the preferred dividend in any year, the dividend is not lost but begins to accumulate.

articles of incorporation

most states require that the application for establishing a corporation includes these 5 components 1) name and date 2) purpose 3) location and expected life 4) provisions for capital stock 5) names and addresses of members of the first board of directors

Presentation of Equity in Corporations

much more complex, stock issued by corporations may have a variety of different characteristics like difference classes that grants different owners different privileges.

Stated value

no par stock may have a stated value. Like par value, stated value is an arbitrary amount assigned by the board of directors to the stock. it also has very little relevance to investors and creditors.

Presentation of Equity in Propiertorships

owner contributions and retained earnings are combined in a single capital account on the balance sheets on the capital statement distributions are called withdrawals

Market value

price an investor must pay to purchase a share of stock the sales price of a share of stock may be more or less than par value

Securities Act of 1933 and Securities Exchange Act of 1934

the Great Depression lead congress to pass these acts to regulate issuing tock and to govern the exchanges. the 1934 Act created the Securities and Exchange Commission to enforce securities laws.

Authorized stock

the maximum number of shares stock corporations are legally permitted to issue

LLCs

limited liability companies offers many of the benefits of corporations yet are in general taxed as partnerships. (proprietorships and partnerships are not separate legal entities so company earnings are taxable to the owners rather than the company itself).

Par value

many states require assigning par value to stock par value represents the maximum liability of the investors. Par value multiplied by the number of shares of stock issued represents the minimum amount of assets that must be retained as protection for creditors (this amount is known as legal capital).

Ownership interest (equity) 2 elements

owner/investor contributions and retained earnings the way these two elements are reported in the financial statements differs for each type of business structure

Double taxation

significant disadvantage of corporate business structure corporations pay income taxes on their earnings and then owners pay income taxes on distributions (dividends) received from corporations

S Corporation status

some states permit small businesses S Corporation status so they can avoid double taxation and just be taxed as proprietorships or partnerships

3 tiers of management in corporations

the owners (stockholders) are the highest level of organizational authority the stockholders elect a board of directors to oversee the company operations the directors hire professional executives to manage the company on a daily basis This management structure can complicate dismissing incompetent managers

Recent changes in relevance of legal capital as defined by par value

to minimize the amount of assets that must maintain in the business, many corporations issue stock with very low par values, often $1 or less. therefore, legal capital as defined by par value has come to have very little relevance to investors or creditors. As a result, many states allow corporations to issue no-par stock.

outstanding stock

total issued stock minus treasury stock is owned by investors outside the corporation

Continuity in corporation

unlike Partnerships and proprietorships terminate with the departure of their owners, a corporation's life continues when a shareholder dies or sells his or her stock.

Closely held corporations

when stock exchanges are limited to transactions between individuals