ACTG 319 Chapter 15

In the absence of restrictive provisions, what are the basic rights of stockholders of a corporation?

1. To share proportionately in profits and losses. 2. To share proportionately in management (the right to vote for directors). 3. To share proportionately in corporate assets upon liquidation. 4. To share proportionately in any new issues of stock of the same class—called the preemptive right.

Distinguish between common and preferred stock.

Common stock: represent the basic ownership interest. the residual corporate interest that bears the ultimate risks of loss and receives the benefits of success. Preferred stock: In return for any special preference, the preferred stockholder always sacrifices some of the inherent rights of common stock ownership.

Why is a preemptive right important?

The preemptive right protects an existing stockholder from involuntary dilution of ownership interest. Without this right, stockholders might find their interest reduced by the issuance of additional stock without their knowledge and at prices unfavorable to them.

Explain each of the following terms: authorized capital stock, unissued capital stock, issued capital stock, outstanding capital stock, and treasury stock.

authorized capital stock: the maximum number of shares that a corporation is legally permitted to issue unissued capital stock: Stock that a publicly-traded company is authorized to issue but has not. issued capital stock: # of shares issued outstanding capital stock: shares refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders. treasury stock: stock which is also bought back by the issuing company, reducing the amount of outstanding stock

Why is the distinction between paid-in capital and retained earnings important?

contributed (paid-in) capital The total amount paid in on capital stock—the amount provided by stockholders to the corporation for use in the business. RE: represents the earned capital of the company.