CH 13

Authorized stock

. The maximum number of shares of stock that the corporate charter allows the corporation to issue.

Corporation Disadvantages

1. Separate ownership and management 2. Double taxation of earnings 3. Expensive government regulation 4. Start up cost Higher

Which characteristic of a corporation is a​ disadvantage?

Double Taxation

Stock certificate

Paper evidence of ownership in a corporation.

Paid-in capital

Represents amounts received from stockholders of a corporation in exchange for stock.

Price/Earnings Ratio

The price/earnings ratio is the ratio of the market price of a share of common stock to the company's earnings per share. This ratio tells investors how much they should be willing to pay for $1 of a company's earnings.

Corporation:

a business organized under state law as a legal entity, separate from its owners.

The two basic sources of​ stockholders' equity are

paid-in capital and retained earnings.

Treasury Stock Basics

• The basics of accounting for treasury stock: - The Treasury Stock account has a normal debit balance. Treasury Stock is a contra equity account. - Treasury stock is recorded at cost, without reference to par value. - The Treasury Stock account is reported beneath Retained Earnings on the balance sheet as a reduction to equity.

Retirement of Stock

A corporation may retire its stock by canceling the stock certificates. Retired stock cannot be reissued. To repurchase previously issued stock for retirement, we debit the stock accounts and credit Cash. - This removes the retired stock from the company's books. - It also reduces total assets and total stockholders' equity.

Stockholders' Rights

A holder of common stock has four basic rights: 1.Vote―Normally,each share of basic ownership in the corporation carries one vote. 2.Dividends―Stockholders receive a proportionate part of any dividend declared and paid. 3.Liquidation―Stock holders receive their proportionate share of any assets remaining after liquidation. 4. Preemptive right―Stock holders have a right to maintain their proportional ownership. 5. Corporations issue different classes of stock: - Common stock represents basic ownership. - Preferred stock gives owners certain advantages over common stock.

HOW ARE DIVIDENDS AND STOCK SPLITS ACCOUNTED FOR?

A profitable corporation may make distributions to stockholders in the form of dividends. Dividends can be paid in the form of cash, stock, or other property. Legal capital refers to the portion of stockholders' equity that cannot be used for dividends.

HOW IS THE COMPLETE CORPORATE INCOME STATEMENT PREPARED?

Continuing operations: - These operations should continue from period to period. - Income from continuing operations helps investors make predictions about future earnings. Discontinued operations: - These gains and losses occur when a company sells or disposes of an identifiable division.- They are reported separately from continuing operations because this type of disposal does not occur frequently. Shown separately - total and per share

Three dividend dates are relevant:

Declaration Date - The board of directors announces the intention to pay the dividend, and a liability is created. Date of Record - This is the date the corporation records the stockholders that will receive dividend checks. Payment Date- This is the date the dividend is paid to the stockholders.

Earnings per Share

Earnings per share (EPS) reports the amount of net income or net loss for each share of the company's outstanding common stock. EPS = net income minus preferred dividends divided by the weighted average number of common shares outstanding. EPS is reported as the final segment of a corporate income statement.

Rate of Return on Common Stockholders' Equity

Rate of return on common stock holders' equity, often shortened to return on equity (ROE), shows the relationship between net income to common stockholders and their average common equity invested in the company.

Stock dividend versus Stock Split

Stock dividend :distribution of a corporation's own stock to its shareholders. Stock split: increases the number of issued and outstanding shares and decreases par value per share Main difference for accounting :A stock split decreases the par value per share (so no journal entry), whereas stock dividends do not affect par value per share. Main similarity for accounting: Neither affects total shareholders' equity

Preferred stock

Stock that gives its owners certain advantages over common stockholders.

Preemptive right

Stockholders' right to maintain their proportionate ownership in the corporation.

Declaring and Paying Cash Dividends―Preferred Stock

The cash dividend rate on preferred stock is often expressed as a percentage of the preferred stock par value, such as 6%. Sometimes, cash dividends on preferred stock are expressed as a flat dollar amount per share, such as $3 per share. E.g.,company has 1,000 outstanding shares of 6%, $50 par value preferred stock

Stockholders' Equity Basics

The maximum number of shares of stock a corporation may issue is called authorized stock. Issued stock has been issued by the corporation. Stock held by the stock holders is called outstanding stock. Stockholders are issued stock certificates. Stock may carry a par value or may be no-par stock. No-par may have stated value.

Statement of Stockholders' Equity

The statement of retained earnings reports how the company's retained earnings balance changed from the beginning of the period to the end of the period. Companies can report a negative amount in retained earnings. This is called a deficit. The statement of stockholders' equity is another option for reporting the changes in stockholders' equity of a corporation. It reports the changes in all stockholders' equity accounts.

Stockholders' Equity Basics Sources of Stockholders' Equity

The two basic sources of stockholders' equity are:- Paid-in capital represents amounts received from stockholders for stock.- Retained earnings is equity earned by profitable operations that is not distributed to stockholders. A company can sell its stock directly to stockholders or use the services of an underwriter. Stocks of public companies are bought and sold on a stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ Stock Market.

Unique characteristics of corporations:

- Separate legal entity - One or more owners (aka stockholders) - No personal liability of the owner(s) - Lack of mutual agency - Indefinite life- Taxation - Capital accumulation

Corporation Advantages

1. raise more money that propitership ot partnership 2. continuos life 3. easy transfer of ownership 4. No mutual agency among stockholders 5. Limited stockholder liability

Treasury stock is a company's stock that it has previously issued and later reacquired.

• Companies purchase treasury stock to: - Increase net assets by buying low and selling high - Support the company's stock price - Avoid a takeover - Reward valued employees with stock