Chapter 13 Accounting

Rights of stockholders

(1) Attend/vote at stockholders' meetings (or register proxy goes electronically) (2) sell stock (3) purchase additional shares of stock (4) receive dividends, if any (5) share equally in any assets remaining after creditors are paid in liquidation. When investors buy stock, they acquire all specific rights the corporations charter grants to stockholders.

Accounting for cash dividends

(1) Date of declaration, record liability for dividend, (2) Date of record, no journal entry required, (3) Date of payment, record payment of cash to stockholders.

Lack of mutual agency for stockholders

A corporation acts through its agents, who are its officers and managers. Stockholders, who are not officers and managers, do not have power to bind the corporation to contracts- referred to as lack of mutual agency.

Incorporation

A corporation is created by obtaining a charter from a state government.

Government regulation

A corporation must meet requirements of a states incorporation laws. Proprietorships avoid many of these.

Separate legal entity

A corporation operates with the same rights, duties, and responsibilities of a person. it takes actions through its agents, who are its officers and mangers.

Stockholders equity

A corporations equity is known as stockholders equity, consists of (1) paid-in (or contributed) capital and (2) retained earnings.

Continuous life

A corporations life continues indefinitely because it is not tied to the physical lives of its owners.

Treasury stock

A corporations reacquired shares (1) neither treasury stock nor unused stock is an asset (2) neither receives cash dividends or stock dividends (3) neither can exercise voting rights.

Small stock dividend

A distribution of 25% or less of previously outstanding shares.

Large stock dividend

A distribution of more than 25% of previously outstanding shares.

Preferred stock

A separate class of stock, typically having priority over common shares in: Dividend distribution, distribution of assets incase of liquidation.

Par value

An arbitrary amount assigned to each share of stock when it is authorized. (DOES NOT EQUAL MARKET VALUE)

Organization expenses/organization costs

Are the costs to organize a corporation; they include legal fees, promoters' fees, and payments to obtain a charter.

Ease of capital accumulation

Buying stock is attractive to investors because (1) stockholders are not liable for the corporation's acts and debts, (2) stocks usually are transferred easily, (3) the life of the corporation is unlimited, and (4) stockholders are not corporate agents. These advantages enable corporations to collect large sums of capital fro many stockholders.

No par value

Capital stock that has not been assigned a value per share in the corporate charter.

Corporate taxation

Corporations pay the same property and payroll taxes as proprietorships and partnerships a\plus additional taxes. The most burdensome are federal and state corporate income taxes that together can take 40% or more of pretax income.

Stock dividend

Declared by a corporations directors is a distribution of additional shares of its own stock to its stockholders without any payment in return.

Cumulative preferred stock

Dividends in arrears must be paid before dividends may be paid on common stock.

Corporation

Entity that is separate from its owners. By law, it has many of the same rights and privileges as individuals. Owners of corporations are called stockholders or shareholders.

Stated value

No par stock to which the directors assign a "stated" value per share. Sated value per share becomes the minutemen legal capital per share in this case.

Premium on stock

Occurs when a corporation sells its stock for more than par (or stated) value.

Discount on stock

Occurs when it is sold for less than par value.

Appropriated retained earnings

Refers to a voluntary transfer of amounts from the retained earnings account to the appropriated retained earnings account to inform users of special activities that require funds.

Cash dividends

Regular cash dividends provide a return to investors and almost always affect the stock markets value. To pay a cash dividend (1) sufficient balance in retained earnings (2) have the cash necessary to pay the dividend (3) board of directors must declare it.

Limited liability of stockholders

Stockholders are not liable for corporate actions or debt.

Management of a corporation

Stockholders control a corporation by electing a board of directors.

Retained earnings

The cumulative net income (and loss) not distributed as dividends to its stockholders.

Stock split

The distribution of additional shares to stockholders according to their percent ownership. A stock split does not have any affect on total paid-in capital, retained earnings, and total stockholders equity.

Authorized stock

The number of shares that a corporation's charter allows it to sell.

Market value per share

The price at which a stock is brought and sold.

Stock options

The right to purchase common stock at a fixed price over a specified period of time. As the stocks price rises above the fixed option price, the value of the option increases.

Paid in capital

The total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock.

Transferable ownership rights

The transfer of shares from one stockholder to another usually has no effect on the corporation or its operations except when this causes a change in the directors who oversee the corporation.

Restricted retained earnings

To limit treasury stock purchases to the amount of retained earnings.

Noncumulative preferred stock

Undeclared dividends from current and prior years do not have to be paid in future years.