BUAD 305 Chapter 11

What are the things about Corporate Form?

- A corporate entity is separate from its owners and has many of the same rights and privileges as individuals - Owners are called stockholders - A publicly held corporation offers its stock for public sale (private corporations do not)

Things to note about Corporate Organization and Management:

- All companies need to pick a state to incorporate a. does not need to be the state the company primarily operates b. state law applies for transactions affecting stockholders' equity - Stockholders control corporation by electing its board of directors (usually has one vote for each share of stock owned) - Board of directors (BOD) oversees hiring and firing key executives who manage day-to-day operations

Why not pay all retained earnings as dividends?

- Bond and loan covenant restrictions - State restrictions - Need to reinvest in business and build up a cash cushion - Aim to smooth dividend payments - Shareholder liquidity and tax considerations

Types of dividends:

- Cash dividends - Property dividends - Liquidating dividends - Stock dividends

Things to notice when issuing stocks:

- Companies can issue shares up to the number of shares authorized - The authorized shares are stipulated in the articles of incorporation and can be amended by the company through voting by stockholders

What are dividend policies?

- Dividends are generally paid out of retained earnings - Do not need profits in the current year to pay dividends - Dividends cannot be declared and paid on treasury stock - Dividends can only be paid on outstanding shares

What are Corporation Disadvantages?

- Governmental regulation - Double taxation - corporate income is taxed and distributions to shareholders as dividends are taxed a second time as personal income

What is Raising Capital?

- Helps corporations generate assets for use in operations - Concept of "shares" of stock (or fractional ownership) - Each share represents an ownership right with privileges

What are stock dividends?

- Issuance of additional shares to existing shareholders - Number of shares issued depends on the number of shares already owned by the stockholder

What are the characteristics of stock split?

- Issue additional shares of stock to stockholders based on number of shares currently owned - Are not dividends - No effect on total PIC, retained earnings, or stockholders' equity - Number of shares increase and par (or stated value) per share decreases - No journal entry is recorded

Define Par value:

- Par value per share is an arbitrary amount chosen by the company - Has no relation to the issue price of the shares - Issue price is determined by the "perceived" value of the company (the PV of the future cash flows)

What are the characteristics of treasury stocks?

- Repurchased shares held by the company - Treasury stock is not an asset - Treasury stock is a contra-equity account - No dividends - No voting rights - No gain or loss on TS transactions

What are Corporate Advantages?

- Separate legal entity - a corporation has many of the same rights, duties, and responsibilities as a person - Takes actions through its agents (officers and managers) - Limited liability - stockholders are not liable for corporate actions or debt - Corporation's life is indefinite because it is not tied to physical life of owners - Stockholders cannot bind the corporation to contracts - Stock ownership is attractive to investors

Why do we purchase treasury stocks?

- Take advantage of undervaluation - Increase EPS or ROE - Provide stock for employee compensation or merger needs - Thwart takeover attemps - take shares away from individual shareholders whare are more likely to "sell out" to acquiring companies

Unlike common stock, preferred stock has:

- fixed dividend - preference as to dividends - preference as to assets in the event of liquidation - absence of voting right

What is cumulative preferred stock?

- has the right to be paid both current and all prior periods' unpaid dividends (arrears) - most preferred stocks carry a cumulative dividend right - Dividends in arrears are usually reported in notes to the financial statements

When reissuing treasury stock, things to notice are:

- if reissued at cost, reverse the entry to record the purchase - If sales are above cost, the amount received in excess of cost is credited to PIC - TS - If sales are below cost: PIC - TS is debited for excess of cost over selling price

Equation of contributed capital:

Capital stock + Paid-in capital = Contributed capital

Define No-par value:

Companies can issue stock without any par value if the state in which the company is incorporated allows issue of no-par stock

Distributions to stockholders:

Could be in the form of dividends (periodic payments to stockholders out of accumulated profits) a. dividends are paid on all outstanding shares b. retained earnings = accumulated profits - dividend distributions Or through the repurchase of shares (repurchased shares are called treasury stock)

Stock issued in noncash transactions:

Record the fair value of the stock issued or the fair value of the noncash consideration received

Equation of Stockholder's Equity:

SE = Capital stock + Paid-in Capital + Retained Earnings - Treasury Stock

No-par stock with stated value:

Some states require companies to have a "stated value" per share even if the shares have no par value. For accounting purposes, treat "stated value" just like par value

Define Components of Stockholders' Equity:

The balance in stockholders' equity is the sum of amounts received through issuance of stock plus cumulative profits over the life of the company less cumulative distributions to stockholders over the life of the company

Define Authorized shares:

The maximum number of shares that a company is legally allowed to issue to investors as per its own determinations.

Define Issued shares:

The shares of a corporation which have been allocated and are subsequently held by shareholders.

Define outstanding shares:

a company's stock currently held by all its shareholders.

Two categories proceed from Stock Issue:

a. Capital stock: equal to par value of the stock issued by company b. Paid-in capital: amounts received in excess of par value when shares are issued

What are small stock dividends?

a. accounting based on fair market value of stock issued b. when declared, transfer amount equal to fair value of stock from retained earnings to contributed capital

What are the characteristics of Large stock dividend?

a. accounting based on par value of stock issued b. when declared, transfer amount equal to par value of stock issued from retained earnings to contributed capital

What are the characteristics of accounting for stock dividends?

a. depends on the size of the dividend b. if less than 25%, then "small" (oridinary) stock dividend c. otherwise "large" stock dividend

What are Common stocks?

a. generally confers right to vote/manage the company b. truly "residual" claim on assets and profits c. bears risk and rewards of ownership in company

What are Preferred stocks?

a. generally no voting/management rights b. preference (over common stock) in dividend distributions and return of capital (liquidation) c. has both equity and debt-like features

What are the characteristics of stock dividends?

a. has no effect on total stockholders' equity b. does not increase or decrease the value of a company c. has no effect on total value of stock held by shareholders d. only increases the number of shares and proportionately reduces the value per share

Define Par value stock:

a. par value does not have any relation to fair market value (the current selling price) b. companies rarely sell stock below par value c. issue price in excess of par value is called paid-in capital in excess of par or additional paidin capital

Why issue stock dividends?

a. to pay dividends without using cash b. to increase the marketability of its stock (more shares outstanding) c. to retain earnings in the business (transfer from retained earnings to contributed capital)

What is noncumulative preferred stock?

does not have rights to prior periods' unpaid dividends if they were not declared

All dividends, except ____________________, reduce total stockholders' equity

stock dividends

What are Accumulated profits?

sum of all net income (or loss) of the company from the date of incorporation

What is preferred stock?

to raise capital without giving up control