chapter 11

Two primary sources of equity

- paid in capital - retained earnings

common stock

All corporations issue common stock.

declaration date

Date on which Board of Directors declares the dividend On this date, the dividend becomes an obligation (a liability) to the company.

Paid-in capital in excess of par value

If shareholders pay more for the stock than the par value, credit the remaining amount to an account calle

stockholders/ shareholders

The owners of a corporation are called An entity (individual, other corporation, etc.) purchases a portion of a corporation by purchasing "shares of stock" (hence, the name "shareholder").

record date

The shareholders entitled to receive the dividend are determined on this date. there is NO journal entry on this date!

Dividends

a distribution of cash or stock to stockholders on a pro rata (proportional to ownership) basis. (dividends are the means by which the shareholders share in the profits of the corporation. ) NOT PAID ON TREASURY STOCK 2 types: 1. Cash dividends 2. Stock dividends

Dividends on common shares are normally expressed

as a dollar amount per share.

2 types of common stock

common stock preferred stock

treasury stock journal entry

contra stockholders equity account NOT ASSET

Cash dividends

corp must have: o Retained earnings (dividends are paid out of retained earnings) o Adequate cash o The Board of Directors must declare a dividend. A corporation is NOT legally required to pay dividends to shareholders until the Board of Directors declares a dividend.

three important dates regarding dividends

declaration date record date payment date

profit entity

exists with the ultimate goal of making a profit for its shareholders.

corporation

is an entity separate and distinct from its owners.

If a company has no treasury stock,

issued will equal outstanding (in balance sheet- she)

No-par value stock

often assigned a stated value

Corporations are classified by

purpose and by ownership

payment date

the company issues dividend checks on this date.

Issued shares

the number of shares a corporation has sold to shareholders, including shares that have been repurchased as treasury stock. (i.e., treasury stock is still considered issued)

Steps to forming a corporation:

1. File application with the Secretary of state 2. Upon receipt and approval of the application, the Secretary of State grants a state charter. (Corporation exists after this) 3. Corporation develops by laws (rules) for conducting the affairs of the corporation. Once chartered, a corporation is allowed to sell shares of stock. With the purchase of stock, stockholders are awarded certain rights: 1. They are allowed to vote in the election of the board of directors and on actions that require stockholder approval. 2. They are allowed to share in the corporate earnings through the receipt of dividends. 3. If a corporation decides to issue new shares of stock, it is legally required to allow its shareholders to purchase enough of the new shares to maintain the same % ownership as they had prior to the new issuance. This right is known as the pre emptive right. 4. If the corporation liquidates (goes out of business), the shareholders have the right to share in assets in proportion to their holdings (e.g., If a shareholder owns 5% of the corporation, they are allowed to have 5% of all assets remaining after all debts are paid.). This right is known as residual claim.

preferred stock differs from common stock

Preferred stockholders have dividend preference over common stockholders. A company must pay dividends to preferred stockholders before it pays dividends to common stockholders. If the corporation fails, preferred stockholders have preference as to the corporate assets.

Dividends on preferred shares are normally expressed

as a percentage of the par value.

Some preferred stock is ______________________ preferred stock.

cumulative This means that holders of the preferred stock must be paid their current annual dividend plus any dividends unpaid in prior years (called dividends in awears) before common stockholders receive any dividends.

Payments to shareholders are known as

dividends

privately held (a.k.a. closely held) corporation

does not offer its shares of stock to the general public. The stock in these companies is not traded on national securities markets. These corporations are normally small in size and normally have few shareholders.

not-for-profit entity

exists with the ultimate goal of something other than earning a profit (such as a charitable organization or an organization that does medical research).

Treasury stock

is a corporation's own stock that it has reacquired from shareholders, but not retired. • Treasury stock is normally accounted for by the cost method

Par-value

is a superficial value assigned to a share of stock

retained earnings (Earned capital)

is the net income that a corporation retains for future use. -Net income increases retained earnings and a net loss decreases retained earnings. -Dividends decrease retained earnings. -A portion of retained earnings may be restricted and thus prohibited from being paid out as dividends.

paid in capital (Contributed capital)

is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock. accounts: i. Preferred stock ii. Common stock iii. Paid-in capital in excess of par value - preferred stock iv. Paid-in capital in excess of par value - common stock

par value and stated value are _______________________ to the market value of the stock (i.e., what the stock sells for). The par/stated value is often much lower than the market value.

not related

publically held corporation

offers its shares of stock to the general public. The stock in these companies is traded on national securities markets (such as the NYSE). These corporations are normally large in size and normally have many (possibly thousands of) shareholders.

ownership

relates to the availability of shares of stock for purchase. -publicly held corporation -privately held (a.k.a. closely held) corporation does

purpose

relates to why the entity exists -for profit entity -not-for-profit entity

Authorized shares

the number of shares a corporation can issue, as indicated in the state charter.

Outstanding shares

the number of shares a corporation has sold to shareholders and that is still held by shareholders. (i.e., treasury stock is not considered outstanding)