ACCT 2113 1st Edition Lecture 10 Outline of Last Lecture II. Financing alternativesA. Debt financingB. Equity financingIII. BondA. Definition of private placementB. CharacteristicsC. Secured & unsecured, term & serial, callable & convertibleIV. Pricing and recording a bondA. Face amount, discount, premiumV. Amortization schedules for bondsVI. Retirement of bondsVII. Other long-term liabilitiesA. Installment notesB. LeasesVIII. Long-term liability ratiosA. Debt to equity ratioB. Times interest earned ratioOutline of Current Lecture II. Stockholders’ EquityA. Paid-in capitalB. Retained earningsC. Treasury stockIII. CorporationsA. Articles of incorporationB. Public or privateC. Advantages and disadvantagesIV. Common stockA. Par ValueB. Accounting for common stock issuesC. Preferred stockD. Accounting for preferred stock issuesV. Treasury stockThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.A. Accounting for treasury stockVI. Retained earnings and dividendsA. Stock dividends and stock splitsVII. Reporting and analyzing stockholders’ equityA. Return on EquityCurrent Lecture Chapter 10: stockholders’ equityStated another way, equity is equal to what we own (assets) minus what we owe (liabilities). Because assets represent resources of the company and liabilities are creditors’ claims to those resources, equity represents the owners’ residual claim to those resources.Stockholders’ equity consists of three primary sections: paid-in capital, retained earnings, and treasury stock. Paid-in capital is the amount stockholders have invested in the corporation. Retained earnings is the amount of earnings the corporation has retained, that is, the earnings not paid out in dividends. Treasury stock is the corporation’s own stock that it has reacquired. Invested CapitalCorporations-o Articles of incorporation (or corporate charter) describe a) the nature of the firm’s business activitiesPrimary Sections of Stockholders’ EquityPaid-in capital Retained Earningsb) the shares to be issuedc) the initial board of directors o Corporation’s stockholders control the corporation - By voting their shares, they determine the makeup of the board of directors - which in turn appoints the management to run the corporation.Stages of Equity Financingo The progression leading to a public offering might include some or all of these steps: o Investment by the founders of the business.o Investment by friends and family of the founders.o Outside investment by “angel” investors (wealthy individuals in the business community willing to provide investment funds) and venture capital firms (provide additional financing for a percentage ownership in the corporation).o Initial public offering (IPO), the first time a corporation issues stock to the public. Public or PrivateCorporations may be either public or privatePublic-  Stocks trade on a stock exchanges such as NYSE, AMEX, NASDAQ; or by over-the-counter(OTC) trading. Regulated by the Securities and Exchange Commission (SEC)  Examples – Wal-Mart, Microsoft, Intel Private- Does not allow investment by the general public and has fewer stockholders Not regulated by the Securities and Exchange Commission (SEC) and do not need to file financial statements with it Examples - Cargill (agricultural commodities) Koch Industries (oil and gas), Chrysler (cars) Stockholder Rights Whether public or private, stockholders are the owners of the corporation and have certain rights:o Right to vote o Right to receive dividendso Right to share in distribution of assetso Preemptive right – allows a stockholder to maintain his or her percentage share of ownership.Advantages and disadvantages of a corporationA corporation offers three primary advantages:Limited Liability - Because of limited liability, even in the event of bankruptcy, stockholders in acorporation can lose no more than the amount they invested in the corporation. Ability to Raise Capital - A corporation is better suited to raising capital than is a sole proprietorship or a partnership. Attracting outside investment is easier for a corporation. Lack of Mutual Agency - Another favorable aspect of investing in a corporation is the lack of "mutual agency." Individual partners in a partnership each have the power to bind the business to a contract. A corporation has two primary disadvantages:Additional Taxes - Corporations have double taxation. As a legal entity separate from its owners, a corporation pays income taxes on its earnings. Then, when it distributes the earnings to stockholders in dividends, the stockholders—the company’s owners—pay taxes a second time on the corporate dividends they receive. More Paperwork - To protect the rights of those who buy a corporation’s stock or who lend money to a corporation, the federal and state governments impose expensive reporting requirements on the corporation. Common StockIf a corporation has only one kind of stock, it usually is labeled as common stock. A common has three types: authorized, issued and outstanding stockAuthorized stock is the total number of shares available to sell, stated in the company’s articles of incorporation. Issued stock is the number of shares that have been sold to investors. Outstanding stock is the number of shares held by investors. Par ValuePar value is the legal capital per share of stock that’s assigned when the corporation is first established and, frankly, has no significant meaning today. Par value has no relationship to the market value of the common stock. No-par value stock is common stock that has not been assigned a par value. In some cases, a corporation assigns a stated value to the shares. Stated value is treated and recorded in the same manner as par value shares.Accounting for Common Stock IssuesWhen a corporation receives cash from issuing common stock, it debits cash. If it issues no-par value stock, the corporation credits the equity account entitled common stock. The journal entry reflects that the corporation issues 1,000 shares of no-par value common stock at $30 per share. Cash (1,000 shares x $30) 30,000 Common Stock 30,000 (Issue no-par value common stock)The entry changes slightly if the corporation issues par value stock rather than no-par value stock. In that case, we credit two equity accounts. We credit the common stock account