Chapter 11: Reporting and Analyzing Stockholders’ EquityChapter 11: Reporting and Analyzing Stockholders’ Equity- Forming a Corporation:o File application with the Secretary of State.o State grants charter. o Corporation develops by-laws.  Companies generally incorporate in a state whose laws are favorable to the corporate for of business (Delaware, New Jersey). Corporations engaged in interstate commerce must obtain a license from each state in which they do business. - Stockholder’s Rights:1. Vote in election of board of directors and on actions that require stockholder approval.2. Share the corporate earnings through receipt of dividends.3. Keep the same percentage ownership when new shares of stock are issued (preemptive right).4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim. - Authorized Stock:o Charter indicates the amount of stock that a corporation is authorized to sell. o Number of authorized shares is often reported in the stockholders’ equity section.- Issuance of Stock:o Corporation can issue common stock directly to investment or indirectly through an investment banking firm.o Top 5 exchanges by value of shares traded:1. New York Stock Exchange.2. Nasdaq Stock Market.3. London Stock Exchange.4. Tokyo Stock Exchange.5. Euronext.- Par and No-Par Value Stocks:o Capital stock that has been assigned a value per share.o Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors. o Today many states do not require a par value.o No-par value stock is fairly common today.o In many states the board of directors assigns a stated value to no-par shares. - Accounting for Issues of Common Stock:1. Identify the specific sources of paid-in capital.2. Maintain the distinction between paid-in capital and retained earnings. o Other than consideration received, the issuance of common stock affects only paid-in capital accounts.2- Treasury Stock: corporation’s own stock that it has reacquired from shareholders, but not retired.o Corporations purchase their outstanding stock:1. To reissue shares to officers and employees under bonus and stock compensation plans. 2. To increase trading of the company’s stock in the securities market.3. To have additional shares available for use in acquiring other companies. 4. To increase earnings per share.- Purchase of Treasury Stock:o Generally accounted for by the cost method. o Debit treasury stock for the price paid. o Treasury stock is a contra stockholders’ equity account, not an asset. o Treasury stock decreases by the same amount when the company later sells the shares. o- Dividend Preferences:o Right to receive dividends before common stockholders.o Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a specified amount.3o Cumulative Dividend: holders of preferred stock must be paid their annual dividend plus any dividend in arrears before common stockholders receive dividends. - Stock Dividends:o Reasons why corporations issue stock dividends:1. Satisfy stockholders’ dividend expectations without spending cash.2. Increase the marketability of the corporation’s stock.3. Emphasize that a portion of stockholders’ equity has been permanently reinvested in the business. - Stock Splits:o Reduces the market value of shares. o No entry recorded for a stock split.o Decrease per value and increase number of shares.- Retained Earnings:o Retained earnings is net income that a company retains for use in thebusiness.o Net income increase retained earnings and a net loss decreases retained earnings. o Retained earnings is part of the stockholders’ claim on the total assets of the corporation.o A debit balance in retained earnings is identified as a