Chapter 11 Corporations Organizations Stocks Dividends Retained Earnings I Corporate Organizations and Stock Transactions Corporations is an entity separate and distinct from its owners A Classifications of a Corporations 1 Separate Legal Existence an entity separate from its owners acts under its own name of its stockholders 2 Limited Liability of a Stockholder only limited to how much is put in 3 Transferable Ownership Rights 4 Ability to acquire Capital 5 Continous Life 6 Corporations Management 7 Government Regulation 8 Additional Taxes i Pay double taxes at Corporate Level individual Level an approved copy of the application form or it may be a B Forming A Corporation 1 Charter separate document conting some basic data organization of business laws that govern an organization 2 ByLaws 3 Organization Costs C Stock Issuance Considerations fees lawyers promotional expenses in volved in 1 Authorized Stock need tfor current and subsequent capital needs Issuance of Stock 2 the number of shares the company anticipates it will 3 Price i Direct to buyers smalle company ii Underwritten through Investment Bank they take a fee 3 1 i Company s anticipated future earnings ii Its expected dividends rate per share iii Current financial position iv Current state of economy v Current state of securities market 4 Market Value of Stock i Traded on exchanges ii Have no effect on a corporations shareholder equity is capital Stock to which the charter has assigned a is capital stock which charter has not assigned a 5 Par Value Stocks value per share value 6 Non Par Value Stocks 7 Corporate Capital Shareholder Equity i Paid In Capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock common stock Credit normal balance ii Retained Earnings future use Credit Normal Balance is the net income that a Corp retains for II Accounting For Common Stock Issues SEE PAGES 517 520 III Accounting for Treasury Stock A Treasury Stock B Reasons for Issuing reacquired from shareholders but not retired is a corporations own stock that it has issued and subsequently a Reissue shares to officeres and employees as bonuses b Signal to market and investors that management believes that the price c Additional shares available for use in the acquisition of other is under priced companies d Reduce shares outstanding and increase earnings per share e Rid company of disgruntled investors to prevent hostile takeover C Outstanding Stock of shares of stock that are being held by shareholders A Preferred Stock has provisions that give it some privilages over common IV Preferred Stock stock a Distributions of earnings dividends b Assets in the event of liquidation c Usually no voting rights B Dividend preference a Right to receive dividends before common stock holders b Cumulative Dividend current dividends and unpaid dividends from prior years i Dividend in arrears dividends that have to be paid c Liquidation preferences to assets or a set price if liquidstion occurs preferred stock holders must be paid both Dividends Dividends is a corporations distribution of cash or stock to its stock holders on a pro rata basis Expressed s either a dollar amounr or percentage of value of stock I Cash dividend is a pr rata distribution of cash to stockholders For a corporation to pay cash dividend A comes out of retained earnings B need adequate cash C Board of directors declares dividend D Accounting entries a Date declared credit cash dividend debit dividends payable b Date paid credit cash debith dividend II Stock Dividend is a pro rata distribution to stockholdes of the corporation s own stock Results in dcrease in retained earnings and increase in paid in capital A results in owning more shares of stock but ownership does not change a b small stock less than 20 25 large stock issue more than 20 25 B entries see page 531 C Effects a Change compostion of shareholder equity i Effects paid in capital increase ii Effects retained earnings decrease III Stock Splits incolves issuance of new shares to stockholders in accordance to their percentage of ownership reduces par value or stated value of stock Retained Earnings is net income that a company retains for use in the business make portions of retained earnings unavailable A Deficit B Retained Earnings Restrictions debit balance to retained earnings for dividends a Legal restrictions b Contractual restrictions c Voluntary Restrictions C Prior Period Adjustment financial statements Makes these corrections to retained earnings the correction of an error in previously issued D Retained Earnings Statement
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