Corporations

1. Corporations Chapter 13 © 2009 The McGraw-Hill Companies, Inc.

2. Characteristics of the Corporate Form Ownership Shares of stock can be purchased or sold in small amounts Owners are calledstockholders Ownership interest is called a share of stock Ownership interests are transferable Stockholders are not liable for the corporation’s debt. Stockholders not personally liable for corporate debts

3. Characteristics of the Corporate Form Laws and Taxes May own assets, incur debts, sue and be sued Separate legal entity Must pay tax onincome generated Taxable entity

4. Characteristics of the Corporate Form Formation Incorporated in a specific state Incorporation laws varyfrom state to state Corporate charter tells name, address and nature of business Identifies type and number of shares to issue

5. Characteristics of the Corporate Form Formation • Type and Number of Shares: • Voting Rights. For each share of stock owned, a stockholder gets one vote on major corporate issues. • Dividends. Dividends can be declared as a way of distributing corporate profits to the stockholders. • Residual Claims. If operations cease, stockholders are entitled to remaining assets after debts have been paid. • Preemptive Rights. Existing stockholders may be given the first chance to buy newly issued stock before it is offered to others.

6. Characteristics of the Corporate Form Formation Preferred Stock Preferred stock generally does not include voting rights. Dividends on preferred stock, if any, are paid at a fixed rate. Preferred stock carries priority over common stock in liquidation.

7. Characteristics of the Corporate Form Financing

8. Accounting for Stock Transactions All transactions between a corporation and its stockholders affect only balance sheet accounts.

9. Common and Preferred Stock Stock Authorization Before stock can be issued, its specific rights and characteristics must be authorized and defined in the corporate charter. One important characteristic is the stock’s par value. Many states require corporations to specify a par value for their stock. Typically, they set par value at a minimal amount, such as $0.01 per share. Other states have dropped the requirement and allow corporations to issue no-par value stock.

10. Common and Preferred Stock Stock Sold Between Investors When a company issues stock to an investor, the transaction is between the issuing corporation and the investor. After the initial sale, investors can sell shares to other investors without directly affecting the corporation. Stock Used to Compensate Employees Stock options allow employees to buy company stock at a pre-determined price during a specified period. The idea is that if employees work hard to meet the company’s goals, the stock price is likely to increase. If it increases before the options expire, employees can exercise their right to buy stock at the lower price and then sell it at the higher market price for an immediate profit.

11. Treasury Stock Although corporations are never obligated to buy back their own stock, some companies find it desirable to do so. A corporation may repurchase its own stock: To signal to investors that the company believes its stock is worthpurchasing, To obtain shares that can be reissued as payment for purchases of other companies, or To obtain shares to reissue to employees, as part of stock option plans. When a corporation buys its own stock back from stockholders, the stock is called treasury stock. While these shares are held in the treasury, they do not offer voting, dividend, or other stockholder rights.

12. Financial Statement Reporting Authorized245,000,000 shares Issued115,183,800 shares Treasury Stock47,171,602 shares Outstanding68,012,198 shares

13. Accounting for Dividends and Splits Dividend Dates Sonic Corporation announced on May 20, 2008, that the Company’s Board of Directors declared a cash dividend of $0.02 per common share, payable on or about July 1, 2008, to stockholders of record as of June 14, 2008. May 20 June 14 July 1 DividendDeclared Date ofRecord Date ofPayment Balance sheet effects: Increase current liabilities Decrease retained earnings No effect Balance sheet effects: Decrease current liabilities Decrease current assets (cash)

14. Stock Dividends A stock dividend occurs when a company distributes shares of its own stock, rather than cash, to stockholders on a pro rata basis, at no cost to the stockholder. Proper accounting for a stock dividend depends upon the size of the dividend. A small stock dividend exists when the total shares distributed is less than 20% to 25% of the currently outstanding shares. A large stock dividend exists when the total shares distributed is more than 20% to 25% of the currently outstanding shares. A small stock dividend is recorded at the market value of the shares issued. A large stock dividend is recorded at the par value of the stock issued.

15. End of Chapter 13 © 2009 The McGraw-Hill Companies, Inc.