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CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS

CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS. Identify the major characteristics of a corporation. Differentiate between paid-in capital and retained earnings. Record the issuance of common stock. Explain the accounting for treasury stock.

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CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS

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  1. CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS

  2. Identify the major characteristics of a corporation. Differentiate between paid-in capital and retained earnings. Record the issuance of common stock. Explain the accounting for treasury stock. Differentiate preferred stock from common stock. Prepare a stockholders’ equity section. Compute book value per share. Study Objectives

  3. Corporations: Organization and Capital Stock Transactions The Corporate Form of Organization Accounting for Common Stock Issues Accounting for Treasury Stock Preferred Stock Statement Presentation and Analysis Characteristics Formation Stockholder rights Stock issue considerations Corporate capital Issuing par value stock Issuing no-par stock Issuing stock for services or noncash assets Purchase of treasury stock Disposal of treasury stock Dividend preferences Liquidation preference Presentation Analysis—Book value per share

  4. The Corporate Form of Organization An entity separate and distinct from its owners. • Classified by Ownership • Publicly held • Privately held • Classified by Purpose • Not-for-Profit • For Profit • Salvation Army • American Cancer Society • McDonald’s • Ford Motor Company • PepsiCo • Google • Cargill Inc.

  5. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Advantages Disadvantages LO 1 Identify the major characteristics of a corporation.

  6. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Corporation acts under its own name rather than in the name of its stockholders. • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management LO 1 Identify the major characteristics of a corporation.

  7. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Limited to their investment. LO 1 Identify the major characteristics of a corporation.

  8. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Shareholders may sell their stock. LO 1 Identify the major characteristics of a corporation.

  9. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Corporation can obtain capital through the issuance of stock. LO 1 Identify the major characteristics of a corporation.

  10. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer. LO 1 Identify the major characteristics of a corporation.

  11. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management LO 1 Identify the major characteristics of a corporation.

  12. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends. LO 1 Identify the major characteristics of a corporation.

  13. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Separation of ownership and management prevents owners from having an active role in managing the company. LO 1 Identify the major characteristics of a corporation.

  14. Characteristics of a Corporation Stockholders Illustration 13-1 Corporation organization chart Chairman and Board of Directors President and Chief Executive Officer General Counsel and Secretary Vice President Marketing Vice President Finance/Chief Financial Officer Vice President Operations Vice President Human Resources Treasurer Controller Look page 558

  15. Forming a Corporation Initial Steps: • File application with the Secretary of State. • State grants charter. • Corporation develops by-laws. Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey). Corporations expense organization costs as incurred. Look page 560

  16. Ownership Rights of Stockholders Illustration 13-3 Stockholders have the right to: 1. Vote in election of board of directors and on actions that require stockholder approval. 2. Share the corporate earnings through receipt of dividends. LO 1 Identify the major characteristics of a corporation.

  17. Ownership Rights of Stockholders Illustration 13-3 Stockholders have the right to: 3. Keep the same percentage ownership when new shares of stock are issued (preemptive right*). * A number of companies have eliminated the preemptive right. LO 1 Identify the major characteristics of a corporation.

  18. Ownership Rights of Stockholders Illustration 13-3 Stockholders have the right to: 4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim. LO 1 Identify the major characteristics of a corporation.

  19. Ownership Rights of Stockholders Prenumbered Illustration 13-4 Class Class A COMMON STOCK Class A COMMON STOCK PAR VALUE $1 PER SHARE PAR VALUE $1 PER SHARE Name of corporation Stockholder’s name Shares Stock Certificate Signature of corporate official LO 1 Identify the major characteristics of a corporation.

  20. Stock Issue Considerations A-Authorized Stock • Charter indicates the amount of stock that a corporation is authorized to sell. • Number of authorized shares is often reported in the stockholders’ equity section. LO 1 Identify the major characteristics of a corporation.

  21. Stock Issue Considerations B-Issuance of Stock • Corporation can issue common stock directly to investors or indirectly through an investment banking firm. • Factors in setting price for a new issue of stock: • the company’s anticipated future earnings • its expected dividend rate per share • its current financial position • the current state of the economy • the current state of the securities market LO 1 Identify the major characteristics of a corporation.

  22. Stock Issue Considerations C-Market Value of Stock • Stock of publicly held companies is traded on organized exchanges. • Interaction between buyers and sellers determines the prices per share. • Prices set by the marketplace tend to follow the trend of a company’s earnings and dividends. • Factors beyond a company’s control, may cause day-to-day fluctuations in market prices (look page 563). LO 1 Identify the major characteristics of a corporation.

  23. Stock Issue Considerations D-Par and No-Par Value Stock • Years ago, par value determined the legal capitalper share that a company must retain in the business for the protection of corporate creditors. • Today many states do not require a par value. • No-par value stock is quite common today. • In many states the board of directors assigns a stated valueto no-par shares. LO 1 Identify the major characteristics of a corporation.

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