Corporations: Organization, Stock Transactions, and Stockholders’ Equity

Flashcards covering key vocabulary and concepts related to corporations, stock transactions, and stockholders’ equity.

Corporation

An entity separate and distinct from its owners.

Separate Legal Existence

Corporation acts under its own name rather than in the name of its stockholders.

Limited Liability of Stockholders

Limited to their investment.

Transferable Ownership Rights

Shareholders may sell their stock.

Ability to Acquire Capital

Corporation can obtain capital through the issuance of stock.

Continuous Life

Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer.

Corporation Management

Managers who are not owners are often compensated based on the performance of the firm. Separation of ownership and management often reduces an owner’s ability to actively manage the company.

Additional Taxes

Corporations must pay income taxes as a separate legal entity and in addition, stockholders must pay taxes on cash dividends.

Forming a Corporation

Companies generally incorporate in a state whose laws are favorable to the corporate form of business.

Stockholder Rights

Vote in election of board of directors at annual meeting and vote on actions that require stockholder approval and Share the corporate earnings through receipt of dividends.

Preemptive Right

Keep the same percentage ownership when new shares of stock are issued.

Residual Claim on Assets

Share in assets upon liquidation in proportion to their holdings. This is called a residual claim because owners are paid with assets that remain after all other claims have been paid.

Authorized Stock

Charter indicates the maximum number of shares that a corporation is authorized to sell.

Issuance of Stock

Companies issue common stock directly to investors or indirectly through an investment banking firm.

Par Value Stock

Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors.

Paid-in capital

Total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.

Retained earnings

Net income that a corporation retains for future use.

Accounting for Common Stock

Primary Objectives: Identify the specific sources of paid-in capital and Maintain the distinction between paid-in capital and retained earnings.

Issuing Common Stock for Services or Noncash Assets

Corporations also may issue stock for: Services (attorneys or consultants) and Noncash assets (land, buildings, and equipment).

Accounting for Preferred Stock

Typically, preferred stockholders have a priority as to: Distributions of earnings (dividends) and Assets in event of liquidation.

Treasury stock

A corporation’s own stock that it has reacquired from shareholders but not retired.

Dividends

Distribution of cash or stock to stockholders on a pro rata (proportional to ownership) basis.

Cash Dividends

For a corporation to pay a cash dividend, it must have: Retained earnings, Adequate cash and Declared dividends by the Board of Directors.

Cumulative Dividend on Preferred Stock

Right to receive dividends before common stockholders. Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a specified amount.

Stock Dividends

A pro rata (proportional to ownership) distribution of the corporation’s own stock to stockholders.

Stock Splits

Issuance of additional shares to stockholders according to their percentage ownership. Reduction in the par or stated value per share and Increase in number of shares outstanding.

Retained earnings

Part of the stockholders’ claim on the total assets of the corporation. Debit balance in Retained Earnings is identified as a deficit.