accounting ch 11 NOTES

Corporations

Learning Objectives:

  • Discuss characteristics of corporations.

  • Explain accounting for stock transactions.

  • Account for cash and stock dividends.

  • Analyze stockholders’ equity reporting.

Characteristics of Corporations

Definition: A corporation is a separate legal entity from its owners, offering limited liability.

Classifications:

  • By Purpose: Not-for-Profit vs. For Profit

  • By Ownership: Publicly Held (e.g., McDonald’s) vs. Privately Held (e.g., Salvation Army).

Advantages and Disadvantages of Corporations

Advantages:

  • Separate Legal Existence: Protects owners from personal liability.

  • Limited Liability: Risks are confined to investment.

  • Transferable Ownership: Easy to sell shares.

  • Capital Acquisition: Can raise funds through stock.

  • Continuous Life: Business persists despite ownership changes.

  • Corporate Management: Professional management can be hired.

Disadvantages:

  • Government Regulations: Subject to strict laws.

  • Additional Taxes: Corporate profits may be taxed twice.

Corporate Structure

Organization Chart:

  1. Stockholders

  2. Board of Directors

  3. CEO

  4. Vice Presidents of key functions (Marketing, Finance, etc.).

Initial Steps to Form a Corporation

  1. File application with the Secretary of State.

  2. Obtain a charter from the state.

  3. Develop by-laws for governance.

  4. Incorporation Locations: Favorable states like Delaware.

Stockholder Rights

  • Voting Rights in elections.

  • Dividends as declared.

  • Preemptive Rights for new stock issuances.

  • Residual Claims on assets during liquidation.

Stock Issuance Considerations

  • Share Authorization: Determine how many shares to allow.

  • Issuance Method: Direct or through investment banks.

  • Stock Value Assignment: Based on market factors.

Authorized Stock

Definition: Max shares the corporation can issue as stated in its charter.

Stock Issuance Process

  • Documentation is required, including signatures on stock certificates.

Common Stock Issuance

  • Stock can be issued directly or via investment banks, with prices influenced by company prospects.

Market Price of Stock

  • Prices reflect supply and demand and are influenced by company performance and economic conditions.