Chapter_11_Lecture_Notes_1_

Chapter 11: Corporate Reporting and Analysis

Overview

  • Focus on the structure and reporting of corporations.

  • Importance of understanding different types of stocks, shareholder rights, and corporate governance.


Corporations

Definition

  • Corporation: A legal entity that is separate from its owners.

Advantages of Corporations (Page 423)

  • Separate Legal Entity: Corporations can own property, enter contracts, and sue or be sued independently of owners.

  • Limited Liability of Stockholders: Stockholders are not personally liable for corporate debts.

  • Transferable Ownership Rights: Shares of stock can be easily transferred.

  • Continuous Life: Corporations can continue to exist regardless of changes in ownership.

  • No Mutual Agency: Stockholders cannot bind the corporation without proper authority.

  • Ease of Capital Generation: Ability to attract investment through stock sales.

Disadvantages of Corporations (Page 423-424)

  • Government Regulation: Corporations face extensive regulations and scrutiny.

  • Double Taxation: Corporate earnings are taxed at the corporate level and again at the shareholder level when dividends are paid.

  • Charter Requirement: To create a corporation, a charter must be obtained from the state.

  • Governance: Stockholders elect a Board of Directors to oversee activities and management.

  • Control: To control a corporation, ownership of more than 50% of shares is necessary.


Stockholders Rights (Page 424)

  • Rights associated with Common Stock:

  • Vote: Stockholders can vote on corporate matters.

  • Sell Stock: Freedom to sell their shares at any time.

  • Preemptive Right: Right to purchase additional shares to maintain ownership percentage.

  • Receive Dividends: Entitled to any profits distributed as dividends.

  • Share Assets in Liquidation: Right to remaining assets after creditors and preferred stockholders are paid.


Definitions (Page 425)

Shares

  • Authorized Shares: The number of shares the charter allows the corporation to sell.

  • Issued Shares: The total number of shares that have been sold in the past.

  • Outstanding Shares: The number of shares that are still held by stockholders after sales and buybacks.

Market Value

  • Market Value: The price at which shares are bought and sold, fluctuating daily.

Classes of Stock

  • Types include Common, Common A, Common B, and Preferred Stock.


Stock Value and Equity (Page 425)

Par Value

  • Par Value: Minimum legal capital, usually a nominal amount assigned by the charter.

  • No Par Stock: No par is assigned, often prevailing in modern corporate structures.

  • Stated Value: A nominal value assigned to no-par stock.

Stockholders Equity

  • Components include:

  • Common Stock

  • Paid in Capital in Excess of Par

  • Retained Earnings


Dividends (Page 428)

Mechanics of Dividends

  • Date of Declaration: The date the board decides to pay a dividend (liability date).

  • Date of Record: Stockholders owning shares on this date receive the dividend.

  • Date of Payment: The date the cash dividend is distributed.


Preferred Stock (Page 432-433)

Characteristics of Preferred Stock

  • Special Rights: Preferred stockholders have priority in dividends and asset distribution during liquidation.

  • No Voting Rights: Typically do not have voting rights in corporate matters.

Types of Preferred Dividends

  • Cumulative: Accumulated unpaid dividends must be paid before common stock dividends.

  • Non-cumulative: Only current year dividends must be paid before common dividends; prior years' unpaid dividends are not owed.


Treasury Stock

Definition and Uses

  • Represents reacquired shares of the company's own stock. Reasons include:

  • Acquisition: Buying back shares potentially for future acquisitions.

  • Avoid Hostile Takeovers: Purchasing stock to prevent outside control.

  • Employee Compensation: Issuing shares as part of employee benefits.

  • Market Control: Maintaining a favorable share price in the market.


Prior Period Adjustments

Definition

  • Corrections of material errors in previously issued financial statements.

  • Reporting: Must be reported in the Retained Earnings section, affecting past financial statements.

  • Correction of Estimates: Distinction made that estimates do not qualify as prior period adjustments; only factual corrections are applicable.

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