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.