ACC 2010 - Chapter 11 Notes (slides)

Learning Objectives

  • LO 1: Major characteristics of a corporation.

  • LO 2: Accounting for stock issuance (common, preferred, treasury).

  • LO 3: Accounting for cash dividends, stock dividends, stock splits.

  • LO 4: Reporting and analyzing stockholders' equity.

Corporate Characteristics

  • Separate Entity: Distinct from owners; created by law.

  • Legal Rights: Rights of a person; can sue, own property, borrow money.

  • Limited Liability: Stockholders' liability limited to their investment.

  • Transferable Ownership: Ownership through transferable shares.

  • Capital Acquisition: Easy to obtain through stock issuance.

  • Continuous Life: Persists despite owner changes.

  • Management Structure: Run by a board of directors elected by stockholders.

Types of Corporations

  • Classified by Purpose:

    • Not-for-profit (e.g., Salvation Army).

    • For-profit (e.g., Apple, Nike).

  • Classified by Ownership:

    • Publicly held (e.g., IBM, Caterpillar).

    • Privately held (e.g., Cargill Inc.).

Stockholder Rights

  • Voting Rights: Participate in board elections and corporate actions.

  • Dividends: Share in corporate earnings through dividends.

  • Preemptive Rights: Maintain ownership percentage in new stock issues.

  • Residual Claim: Share in assets upon liquidation.

Accounting for Stock Issuance

  • Common Stock: Issued for services or assets; measured by market price.

  • Preferred Stock: Layered priority over common stock regarding dividends and assets.

  • Treasury Stock: Shares reacquired by the corporation; affects stockholders' equity.

Cash Dividends

  • Declaration: Board declares a liability.

  • Record Date: Determines eligible stockholders; no entry recorded.

  • Payment: Payment leads to reduction in assets and stockholders' equity.

Stock Dividends

  • Types: Small (10-25%) vs. Large (>25%); affect retained earnings and paid-in capital.

  • Effects: Increase total shares but not total equity.

Stock Splits

  • Purpose: Lower share price to increase marketability; no journal entry.

  • Number of shares increase, par value decreases, no effect on total equity.

Analyzing Stockholders' Equity

  • Components: Paid-in capital, retained earnings, accumulated other comprehensive income, treasury stock.

  • Ratios: Payout ratio indicates dividend proportion; return on equity (ROE) assesses profitability.

Knowledge Checks

  • Determines true/false statements on corporate characteristics, stock issuance, dividends, and more.