FY

Ch 11 Powerpoint Notes

Chapter 11: Reporting and Analyzing Stockholders’ Equity

Learning Objectives

  • LO 1: Discuss characteristics of a corporation.

  • LO 2: Explain accounting for stock issuance and dividends.

  • LO 3: Explain accounting for cash dividends, stock dividends, and stock splits.

  • LO 4: Discuss how stockholders’ equity is reported and analyzed.

Corporate Characteristics (LO 1)

Corporate Form of Organization

  • Separate Entity: A corporation is legally distinct from its owners.

  • Created by Law: Existence is subject to state statutes.

  • Rights and Responsibilities: Has rights like a person and responsibilities, including tax obligations.

Classifications of Corporations

  • By Purpose:

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

    • For Profit (e.g., McDonald’s, Google)

  • By Ownership:

    • Publicly Held (e.g., IBM)

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

Key Differences from Other Organizations

  • Separate legal existence

  • Limited liability for stockholders

  • Ownership is transferable

  • Capital acquisition is easier

  • Corporations endure indefinitely

  • Management actions are scrutinized by a board of directors.

  • Subject to government regulations and additional taxes.

Unique Corporation Characteristics

  • Separate Legal Existence: Corporations operate under their own name, own property, borrow, and can sue.

  • Limited Liability: Stockholders' liability is confined to their investment; personal assets are protected.

  • Transferable Ownership Rights: Shares can easily be sold without affecting corporate operations.

  • Ability to Acquire Capital: Stock issuance makes capital acquisition more accessible.

  • Continuous Life: Independent of stockholders' life events.

  • Management Structure: Stockholders elect a board of directors to manage operations.

  • Government Regulations: Adheres to state and federal laws governing stock and financial reporting.

  • Taxation: Subject to double taxation at both corporate and personal levels on dividends.

Advantages and Disadvantages of Corporations

Advantages

  • Separate legal existence

  • Limited liability

  • Transferable ownership

  • Capability to raise capital

  • Perpetual existence

  • Professional management

Disadvantages

  • Management and ownership separation

  • Increased regulations

  • Double taxation

Other Business Forms

  • Hybrid Forms: Include S corporations and limited liability companies (LLCs) which combine features of partnerships and corporations.

Knowledge Check on Corporations

Statements about corporations' structural and ownership features assessed for correctness (mostly true/false).

Formation of a Corporation

  • Requires a corporate charter, detailing important corporate information and bylaws.

Organization Costs

  • Initial costs include legal fees and are expensed immediately to avoid overestimations of future benefits.

Stockholder Rights

  • Voting Rights: Elect board members and approve corporate actions.

  • Earnings Sharing: Rights to dividends.

  • Preemptive Rights: Maintain ownership percentage in additional stock issuances.

  • Asset Sharing: Rights to corporate assets upon liquidation provided distributions are made after all claims are satisfied.

Stock Certificates

  • Serve as proof of ownership, detailing company, stockholder name, number of shares, and signatures of officials.

Corporate Social Responsibility (CSR)

  • Growing investor interest in CSR as it relates to long-term shareholder value.

Stock Issuance Considerations (LO 2)

  • Decisions on authorized shares, method of issuance, and valuation consider future earnings, market position, etc.

Authorized Stock

  • The charter specifies maximum share issuance and requires state consent for additional shares if fully issued.

Common Stock Accounting

  • Common stock may be issued for cash, services, or noncash assets, valued at market price.

  • Journal Entries: Different categories for stock issued at, above, or below par, with corresponding impacts on equity accounts.

Preferred Stock Accounting

  • Carries preferential treatment for dividends and assets in liquidation. Issuance follows similar procedures as common stock.

Treasury Stock Accounting

  • Treasury stock is repurchased shares retained by the corporation, diminishing stockholder equity but not changing the number of issued shares.

Cash Dividends Accounting (LO 3)

  • Regular distributions of cash to stockholders following a structured declaration and payment process.

Types of Dividends

  • Cash Dividends: Declared based on retained earnings and require adequate cash.

  • Stock Dividends: Redistributes corporation’s equity without cash outflow.

  • Stock Splits: Increase share quantity while lowering par value, aimed to enhance marketability.

Stockholder's Equity Reporting (LO 4)

  • Balance Sheet Items: Typically reported include paid-in capital, retained earnings, treasury stock, and comprehensive income.

  • Comprehensive Income: Reflects all unrealized gains/losses not included in net income affecting stockholders’ equity.

  • Dividend Payout Ratio and ROE: Key metrics for assessing performance and distribution strategies.

Conclusion

  • Corporations operate under a complex structure with various implications on ownership, liability, and financial reporting. Mastery of these concepts is crucial for effective financial decision-making in the corporate environment.