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.