Stockholders’ Equity: Paid-In Capital Chapter 11 Chapter 11: Stockholders’ Equity: Paid-In Capital

Corporations Ownership can be An entity created by law. Existence is separate from owners. Ownership can be Privately, or Closely Held Corporations are entities created by law that exist separately from their owners and have rights and privileges. Ownership in a corporation can be publicly or privately held. Owners of a corporation are called stockholders. The assets of a corporation belong to the corporation itself, not to the stockholders. The corporation is responsible for its own debts and must pay income taxes on its earnings. Has rights and privileges. Publicly Held

Advantages of Incorporation Limited personal liability for stockholders Transferability of ownership Professional management The corporate form of organization has several advantages. Corporations are separate legal entities that can enter into contracts, sue, and be sued. Stockholders’ losses are limited to the amount invested in the corporation. Ownership rights are transferable. Most corporations have a professional management team that runs the business on a day-to-day basis. The corporation continues to exist even when ownership changes. Continuity of existence

Disadvantages of Incorporation Heavy taxation Greater regulation Cost of formation There are also several disadvantages of incorporation. There are extra governmental regulations imposed on corporations and corporate taxation of earnings. Corporations pay taxes on their earnings and if they distribute a dividend to stockholders, the stockholders pay taxes on the dividends received. This is sometimes referred to as double taxation. It’s also costly to form a corporation. And, the separation of stockholder owners from management can create problems as well if management does not act in the best interest of the owners, but rather in the best interest of the management team. Separation of ownership and management

Formation of a Corporation The costs associated with incorporation are usually expensed immediately, but amortized over 5 years for tax purposes. Each corporation is formed according to the laws of the state where it is located. The application for corporate status is called the Articles of Incorporation. Part I The requirements for forming a corporation are determined by the laws of the state where the corporation is incorporated. The Articles of Incorporation is the application for corporate status. Part II The costs incurred to incorporate a business are expensed immediately for financial reporting purposes. However, these costs are amortized over 5 years for tax purposes.

Rights of Stockholders Voting (in person or by proxy). Proportionate distribution of dividends. Proportionate distribution of assets in a liquidation. Rights Stockholders have several rights. They have a right to vote at stockholders’ meetings; they can sell and buy shares of stock; they receive dividends declared by the Board of Directors; and in the event of liquidation, they share equally in any remaining assets after creditors are paid. Stockholders

Rights of Stockholders Stockholders usually meet once a year. Ultimate control At their annual meeting, stockholders elect the Board of Directors and vote on important management issues facing the company. The primary functions of the board of directors are to set corporate policies and to protect the interests of the stockholders.

Functions of the Board of Directors Primary functions are to set corporate policies ad protect stockholders. The primary functions of the board of directors are to set corporate policies and to protect the interests of the stockholders. Specific duties of the directors include hiring corporate officers and setting those officers’ salaries, declaring dividends, and reviewing the findings of both internal auditors and independent auditors.

Functions of the Corporate Officers Contractual and legal representation Chief Accountant Custodian of funds The executive management team manages the day-to-day decisions for the corporation.

Publicly Owned Corporations Face Different Rules By law, publicly owned corporations must: Prepare financial statements in accordance with GAAP. Have their financial statement audited by an independent CPA. Comply with federal securities laws. Submit financial information for SEC review. By law, publicly owned corporations must prepare financial statements in accordance with GAAP, have their financial statements audited by an independent certified public accountant, comply with federal securities laws, and submit financial information to the Securities and Exchange Commission for review.

Stockholder Records in a Corporation Stockholder ledgers are often maintained by a stock transfer agent or stock registrar. Stockholders usually meet once a year. Each unit of ownership is called a share of stock. Stock certificates serve as proof that a stockholder has purchased shares. To keep track of the actual owners of a corporation, a stockholder ledger is often maintained by a stock transfer agent or stock registrar. This ledger keeps track of contact information of current stockholders who own the corporation. Each unit of ownership is called a share of stock. Stock certificates serve as proof that a stockholder has purchased shares. When stock is sold, the seller signs a transfer endorsement on the back of the stock certificate. When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.

Stockholders’ Equity of a Corporation Stockholders’ equity can be increased in two ways. First, equity is increased by issuing stock to investors. This is an increase in Paid-in Capital. Second, equity is increased by the retention of profits earned by the corporation. This is an increase in Retained Earnings.

Authorization and Issuance of Capital Stock Authorized Shares Outstanding shares are issued shares that are owned by stockholders. Outstanding Shares Unissued Shares Issued Shares Part I Issued shares can be classified as outstanding shares and treasury shares. Outstanding shares are shares that are currently owned by stockholders. Part II Treasury shares are shares that once were owned by stockholders but were repurchased by the corporation in the stock market. Thus, the corporation is now the owner of those shares. Treasury shares are issued shares that have been reacquired by the corporation. Treasury Shares

Stockholders’ Equity Common stock can be issued in three forms: Par Value Common Stock No-Par Common Stock Stated Value Common Stock Part I Stock can have a par value, not have a par value, or have a stated value. Part II Let’s look at how to account for par value stock. Accounting entries for stated value stock are very similar to accounting for par value stock. When a company has no-par stock, all the proceeds are credited to the Common Stock account. Let’s examine this form of stock. All proceeds credited to Common Stock Treated like par value common stock

Preferred Stock A separate class of stock, typically having priority over common shares in . . . Dividend distributions (rate is usually stated). Distribution of assets in case of liquidation. Other Features Include: Preferred stock is a separate class of stock that typically has priority over common stock in dividend distributions and distribution of assets in a liquidation. Preferred stock usually has a stated dividend that is expressed as a percentage of its par value. It normally does not have voting rights and is often callable by the corporation at a stated value. Let’s take a closer look at the cumulative dividend rights of preferred stock on the next screen. Cumulative dividend rights. Usually callable by the company. Normally has no voting rights.

End of Chapter 11 End of chapter 11.