Presentation on theme: "Corporation Created by law Legal entity"— Presentation transcript:
1Corporation Created by law Legal entity Has most of the rights and privileges of a personClassified by purpose and ownershipPurpose - profit or nonprofitOwnership - publicly or privately held
2Publicly Held Corporation... May have thousands of stockholders.Its stock is regularly traded on national securities markets.Privately Held Corporation...Usually has only a few stockholders and does not offer its stock for sale to general public.
3Characteristics of a Corporation 111Characteristics of a CorporationSeparate legal existenceLimited liability of stockholdersTransferable ownership rightsAbility to acquire capitalContinuous lifeCorporation managementGovernment regulationsAdditional taxes
4Separate Legal Existence Separate and distinct from its owners.Acts under its own name.May buy, own, sell property; borrow money; enter into legally binding contracts; may sue or be sued; pays its own taxes.Owners (stockholders) cannot bind corporation unless owners are agents of the corporation.
5Limited Liability of Stockholders Creditors have recourse only to corporate assets to satisfy their claims.Liability of stockholders limited to their investment in their corporation.Creditors have no legal claim on personal assets of stockholders unless fraud has occurred.Stockholders’ losses limited to amount of capital invested.
6Transferable Ownership Rights Ownership evidenced by shares of stockTransfer of ownership among stockholders has no effect on corporation’s operating activities or assets, liabilities and total stockholders' equity.Corporation does not participate in transfer ofownership rights after original sale.
7Ability to Acquire Capital Limited liability of stockholders coupled with transferable ownership rights make it easy to raise capital.
8Continuous LifeLife of corporation is stated in its charter - may be perpetual or limited to specific number of years (can be extended).Corporation is separate legal entity, thus life not affected by withdrawal, death, or incapacity of a stockholder.
9Corporation Management The corporation establishes by-laws upon receipt of its charter from the state of incorporation.Stockholders manage corporation indirectly through board of directors.Board of directorsformulates operating policiesselects officers to execute policy and to perform daily management functions.
13Forming a CorporationA corporation can operate in various states (must have a license from each state in which it does business) but can be incorporated in only one state.
14Stockholder Rights Once chartered, the corporation sells stock . If only one class of stock - called common stock.Ownership rights specified in the articles of incorporation or by-laws.Proof of stock ownership is a printed or engraved form known as a stock certificate.
16Stockholders’ Equity Section of a Corporation’s Balance Sheet Two Parts:Paid-in (contributed) capital - Amount paid to corporation by stockholders in exchange for shares of ownership.Retained earnings (earned capital) - Earned capital held for future use in the business.
17Balance Sheet (partial) Hydro-Slide, Inc.Balance Sheet (partial)Stockholders' equityPaid-in capitalCommon stock $ 2,000Paid-in capital in excess of par ,000Total paid-in capital $ 6,000Retained earnings ,000Total stockholders' equity $33,000
19Treasury Stock... 3 Is a corporation's own stock that has been issued 113Is a corporation's own stockthat has been issuedfully paid forreacquired by the corporationheld in its treasury for future use.
20Corporations Acquire Treasury Stock to... Reissue shares to officers and employees under bonus and stock compensation plans.Increase trading of company's stock in securities market in hopes of enhancing market value.Have additional shares available for use in acquisition of other companies.Reduce number of shares outstanding thereby increasing earnings per share.Prevent a hostile takeover.
21Purchase of Treasury Stock On February 1, 2007, Mead acquires ,000 shares of its stock at $8 per share.Treasury Stock 32,000Cash ,000
22Treasury StockThe Treasury Stock account would increase by the cost of the shares purchased - $32,000.The original paid-in capital account, Common Stock, would not be affected because the number of issued shares does not change.Treasury stock is deducted from total paid-in capital and retained earnings in the stockholders' equity section of the balance sheet.
24114Preferred Stock...Capital stock that has contractual preferences over common stock in certain areas.DividendsAssets in the event of liquidationPreferred stockholders do not have voting rights.
25Preferred StockAssume Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share.Cash ,000Preferred Stock ,000Paid-in Capital in Excess ,000of Par Value--Preferred Stock(Preferred stock may have either a par value or no-par value.)
26Dividend PreferencesPreferred stockholders have the right to share in the distribution of corporate income before common stockholders.The first claim to dividends does not guarantee dividends.
27Cumulative Dividend...Is a feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends.
28Dividends in Arrears...Are preferred dividends that were scheduled to be declared but were not declared during a given period.Are not a liability. No obligation exists until a dividend is declared by the board of directors.Must be disclosed in the notes to the financial statements.
29Liquidation Preference Is a feature that gives preferred stockholders preference to corporate assets in the event of liquidation.
30Retained Earnings... 6 Is net income that is retained in the business. 116Retained Earnings...Is net income that is retained in the business.The balance in retained earnings is part of the stockholders' claim on the total assets of the corporation.Retained earnings does not represent a claim on any specific asset.
31DeficitIs a debit balance in retained earnings and is reported as a deduction in the stockholders' equity section of the balance sheet.
32Retained Earnings Restrictions... Are legal, contractual or voluntary circumstances that make a portion of retained earnings currently unavailable for dividends.