Presentation on theme: "PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright."— Presentation transcript:
11-2 Understanding The Business Simple to become an owner Easy to transfer ownership Provides limited liability Advantages of a corporation Because a corporation is a separate legal entity, it can... Own assets. Sue and be sued. Incur liabilities. Enter into contracts.
11-3 Elected by shareholders Appointed by directors Ownership of a Corporation
11-4 Common Stock Transactions Two primary sources of stockholders equity Retained earnings Contributed capital Common stock, par value Capital in excess of par value
11-5 Initial Sale of Stock Initial public offering (IPO) Seasoned new issue The first time a corporation sells stock to the public. Subsequent sales of new stock to the public. Kroger issues new stock. Kroger
11-6 Stock Issued for Employee Compensation Employee If Kroger does not have new stock to issue when the stock options are exercised, then.. Kroger Stock options allow employees to purchase stock from the corporation at a predetermined, fixed price. Employee compensation package includes salary and stock options.
11-7 Repurchase of Stock Kroger buys its own stock in the secondary market. (Treasury stock) Stockholders Kroger Repurchased stock is called treasury stock. A corporation records treasury stock at cost. Treasury stock has no voting or dividend rights. Treasury stock is not an asset. It is a contra equity account.
11-8 Dividends on Common Stock Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash. Declaration date Board of directors declares the dividend. Record a liability.
11-9 Date of Record Stockholders holding shares on this date will receive the dividend. (No entry) Dividend Dates Date of Payment Record the dividend payment to stockholders.
11-10 Stock Dividends Distribution of additional shares of stock to owners. No change in total stockholders equity. All stockholders retain same percentage ownership. No change in par values. Stock dividend < 20-25% Record at current market value of stock. Small Stock dividend > 20-25% Record at par value of stock. Large
11-11 Stock splits change the par value per share, but the total par value is unchanged. Stock Splits Assume that a corporation had 3,000 shares of $2 par value common stock outstanding before a 2–for–1 stock split. Increase Decrease No Change
11-12 Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate
11-13 Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock. Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid. Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock. Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid. Dividends on Preferred Stock If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently.
11-14 A sole proprietorship is owned by a one person. Two equity accounts CapitalDrawings Chapter Supplement Accounting for Owners Equity for Sole Proprietorships and Partnerships
11-15 Partnerships A partnership is owned by two or more individuals. Partnerships require clear agreements about authority, risks, and the sharing of profits and losses. A partnership is owned by two or more individuals. Partnerships require clear agreements about authority, risks, and the sharing of profits and losses. Separate capital and drawings accounts are maintained for each partner. Partnership income is divided among the partners according to the partnership agreement. Advantages Complete control by partners No income taxes on business Primary disadvantage Unlimited liability Ease of formation
11-16 Accounting and Reporting for Three Types of Businesses