review11 - CHAPTER 11 Contributed Capital 0REVIEWING THE...

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CHAPTER 11 Contributed Capital 0REVIEWING THE CHAPTER Objective 1: Identify and explain the management issues related to contributed capital. 10. A corporation is a business unit chartered by the state and legally separate from its owners —the stockholders. The management of contributed capital (stockholders’ investments) is critical to the financing of a corporation. Specifically, management must fully understand (a) the advantages and disadvantages of incorporation, (b) the issues involved in equity financing, (c) the business’s dividend policies, (d) the use of return on equity to evaluate performance, and (d) the company’s stock option plans. These topics will be addressed in the paragraphs to follow. 20. To form a corporation, most states require persons (called incorporators ) to sign an application and file it with the proper state official. This application contains the articles of incorporation. These articles become a contract between the state and the incorporators. The company is then authorized to do business as a corporation. Because of the ease with which a corporation can raise large amounts of capital, it is the dominant form of business in the United States. The corporation has several advantages over the sole proprietorship and partnership. In addition to its ability to raise large amounts of capital, it is a separate legal entity, offers its owners limited liability, lacks the mutual agency that characterizes a partnership, has a continuous existence, and allows for centralized authority and responsibility, as well as for professional management. It is also easy to transfer ownership in a corporation. However, a corporation has several disadvantages when compared with a sole proprietorship or partnership. It is subject to greater government regulation and to double taxation (i.e., the corporation’s income is subject to income taxes, and its stockholders are taxed on any dividends), and the owners’ limited liability can limit the amount a small corporation can borrow. Moreover, separation of ownership and control may allow management to make harmful decisions. 30. A unit of ownership in a corporation is called a share of stock. Ownership in a corporation is evidenced by a document called a stock certificate, which shows the number of shares the stockholder owns. A stockholder sells stock by endorsing the stock certificate and sending it to the corporation’s secretary. The secretary—or in many instances, an independent registrar or transfer agent—is responsible not only for transferring the stock, but also for maintaining stockholders’ records, preparing a list of stockholders for stockholders’ meetings, and paying dividends. Par value is an arbitrary amount assigned to each share of stock, and it constitutes a corporation’s legal capital. Legal capital equals the number of shares issued times the par value; it is the minimum amount that can be reported as contributed capital. Par value bears little if any relationship to the market value or book
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This note was uploaded on 06/10/2009 for the course ACG 2021 taught by Professor Magoulis,b during the Spring '08 term at Pasco-Hernando Community College.

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review11 - CHAPTER 11 Contributed Capital 0REVIEWING THE...

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