ch11 - CHAPTER 11 Reporting and Analyzing Stockholders...

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CHAPTER 11 Reporting and Analyzing Stockholders’ Equity Study Objectives 1. Identify and discuss the major characteristics of a corporation. 2. Record the issuance of common stock. 3. Explain the accounting for the purchase of treasury stock. 4. Differentiate preferred stock from common stock. 5. Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits. 6. Identify the items that affect retained earnings. 7. Prepare a comprehensive stockholders' equity section. 8. Evaluate a corporation's dividend and earnings performance from a stockholder's perspective. 9. (Appendix) Prepare entries for stock dividends. Study Objective 1 - Identify and Discuss the Major Characteristics of a Corporation A corporation is: A legal entity. Created by law. Enjoys most of the rights and privileges of a person. May be classified by purpose and by ownership . A corporation may be organized for the purpose of making a profit (such as Nike or General Motors) or it may be a nonprofit charitable, medical, or educational corporation (such as the Salvation Army or the American Cancer Society). 11-1
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Classification by ownership differentiates publicly held or privately held corporations. A publicly held corporation is regularly traded on a national securities market and may have thousands of stockholders . A privately held corporation , often referred to as a closely held corporation, does not offer its stock for sale to the general public and may have only a few stockholders. Several characteristics distinguish corporations from proprietorships and partnerships. Separate legal existence: An entity separate and distinct from owners. Acts under its own name rather than name of stockholders. May buy, own, and sell property; borrow money; and enter into legally binding contracts; may sue or be sued; and pays its own taxes. The acts of owners (stockholders) cannot bind the corporation unless owners are agents of the corporation . Limited liability of stockholders: Creditors ordinarily have recourse only to corporate assets to satisfy their claims. Liability of stockholders is normally limited to investment in corporation. Creditors have no legal claim on personal assets of owners unless fraud has occurred. In the event of bankruptcy of the corporation, stockholders’ losses are generally limited to the amount of capital they have invested in the corporation. Transferable ownership rights: Ownership is evidenced by shares of capital stock, which are transferable units. The transfer of stock is at the discretion of the stockholder; it does not require the approval of either the corporation or other stockholders. Transfer of ownership rights among stockholders has no effect on operating activities of the corporation; nor does if affect the corporation's assets, liabilities and total stockholders' equity.
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