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Unformatted text preview: Chapter 11 Reporting and Interpreting Owners’ Equity ANSWERS TO QUESTIONS 1. A corporation is a separate legal entity (authorized by law to operate as an individual). It is owned by a number of persons and/or entities whose ownership is evidenced by shares of capital stock. Its primary advantages are: (a) transferability of ownership, (b) limited liability to the owners, and (c) the ability to accumulate large amounts of resources. 3. (a) Authorized capital stock—the maximum number of shares of stock that can be sold and issued as specified in the charter of the corporation. (b) Issued capital stock—the total number of shares of capital stock that have been issued by the corporation at a particular date. (c) Outstanding capital stock—the number of shares currently owned by the stockholders. 4. Common stock—the usual or normal stock of the corporation. It is the voting stock and generally ranks after the preferred stock for dividends and assets distributed upon dissolution. Often it is called the residual equity. Common stock may be either par value or no-par value. Preferred stock—when one or more additional classes of stock are issued, the additional classes are called preferred stock. Preferred stock has modifications that make it different from common stock. Generally, preferred stock has both favorable and unfavorable features in comparison with common stock. Preferred stock usually is par value stock and usually specifies a dividend rate such as “6% preferred stock.” 6. The usual characteristics of preferred stock are: (1) dividend preferences, (2) conversion privileges, (3) asset preferences, and (4) nonvoting specifications. 7. The two basic sources of stockholders’ equity are: Contributed capital—the amount invested by stockholders by purchase from the corporation of shares of stock. It is comprised of two separate elements: (1) the par or stated amount derived from the sale of capital stock (common or preferred) and (2) the amount received in excess of par or stated value. Retained earnings—the accumulated amount of all net income since the organization of the corporation, less losses and less the accumulated amount of dividends paid by the corporation since organization. 9. Treasury stock is a corporation’s own capital stock that was sold (issued) and subsequently reacquired by the corporation. Corporations frequently purchase shares of their own capital stock for sound business reasons, such as to obtain shares needed for employees’ bonus plans, to influence the market price of the stock, to increase earnings per share amounts, and to have shares on hand for use in the acquisition of other companies. Treasury stock, while held by the issuing corporation, confers no voting, dividend, or other stockholder rights....
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- Spring '06
- Corporate Finance, Dividend