BA 257 Chapter 11 class notes Kimmel

Accounting: Tools for Business Decision Making

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1 Chapter 11 Reporting and Analyzing Stockholder’s Equity Corporate form of business organization Organizing a Corporation Corporate charter obtained from state Organizational costs include legal fees, promoter’s fees, and amounts paid to obtain a charter Organization costs – expense in year incurred. Management of a Corporation See Illustration 11.1 pg. 536 Corporations are owned by stockholders (shareholders) Stockholders have ultimate control through vote to elect board of directors. Board of directors has final managing authority, but it usually limits its actions to establishing broad policy. Day-to-day direction of corporate business is delegated to executive officers appointed by the board. Characteristics of corporations: 1. Advantages: Continuous life Ease of transferring ownership No mutual agency of stockholders Separate legal entity *Limited liability to stockholders* Ability to raise capital 2. Disadvantages: Separation of ownership Double taxation (regular corp.) More government regulation BE11-1, pg. 566 Capitalizing corporations: Corporations are capitalized with debt and equity Accounting Equation: Assets = Liabilities + Stockholders’ Equity Ch. 10 Ch. 11 Note: Owner’s Equity for a Corporation is called “stockholders’ equity” or “shareholders’ equity” Stockholders’ Equity Two main components 1. Paid-in Capital (a.k.a Contributed Capital .) Amount the owners have paid for the stock of the corporation. Note: 1 share of stock = 1 unit of ownership
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2 2. Retained Earnings Cumulative: Net Income minus Net Losses minus Dividends since the corporation began its existence. Note: R/E does not come from stockholders, and Paid-in Capital is not affected by net income or net losses. Retained earnings is increased by Net Income, decreased by Net Losses and Dividends Closing entry to close income summary (after you close all revenue and expense accts. through the income summary account): Example: Entry to close income summary account if net income is $120,000: Dr Cr Stock Terminology: Authorized shares – maximum shares the corp. can issue (per charter)
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BA 257 Chapter 11 class notes Kimmel - 1 Chapter 11...

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