WRD_IMCh13_10_2010 - chapter 13 Corporations Organization...

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chapter 13 Corporations: Organization, Stock Transactions, and Dividends ______________________________________________ OPENING COMMENTS This chapter explains the characteristics of a corporation, also known as a “C” Corporation. It also introduces many of the terms related to stock: common, preferred, par value, stated value, no-par, cumulative, noncumulative, participating, and nonparticipating. Additional topics covered in Chapter 13 are treasury stock (cost method), stock splits, and dividends. Remember to download the Transparency Masters (TM) which I have posted on Modules as they complement the lecture listed below. After studying the chapter, your students should be able to: 1. Understand the nature of the corporate form of organization. 2. Understand the two main sources of stockholders’ equity. 3. Understand and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. 4. Understand and illustrate the accounting for cash dividends and stock dividends. 5. Understand and illustrate the accounting for treasury stock transactions. 6. Understand and illustrate the reporting of stockholders’ equity. 7. Understand the effect of stock splits on corporate financial statements. OBJECTIVE 1 Understand the nature of the corporate form of organization. KEY TERMS Stock Stockholders Objective 1 focuses on the characteristics of a corporation. Use TM 13-1 to review these characteristics. With regard to the concept of limited liability, it is common for owners of small private corporations to pledge their personal assets in order to obtain bank loans. Also penalty resulting from double taxation of corporate earnings is one of the main disadvantages of the corporate form of business. Nonprofit entities often organize as corporations to limit their legal liability and to obtain favorable tax treatment under federal tax laws. Examples of nonprofit corporations include the United Way and The Salvation Army. OBJECTIVE 2 Understand the two main sources of stockholders’ equity. KEY TERMS Deficit Retained Earnings Dividends Stockholders’ Equity Paid-in Capital Let’s think about this question; if you need money, what legal methods can you use to get it? I am thinking your answer will be one of the followings: 1. You can borrow money. 2. You can earn it by getting a job. 3. Someone (such as a parent) can give it to you.
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A corporation can borrow money, creating a liability. This is known as debt financing. It can also get cash by making a profit from its operations. Finally, it may be given cash by its shareholders as they invest in the corporation by purchasing shares of stock. Funds resulting from a corporation’s profits and shareholder investment are known as equity financing. Therefore, the two sources of owner’s equity are as follows: 1. Paid-in capital (also called contributed capital): funds invested by the shareholders 2. Retained earnings: the net income of the corporation less the dividends that have been paid to the shareholders. If the business has sustained net losses, Retained Earnings may have a negative (or deficit) balance.
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