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Ch14 - Chapter 14 Companies Share capital and the balance...

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Chapter 14 – Companies: Share capital and the balance sheet CHAPTER OVERVIEW In Chapter 13 you learned about the partnership form of organisation. In this chapter, we begin an in- depth discussion of the company (corporate) form of organisation. Because the company is more complex than proprietorships or partnerships, our discussion of companies (corporations) continues in Chapter 15, 16 and 17. Therefore, an understanding of the topics in this chapter is important before continuing to the next chapters. The learning objectives for this chapter are to: 1. Identify the characteristics of a company 2. Record the issue of shares 3. Prepare the shareholders’ equity section of a company’s balance sheet 4. Account for cash dividends 5. Use different share values in decision-making 6. Evaluate return on assets and return on shareholders’ equity 7. Account for the income tax of a company CHAPTER REVIEW Objective 1 - Identify the characteristics of a company. 1. A company is a separate legal entity registered and regulated under the Australian Securities and Investments Commission (ASIC). The owners’ equity of a company is held by the shareholders. 2. A company has continuous life and transferability of ownership . A change in ownership of the shares does not affect the life of the company. Shares, especially in publicly listed companies, are easily bought and sold. 3. Mutual agency of owners is not present in companies. A shareholder cannot commit a company to a binding contract (unless that shareholder is also an officer of the company). 4. Shareholders have limited liability . That is, they have no personal obligation for the debts of the company. 5. Ownership and management are separated . Companies are controlled by boards of directors who appoint officers to manage the business. Directors are elected by the shareholders (stockholders). Thus, shareholders are not obligated to manage the business; ownership is separate from management. 6. Companies pay income taxes . A company pays a dividend to shareholders who then pay personal income taxes on their dividends but receive a (franking) credit for the tax the company has already paid. This removes double taxation of company earnings. 7. Government regulation: Because shareholders have limited liability, creditors have only the company’s asset available to satisfy claims. The government requires companies to provide more detailed disclosure than is required for sole traders and partnerships. Exhibit 14-1 in your text summarises the advantages and disadvantages of a company. Companies come into existence when a certificate of registration is obtained from ASIC. A company constitution which regulates the internal management is then adopted. The shareholders elect a board of directors , who appoint the officers of the company. The managing director or chief executive officer is charged with the day-to-day running of the company. (Review Exhibit 14-2 in your text.) Owners may receive share certificates or CHESS holding statement for their investment (see Exhibits 14-3 and 14-4). The basic unit of investment is a
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