chapter 13 - Lesson 13-Organization and Capital Stock...

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Lesson 13--Organization and Capital Stock Corporations: Organization and Capital Stock Transactions Chapter 13 introduces the corporate form of organization. Unlike a proprietorship or partnership, a corporation is an entity separate from its owners. The chapter describes some of the characteristics of a corporation, along with the fundamental structure of the Stockholders' Equity section. It is the Stockholders’ Equity section that provides much of the contrast between corporations and other types of organizations. Learning Objectives The topics addressed in Chapter 13 could be outlined as follows: 1. Definitions and Characteristics of a Corporation 2. Recording issuance of stock 3. Preparing a stockholders' equity section of the balance sheet 4. Accounting for cash dividends 5. Evaluating corporate performance: return on assets and return on stockholders' equity 6. Corporate income taxes 7. Preferred Stock 8. Calculation of Book Value Definitions and Characteristics of a Corporation The following list summarizes the most important characteristics of corporations: 1. A corporation has a separate legal existence from that of its owners. A corporation is chartered in a state, and each state has its own rules as to incorporation requirements. A corporation is an income-taxable entity, which means that "Income Tax Expense" will show up on the Income Statement for a corporation. The organization types you have studied in the past (proprietorship and partnership) are not income-tax paying entities--the income tax is paid by the proprietor or individual partner. 2. Stockholders have limited liability . Unlike a proprietorship or partnership, wherein personal assets of the owners are at risk if the company fails, such is not the case for a corporation's stockholders. A stockholder risks only the dollar amount invested in the corporation. Example: you invest $10,000 in shares of the Boeing Company. If the Boeing Company should fail as a business, you could
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lose your $10,000. But that would be the extent of your loss. Contrast this liability with that of a proprietor--whose risk extends to personal assets such as a home or automobile, to satisfy the debts of the proprietorship. The limited liability feature allows a corporation to amass large amounts of cash, and, allows stockholders to limit risk on their investments. 3. Ownership rights (shares) are easily transferred . The various stock exchanges in the United States are well organized and regulated, allowing buyers and sellers to trade shares safely and fairly. For example, the Boeing Company is traded on the New York Stock Exchange. A person wishing to invest in the Boeing Company would purchase shares from a brokerage (such as Charles Schwab or Fidelity Investments), who would acquire the shares on the buyer's behalf. Similarly, when the investor wishes to sell the shares, the broker would handle that transaction by selling the shares on the exchange.
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