121_09SG - Chapter 9Shareholders Equity CHAPTER OVERVIEW...

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Chapter 9 Chapter 9—Shareholders’ Equity CHAPTER OVERVIEW The last four chapters have provided a detailed examination of assets and liabilities, two of the three sections on the balance sheet. We now turn our attention to the third section, stockholders’ equity. The term refers to one of the three legal forms of business organization—a corporation. The corporate form is more complex than sole proprietorships or partnerships. Although sole proprietorships are greater in number, corporations account for more revenues and total assets than the others. The learning objectives for this chapter are to 1. Explain the advantages and disadvantages of a corporation. 2. Measure the effect of issuing stock on a company’s financial position. 3. Describe how treasury stock transactions affect a corporation. 4. Account for dividends and measure their impact on a company. 5. Use different stock values in decision making. 6. Evaluate a company’s return on assets and return on stockholders’ equity. 7. Report stockholder equity transactions on the statement of cash flows. CHAPTER REVIEW Objective 1 - Explain the advantages and disadvantages of a corporation. 1. A corporation is a separate legal entity chartered and regulated under state law. The owners’ equity of a corporation is held by stockholders as shares of stock. 2. A corporation has continuous life . A change in ownership of the stock does not affect the life of the corporation. 3. Mutual agency of owners is not present in corporations. A stockholder cannot commit a corporation to a binding contract (unless that stockholder is also an officer of the corporation). 4. Stockholders have limited liability . That is, they have no personal obligation for the debts of the corporation. 5. Ownership and management are separated . Corporations are controlled by boards of directors who appoint officers to manage the business. Boards of directors are elected by stockholders. Thus, stockholders are not obligated to manage the business; ownership is separate from management. 6. Corporations pay taxes : state franchise taxes and federal and state income taxes. Corporations pay dividends to stockholders who then pay personal income taxes on their dividends. This is considered double taxation of corporate earnings. 7. Corporations are subject to more government regulation than sole proprietorships or partnerships. States monitor corporations more closely and require them to disclose information to investors and creditors. Corporations come into existence when a charter is obtained from a relevant state official. Bylaws are then adopted. The stockholders elect a board of directors , who appoint the officers of the corporation. (Review exhibit 9-2 in your text.)
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121_09SG - Chapter 9Shareholders Equity CHAPTER OVERVIEW...

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