Chapter 12 Lecture Notes_Solutions

Chapter 12 Lecture Notes_Solutions - Chapter 12 Lecture...

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Chapter 12 Lecture Notes Accounting for Stockholder's Equity I The Corporate Form of Organization Advantages of the Corporate Form of Organization 1) Limited Liability – Corporation is responsible for its actions and liabilities. Stockholders cannot lose more than they invested in the business. 2) Continuity of Existence – Corporation has an indefinite life and continues to exist even as ownership changes. 3) Transferable Ownership – Shares of the company’s stock may be traded without disrupting activities, and shares may be readily converted to cash. 4) Professional Management – Corporation may hire the best managerial talent available. Disadvantages of the Corporate Form of Organization 1) Heavy Taxation – Corporate profits may be taxed twice: (i) Corporation is taxed as a legal entity, and ii) stockholders pay personal income taxes on dividends received. 2) Government Regulation – Public corporations must comply with the laws of the Securities & Exchange Commission (SEC) as well as the security exchange on which they trade. 3) Separation of Ownership and Control – Management may not act in the best interests of the shareholders (agency conflict) II. Components of Stockholder's Equity: Paid In Capital - Assets invested in the corporation by stockholders (or donated by non- stockholders). The main components of paid-in capital are: - common stock - preferred stock - paid in capital in excess of par value - donated capital Retained Earnings - Cumulative amount of income earned by the corporation and retained in the business since its existence (not paid out as dividends).
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2 A) Paid-In Capital - Ownership in the corporation is evidenced by shares of stock. 1) Rights of Stockholder's - Elect Board of Directors and vote on actions that require approval of shareholders (e.g., merger with other firm). - Share in corporate profits. - Share in distribution of assets in event of liquidation. - Pre-emptive right - Right to purchase additional shares issued by the company 2) Number of Shares i) Shares authorized - number of shares that the corporation is authorized to sell (specified in Corporate Charter) ii) Shares issued - number of shares issued to stockholders (Outstanding Stock (held by investors) + Treasury Stock (stock bought back by company). iii) Shares outstanding - number of shares in the hands of stockholders. 3)
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Chapter 12 Lecture Notes_Solutions - Chapter 12 Lecture...

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