Chapter 15 Notes - Chapter 15 Stockholders Equity The...

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Chapter 15: Stockholders’ Equity The Corporate Form of Organization - Corporation are the leader in terms of aggregate amount of resources controlled, goods and services produced, and people employed - Corporate form’s principle advantage is its facility for attracting and accumulating large amounts of capital - Special characteristics of corporations that affect accounting include: o Influence of state corporate law o Use of the capital stock or share system o Development of a variety of ownership interests State Corporate Law - Anyone who wishes to establish a corporation must submit articles of incorporation to the state in which incorporation is desired - State issues a corporation charter - Can only be incorporated in one state no matter how many states you do business - Each state has its own business incorporate act - Accounting for stockholders’ equity follows the provisions in these acts - In many cases states have adopted the principles contained in the Model Business Corporate Act prepared by the American Bar Association Capital Stock or Share System - Stockholders’ equity usually consists of a large number of units or shares - The number of shares possessed determines each owner’s interest - Each share of stock has certain rights and privileges - In the absence of restrictive provisions, each share carries the following rights: o To share proportionately in profits and losses o To share proportionately in management (the right to vote for directors) o To share proportionately in corporate assets upon liquidation
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o To share proportionately in any new issues of stock of the same class – called the preemptive right - Preemptive right protects an existing stockholder from involuntary dilution of ownership interest o Many corporations have eliminated the preemptive right because the right make it inconvenient for corporations to issue large amount of additional stock, as they frequently do in acquiring other companies - Share system easily allows an individual to transfer an interest in a company to another investor - Each share is personal property of the owner, who may dispose of it at will - Corporations often use registrars and transfer agents who specialize in providing services of recording and transferring stock - Uniform Stock Act and Uniform Commercial Code govern the negotiability of stock certificates Variety of Ownership Interests - In every corporation one class of stock must represent the basic ownership interest, this class is called common stock - Common Stock - residual corporate interest that bears the ultimate risks of loss and receives the benefits of success o It is guaranteed neither dividends nor assets upon dissolution o Often control the management of a corporation and tend to profit most if the company is successful - If a corporation only has one class of issued stock, by definition that is common stock - By special stock contracts between the corporation and its stockholders, the stockholder may sacrifice some of its rights or privileges o
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