ch9s - Chapters 9 Stockholders Equity This chapter 9 covers...

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1 of 12 Chapters 9 – Stockholders’ Equity This chapter 9 covers corporations and events that affect the Stockholders’ section of the Balance Sheet. 1. Characteristics of a corporation : Advantages Disadvantages 2. Organization of a Corporation Organizers obtain charter from state government, pay fees, sign charter, and agree to a set of bylaws that govern the corporation. Stockholders of the corporation elect Board of Directors who set company policies and appoint managers who conduct day-to-day operations. 3. Stockholders’ Equity Section of Balance Sheet Divided into 2 main sections: Contributed Capital: Cumulative amount of assets contributed by owners in exchange for stock certificates Retained Earnings: Cumulative amount of assets from earning net income, minus assets given to stockholders as dividends. Contributed Capital Section: There are two classes of stock that corporations may issue--- common stock (which all corporations must have), and preferred stock . All stockholders have four basic rights (unless specifically withheld): 1. Vote : one vote for each share of stock owned. 2. Dividends : right to receive a proportionate share of any dividends declared by the company’s board of directors (but not otherwise). 3. Liquidation : right to receive a proportionate share of any assets remaining after the corporation pays off its liabilities in liquidation. 4. Preemption : allows stockholders the right to purchase additional shares of a new issue of stock in proportion to the amount they currently own, prior to these shares being sold to non-stockholders. This allows existing stockholders to maintain the same ownership percentage after a new stock issue as before the new stock issue took place. Preemptive rights maybe with held by the corporation.
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2 of 12 Preferred stock gives up the right to vote and preemptive rights, but in exchange it receives a preference over common stock as to dividends ---preferred stock carries an annual dividend entitlement , the amount of dividends that must be paid to preferred stockholders before any dividend can be paid to common stockholders---and it also receives a preference over common in liquidation ---if the company liquidates, preferred stockholders will have their claims satisfied before those of common. Companies sometimes add features to preferred stock to enhance their marketability. For example, preferred stock is sometimes issued that is: Convertible: gives stockholders the option of converting their preferred stock into common stock. Cumulative: if preferred stockholders fail to receive some of their annual dividend entitlement in a given year, the unpaid amount (termed “dividends in arrears”) carries forward to next year and must be paid, along with that year’s annual dividend entitlement, before any dividend can be paid to common. Dividends in arrears are reported in the notes to the company’s financial statements. Note: unless the preferred stock
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This note was uploaded on 09/26/2011 for the course 06A 001 taught by Professor Stuff during the Fall '10 term at University of Iowa.

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ch9s - Chapters 9 Stockholders Equity This chapter 9 covers...

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