This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: CHAPTER 11 Reporting and Analyzing Stockholders’ Equity Chapter Outline Major Characteristics of a Corporation A corporation is: A legal entity created by law. Enjoys most of the rights and privileges of a person. May be classified by purpose and by ownership . Organized for the purpose: 1. profit making (such as Nike or General Motors) 2. nonprofit charitable, medical, or educational corporation (such as the Salvation Army or the American Cancer Society). Ownership differentiates 1. publicly held corporation- regularly traded on a national securities market and may have thousands of stockholders. 2. privately held corporation - often referred to as a closely held corporation, does not offer its stock for sale to the general public and may have only a few stockholders. ♦ Characteristics that distinguish corporations from proprietorships and partnerships. 1. Separate legal existence: An entity separate and distinct from owners. Acts under its own name rather than name of stockholders. May buy, own, and sell property; borrow money; and enter into legally binding contracts; may sue or be sued; and pays its own taxes. The acts of owners (stockholders) cannot bind the corporation unless owners are agents of the corporation. 2. Limited liability of stockholders: Creditors ordinarily have recourse only to corporate assets to satisfy their claims. Liability of stockholders is normally limited to investment in corporation. Creditors have no legal claim on personal assets of owners unless fraud has occurred. In the event of bankruptcy of the corporation, stockholders’ losses are generally limited to the amount of capital they have invested in the corporation. 11-1 3. Transferable ownership rights: Ownership is evidenced by shares of capital stock, which are transferable units. The transfer of stock is at the discretion of the stockholder; it does not require the approval of either the corporation or other stockholders. Transfer of ownership rights among stockholders has no effect on operating activities of the corporation; nor does if affect the corporation's assets, liabilities and total stockholders' equity. The corporation does not participate in transfer of ownership rights after original sale of capital stock. 4. Ability to acquire capital: It is relatively easy for a corporation to obtain capital through the issuance of stock. Buying stock in a corporation is often attractive to an investor because a stockholder has limited liability and shares of stock are readily transferable. Numerous individuals can become stockholders by investing small amounts of money. 5. Continuous life: The life of a corporation is stated in its charter. It may be perpetual or limited to a specific number of years....
View Full Document
- Fall '11
- Corporate Finance, Dividend