311-Ch11RevNotes(7th)

311-Ch11RevNotes(7th) - Chapter 11 Reporting and...

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Chapter 11 - Reporting and Interpreting Owners’ Equity Overview This chapter discusses accounting for owners' equity for corporations. Each specific source of owners' equity should be accounted for separately. The two basic sources of owners' equity for a corporation are contributed capital and retained earnings. Separate accounts are kept for each element of capital stock. A corporation may purchase its own stock in the marketplace. Stock previously issued by the corporation and subsequently reacquired is known as treasury stock as long as it is held by the issuing corporation. The purchase of treasury stock is viewed as a contraction of corporate capital, and the subsequent resale of the treasury stock is viewed as an expansion of corporate capital. The earnings of a corporation that are not retained for business growth and expansion are distributed to the stockholders by means of dividends. Dividends are paid only after dividends are declared by the board of directors of the corporation. A cash dividend results in a decrease in assets (cash) and a commensurate decrease in stockholders' equity (retained earnings). In contrast, a stock dividend does not change assets, liabilities, or total stockholders' equity. A stock dividend results in a transfer of retained earnings to the permanent or contributed capital of the corporation. Therefore, a stock dividend affects only certain account balances within stockholders' equity. A stock split affects only the par value of the stock and the number of shares outstanding; the individual equity account balances are not changed. Business Background Corporations are the dominant form of business organization in the terms of volume of operations. The popularity of the corporate form of business is due to several advantages. Participation in corporate ownership commences by purchasing stock. Stock ownership can be transferred (sold) easily through established markets (stock exchanges). A corporation provides its owners with limited liability. That is, the maximum a stockholder stands to lose is the investment in the stock. Since a corporation is a separate legal entity, it enjoys continuity of life (separate from its owners). Corporations have the ability to raise substantial amounts of capital through debt and equity issues. Corporations offer the ability for owners to earn high returns on their investments. However, this is not without risk and can result in losses to owners. There are two primary sources of stockholders' equity. Contributed capital constitutes amounts received from shareholders in exchange for stock ownership. The components of this type of equity are par value derived from the sale of stock and additional contributed capital (additional paid-in capital) in excess of par value. Retained earnings
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311-Ch11RevNotes(7th) - Chapter 11 Reporting and...

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