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Unformatted text preview: Chapter 11 - Reporting and Interpreting Owners Equity Chapter 11 Reporting and Interpreting Owners Equity ANSWERS TO QUESTIONS 1. A corporation is a separate legal entity (authorized by law to operate as an individual). It is owned by a number of persons and/or entities whose ownership is evidenced by shares of capital stock. Its primary advantages are: (a) transferability of ownership, (b) limited liability to the owners, and (c) the ability to accumulate large amounts of resources. 2. The charter of a corporation is a legal document from the state that authorizes its creation as a separate legal entity. The charter specifies the name of the entity, its purpose, and the kinds and number of shares of capital stock it can issue. 3. (a) Authorized capital stockthe maximum number of shares of stock that can be sold and issued as specified in the charter of the corporation. (b) Issued capital stockthe total number of shares of capital stock that have been issued by the corporation at a particular date. (c) Outstanding capital stockthe number of shares currently owned by the stockholders. 4. Common stockthe usual or normal stock of the corporation. It is the voting stock and generally ranks after the preferred stock for dividends and assets distributed upon dissolution. Often it is called the residual equity. Common stock may be either par value or no-par value. Preferred stockwhen one or more additional classes of stock are issued, the additional classes are called preferred stock. Preferred stock has modifications that make it different from common stock. Generally, preferred stock has both favorable and unfavorable features in comparison with common stock. Preferred stock usually is par value stock and usually specifies a dividend rate such as 6% preferred stock. 11-1 Chapter 11 - Reporting and Interpreting Owners Equity 5. Par value is a nominal per share amount established for the common stock and/or preferred stock in the charter of the corporation, and is printed on the face of each stock certificate. The stock that is sold by a corporation to investors above par value is said to have sold at a premium, while stock that is sold below par is said to have sold at a discount. The laws of practically all states forbid the initial sale of stock by a corporation to investors below par value. No-par value stock does not have an amount per share specified in the charter. As a consequence, it may be issued at any price without involving a discount or a premium. It avoids giving the impression of a value that is not present. 6. The usual characteristics of preferred stock are: (1) dividend preferences, (2) conversion privileges, (3) asset preferences, and (4) nonvoting specifications....
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This note was uploaded on 02/22/2012 for the course AC 221 taught by Professor Albuquerque during the Fall '08 term at BU.
- Fall '08
- Financial Accounting