Corporations
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Corporations. Chapter 13. © 2009 The McGraw-Hill Companies, Inc. Characteristics of the Corporate Form. Ownership. Shares of stock can be purchased or sold in small amounts. Owners are called stockholders. Ownership interest is called a share of stock. Ownership interests are transferable.

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Corporations

Corporations

Chapter 13

© 2009 The McGraw-Hill Companies, Inc.


Characteristics of the corporate form

Characteristics of the Corporate Form

Ownership

Shares of stock can be purchased or sold in small amounts

Owners are calledstockholders

Ownership interest is

called a share of stock

Ownership interests are transferable

Stockholders are not liable for the corporation’s debt.

Stockholders not personally

liable for corporate debts


Characteristics of the corporate form1

Characteristics of the Corporate Form

Laws and Taxes

May own assets, incur debts, sue and be sued

Separate legal entity

Must pay tax onincome generated

Taxable entity


Characteristics of the corporate form2

Characteristics of the Corporate Form

Formation

Incorporated in a specific state

Incorporation laws varyfrom state to state

Corporate charter tells name, address and nature of business

Identifies type and number of shares to issue


Characteristics of the corporate form3

Characteristics of the Corporate Form

Formation

  • Type and Number of Shares:

  • Voting Rights. For each share of stock owned, a stockholder gets one vote on major corporate issues.

  • Dividends. Dividends can be declared as a way of distributing corporate profits to the stockholders.

  • Residual Claims. If operations cease, stockholders are entitled to remaining assets after debts have been paid.

  • Preemptive Rights. Existing stockholders may be given the first chance to buy newly issued stock before it is offered to others.


Characteristics of the corporate form4

Characteristics of the Corporate Form

Formation

Preferred Stock

Preferred stock generally does not include voting rights.

Dividends on preferred stock, if any, are paid at a fixed rate.

Preferred stock carries priority over common stock in liquidation.


Characteristics of the corporate form5

Characteristics of the Corporate Form

Financing


Accounting for stock transactions

Accounting for Stock Transactions

All transactions between a corporation and its stockholders affect only balance sheet accounts.


Common and preferred stock

Common and Preferred Stock

Stock Authorization

Before stock can be issued, its specific rights and characteristics must be authorized and defined in the corporate charter. One important characteristic is the stock’s par value. Many states require corporations to specify a par value for their stock. Typically, they set par value at a minimal amount, such as $0.01 per share. Other states have dropped the requirement and allow corporations to issue no-par value stock.


Common and preferred stock1

Common and Preferred Stock

Stock Sold Between Investors

When a company issues stock to an investor, the transaction is between the issuing corporation and the investor. After the initial sale, investors can sell shares to other investors without directly affecting the corporation.

Stock Used to Compensate Employees

Stock options allow employees to buy company stock at a pre-determined price during a specified period. The idea is that if employees work hard to meet the company’s goals, the stock price is likely to increase. If it increases before the options expire, employees can exercise their right to buy stock at the lower price and then sell it at the higher market price for an immediate profit.


Treasury stock

Treasury Stock

Although corporations are never obligated to buy back their own stock, some companies find it desirable to do so. A corporation may repurchase its own stock:

To signal to investors that the company believes its stock is worthpurchasing,

To obtain shares that can be reissued as payment for purchases of other companies, or

To obtain shares to reissue to employees, as part of stock option plans.

When a corporation buys its own stock back from stockholders, the stock is called treasury stock. While these shares are held in the treasury, they do not offer voting, dividend, or other stockholder rights.


Financial statement reporting

Financial Statement Reporting

Authorized245,000,000 shares

Issued115,183,800 shares

Treasury Stock47,171,602 shares

Outstanding68,012,198 shares


Accounting for dividends and splits

Accounting for Dividends and Splits

Dividend Dates

Sonic Corporation announced on May 20, 2008, that the Company’s Board of Directors declared a cash dividend of $0.02 per common share, payable on or about July 1, 2008, to stockholders of record as of June 14, 2008.

May 20

June 14

July 1

DividendDeclared

Date ofRecord

Date ofPayment

Balance sheet effects:

Increase current liabilities

Decrease retained earnings

No effect

Balance sheet effects:

Decrease current liabilities

Decrease current assets (cash)


Stock dividends

Stock Dividends

A stock dividend occurs when a company distributes shares of its own stock, rather than cash, to stockholders on a pro rata basis, at no cost to the stockholder. Proper accounting for a stock dividend depends upon the size of the dividend. A small stock dividend exists when the total shares distributed is less than 20% to 25% of the currently outstanding shares. A large stock dividend exists when the total shares distributed is more than 20% to 25% of the currently outstanding shares.

A small stock dividend is recorded at the market value of the shares issued. A large stock dividend is recorded at the par value of the stock issued.


End of chapter 13

End of Chapter 13

© 2009 The McGraw-Hill Companies, Inc.


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