STOCKHOLDERS

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Chapter11
STOCKHOLDERS EQUITYPaid-In Capital
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Corporations
An entity created by law.
Privately, or Closely, Held
Existence is separate from owners.
Ownership can be
Has rights and privileges.
Publicly Held
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Learning Objective
To discuss the advantages and disadvantages of
organizing a business as a corporation.
LO1
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Advantages of Incorporation
Limited personal liability for stockholders
Transferability of ownership
Professional management
Continuity of existence
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Disadvantages of Incorporation
Heavy taxation
Greater regulation
Cost of formation
Separation of ownership and management
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Learning Objective
To distinguish between publicly owned and closely
held corporations.
LO2
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Publicly Owned Corporations Face Different Rules

• By LAW, publicly owned corporations must
• Prepare financial statements in accordance with
  GAAP.
• Have their financial statement audited by an
  independent CPA.
• Comply with federal securities laws.
• Submit financial information for SEC review.

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Formation of a Corporation
The costs associated with incorporation are
usually expensed immediately, but amortized over
5 years for tax purposes.

• Each corporation is formed according to the laws
  of the state where it is located.
• The application for corporate status is called
  the Articles of Incorporation.

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Learning Objective
To explain the rights of stockholders and the
roles of corporate directors and officers.
LO3
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Rights of Stockholders
Stockholders
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Rights of Stockholders
Stockholders usually meet once a year.
Ultimate control
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Rights of Stockholders
Stockholder ledgers are often maintained by a
stock transfer agent or stock registrar.
Stockholders usually meet once a year.
Ultimate control
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Rights of Stockholders
Each unit of ownership is called a share of
stock. Stock certificates serve as proof that a
stockholder has purchased shares.
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Rights of Stockholders
When the stock is sold, the stockholder signs a
transfer endorsement on the back of the stock
certificate.
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Functions of the Board of Directors
Overall responsibility for managing the company.
Selected by a vote of the stockholders
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Functions of the Corporate Officers
Contractual and legal representation
Chief Accountant
Custodian of funds
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Learning Objective
To account for paid-in capital and prepare the
equity section of a corporate balance sheet.
LO4
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Stockholders Equity of a Corporation
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Authorization and Issuanceof Capital Stock
Authorized Shares
The maximum number of shares of capital stock
that can be sold to the public.
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Authorization and Issuanceof Capital Stock
Authorized Shares
Usually shares are sold through an underwriter.
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Authorization and Issuanceof Capital Stock
Authorized Shares
Outstanding shares are issued shares that are
owned by stockholders.
Outstanding Shares
Unissued Shares
Issued Shares
Treasury shares are issued shares that have been
reacquired by the corporation.
Treasury Shares
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Stockholders Equity
Par value is an arbitrary amount assigned to each
share of stock when it is authorized.
Market price is the amount that each share of
stock will sell for in the market.
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Stockholders Equity
Common stock can be issued in three forms
No-Par Common Stock
Par Value Common Stock
Stated Value Common Stock
Lets examine this form of stock.
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Issuance of Par Value Stock
Record The cash received. The number of shares
issued the par value per share in the Common
Stock account. The remainder is assigned to
Contributed Capital in Excess of Par.
Matrix, Inc. issues 10,000 shares of its 2 par
value stock for 25 per share on September 1,
2007.
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Issuance of Par Value Stock
Matrix, Inc. issues 10,000 shares of its 2 par
value stock for 25 per share on September 1,
2007.
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Issuance of Par Value Stock
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Learning Objective
To contrast the features of common stock with
those of preferred stock.
LO5
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Preferred Stock

• A separate class of stock, typically having
  priority over common shares in . . .
• Dividend distributions (rate is usually stated).
• Distribution of assets in case of liquidation.

Other Features Include
Cumulative dividend rights.
Normally has no voting rights.
Usually callable by the company.
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Cumulative Preferred Stock
Dividends in arrears must be paid before
dividends may be paid on common stock.
Undeclared dividends from current and prior years
do not have to be paid in future years.
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Stock Preferred as to Dividends
Example Consider the following partial
Statement of Stockholders Equity.
During 2007, the directors declare cash dividends
of 5,000. In 2008, the directors declare cash
dividends of 42,000.
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Stock Preferred as to Dividends
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Other Features of Preferred Stock
I just converted 100 shares of preferred stock
into 1,000 shares of common stock and ended up
with a higher dividend yield!
Some preferred stock is convertible into shares
of common stock.
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Preferred Stock
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Learning Objective
To discuss the factors affecting the market price
of preferred stock and common stock.
LO6
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Market Value
Common stock is carried at original issue price.
Accounting by the issuer.
Investments in marketable securities are carried
at market value.
Accounting by the investor.
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Market Price of Preferred Stock

• Factors affecting market price of preferred
  stock
• Dividend rate
• Risk
• Level of interest rates

The return based on the market value is called
the dividend yield.
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Market Price of Common Stock

• Factors affecting market price of common
  stock
• Investors expectations of future profitability.
• Risk that this level of profitability will not be
  achieved.

Changes in market value have no impact on the
books of the issuer.
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Learning Objective
To explain the significance of par value, book
value, and market value of capital stock.
LO7
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Book Value per Shareof Common Stock
Book Value Market Value
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Learning Objective
To explain the purpose and effects of a stock
split.
LO8
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Stock Splits

• Companies use stock splits to reduce market
  price.
• Outstanding shares increase, but par value is
  decreased proportionately.

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Stock Split
Assume a corporation has 5,000 shares of 1 par
value common stock outstanding before a 2for1
stock split.
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Learning Objective
To account for treasury stock transactions.
LO9
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Treasury Stock
Treasury shares are issued shares that have been
reacquired by the corporation.
When stock is reacquired, the corporation records
the treasury stock at cost.
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Treasury Stock - Example
On May 1, 2007, East, Inc. reacquires 3,000
shares of its common stock at 55 per
share. Prepare the journal entry for May 1.
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Treasury Stock - Example
On December 3, 2007, East Corp. reissued 1,000
shares of the stock at 75 per share. Prepare
the journal entry for December 3.
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Stockholders Equity - Presentation
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End of Chapter 11