Chapter 11: The Corporate Form of Organization

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corporation
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created by law; has most of the rights and priviledges of a person
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two common classifications of corporations
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1. by purpose 2. by ownership
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publicly held corporation
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may have thousands of stockholders, and its stock is traded on a national securities market such as the New York Stock Exchange
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privately held corporation
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also known as a closely held corporation; usually has only a few stockholders and does not offer its tock for sale to the general public; much smaller than publicly hedl corporations
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Separate Legal Existence
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means that a corporation acts under its own name rather than in the name of its stockholders
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Limited Liability of Stockholders
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means that the liability of stockholders is limited to ther investment in the corporation; creditors have no legal claims on the personal assets of the stockholders unless fraud has occurred
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Transferable Ownership Rights
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means that stockholders may dispose of part or all of their interest in a corporation simply by selling their stock
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Ability to Acquire capital
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means that it is easy for a coporation to obtain captial through the issuance of stock
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Continuous life
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means that the life of a corporation, which is stated on the charter, can be renewed continuously
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controller
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Chief Accounting officer; (1) miantains the accounting records (2) maintains an adequate system of internal control (3) prepares financial statements, tax returns, and internal reports
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treasurer
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has custody of the corporation’s funds and maintains the company’s cash position
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double taxation
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corporate income is taxed at the corporate level and at the individual level
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S corporation
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a type of corporate from that allows for legal treatement as a corporation but tax treatment as a partnership but the size of the corporation is limited
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charter
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a grant that forms a corporation; a document that describes the name and prurpose of the corporation, the types and numbers of shares of stock that are authroized to be issued and the number of shares that theses individuals agreed to purchase
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by-laws
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establish the internal rules and procedures for conducting the affairs of the corporation
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common stock
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the kind of stock issued when a corporation has only one class of stock; gives the stockholder a vote in the way that the company is run
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stock certificate
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proof of stock ownership evidenced by a printed or engraved form
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Stockholders have the right to…
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1. vote in election of board of directors 2. receive dividends 3. preemptive right 4. share in assets upon liquidation
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preemptive right
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the stockholder’s right to keep the same percentage ownership when new shares of stock are issued
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authorized stock
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the amount of stock that a corporation is authorized to sell as indicated in its charter; the authorization of common stock does not result in a formal accounting entry
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par value stock
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capital stock that has been assigned a value per share in the corporate charter
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legal capital
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used to determine par value
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market price
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the actual price that stock is sold at
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no-par value stock
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capital stock that has not been assigned a value in the corporate charter
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stated value
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a value assigned by the board of directors to no-par shares
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the stockholders’ equity section of a corporation’s balance sheet includes…
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1. paid in (contributed) capital 2. retained earnings (earned capital)
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paid-in capital
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the amount stockholders paid to the corporation in exchange for shares of ownership
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retained earnings
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earned capital held for future use in the business; net income that a company retains in the business
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treasury stock
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a corporation’s own stock that has been reacquired by the corporation and is bein held for future use
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Reasons a corporation may acquire treasury..
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1. to reissue the shares to officers/ employees 2. to increase trading of the company’s stock in the securities market 3. to have additional shares available for use in acquiring other companies 4. to reduce the number of shares outstanding and increase earnings per share
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outstanding stock
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the number of shares of issued stock that are being held by stockholders
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preferred stock
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has contractual provisions that give it preference over common stock in certain areas like priority in relation to dividends and assets in the event of liquidation; no voting rights however
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cumulative dividend
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a feature often included in preferred stock contracts that stipulates that preferred stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders are paid dividends
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dividends in arrears
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preferred dividends not declared in a given period when preferred stock is cumulative
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dividend
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a distribution by a corporation to its stockholders on a pro rata basis
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pro rata
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means that if you own 105 of the common shares, you will receive 10% of the dividend
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cash dividend
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a pro rata distribution of cash to stockholders; not paid on treasury shares
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for a corporation to pay a cash dividend it must have…
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1. Retained earnings 2. Adequate cash 3. Declared dividends
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three important dates in connection with dividends
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1. the declaration date 2. the record date 3. the payment date
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declaration date
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date on which the board of directos formally authorizes the cash dividend and announces it to the stockholders; commits the corporation to a binding legal obligation
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record date
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date at which the company determines ownership of the outstanding shares for dividend purposes
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payment date
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date on which the company makes cash divdedn payments to the stockholders on record
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stock dividend
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a pro rata distribution of the corporation’s own stock to stockholders; paid in stock
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stock split
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involves the issuance of additional shares of stock to stockholders according to their percentage ownership; results in a reduction in the par or stated value per share
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retained earnings restrictions
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make a portion of the balance currrently unavailable for dividends
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two classifications within paid-in capital
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1. Capital Stock 2. Additional paid-in capital
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payout ratio
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measures the percentage of earnings a company distributes in the form of cash dividends to common stockholders; computed by dividng total cash dividens declared to common shareholders by net income
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return on common stockholders’ equity (ROE)
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a widely used ratio that measures profitability from the common stockholders’ viewpoint

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