Proprietorships Partnerships and Corporations 2015 McGrawHill Education Corporate Advantages Separate legal Entity Limited liability of stockholders Continuous life Management Structure ID: 323419
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Chapter Eight
Proprietorships, Partnerships, and Corporations
© 2015 McGraw-Hill Education.Slide2
Corporate Advantages
Separate legal Entity
Limited liability of stockholders
Continuous life
Management StructureEasily transferable ownership rightsAbility to raise capitalCorporate DisadvantagesGovernmental regulationCorporate double taxation
Comparing Corporations with Proprietorships and Partnerships
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Appearance of Capital Structure in Financial Statements
The ownership interest (equity)
in a business is composed of:
Owner/investor contributions. Retained earnings.
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Legal capital is the amount of capital, required by the state of incorporation, that must remain invested in the business.
Par Value
Nominal Amount
Legal capital
Characteristics of Capital stock
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Some states do not
require a par value to be stated in the charter.
No-par Stock
Characteristics of Capital stock
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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.
Characteristics of Capital stock
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Authorized, Issued, and Outstanding Capital Stock
The maximum number of shares of capital stock that can be sold to the public.
Authorized
Shares
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Authorized, Issued, and Outstanding Capital Stock
Issued shares
are authorized shares of stock that have been sold.
Unissued shares are authorized shares of stock that never have been sold.
AuthorizedShares
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Authorized, Issued, and Outstanding Capital Stock
Unissued
Shares
Treasury
Shares
OutstandingShares
Issued
Shares
Treasury shares
are issued shares that have been reacquired by the corporation.
Outstanding shares
are issued shares that are owned by stockholders.
Authorized
Shares
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Common stockholders have the rights to:
Buy and sell stock.
Share in the distribution of profits. Share in the distribution of assets in the case of liquidation.
Vote on significant matters that affect
the corporate charter. Participate in the election of directors.
Classes of Stock – Common Stock
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A separate class of stock, typically having priority over common shares in . . .
Dividend distributions.
Distribution of assets in case of liquidation.Classes of Stock – Preferred Stock
Usually has a stated dividend rate.
Normally has no voting rights.
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Noncumulative
Cumulative
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.
Most preferred stock is cumulative
.
Preferred Stock Dividends
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Issuing Stock, $10 Par Value
Nelson, Incorporated issued 100 shares of
$10 par value stock for $22 per share.The effects on the financial statements would be:
100 shares × $22 per share = $2,200
100 shares × $10 par value = $1,000
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Issuing Stock, $20 Par Value
Assume that Nelson has another class of
common stock, $20 par value Class B.The company issues 150 shares of Class B
common stock at $25 per share.
The effects on the financial statements would be as follows:
150 shares × $25 per share = $3,750
150 shares × $20 par value = $3,000
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Assume that Nelson issues 100 shares of 7 percent
cumulative preferred stock with a stated value of
$10 per share at a price of $22 per share.The effects on the financial statements would be as follows:
Issuing Stock, $10 Stated Value
100 shares × $22 per share = $2,200
100 shares × $10 par value = $1,000
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Issuing Stock with No Par Value
Assume that Nelson issues 100 shares of no
par common stock at a price of $22 per share.The effects on the financial statements would be as follows:
100 shares × $22 per share = $2,200
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Financial Statement Presentation
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No voting or dividend rights
Contra equity account
When stock is reacquired, the corporation records the treasury stock at
cost.
Treasury shares
are issued shares that have been reacquired by the corporation.
Treasury Stock
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Three important dates
Cash Dividends
Date of Record
No entry
required.Payment Date
Record payment ofcash to stockholders.
Declaration Date
Record liability
for dividend.
Dividends
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Stock Dividends
Distribution of additional shares
of stock to stockholders.
No change in total stockholders’ equity.
No change inpar values.
All stockholders retain same percentage ownership.
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Stock Splits
Stock splits replace existing shares with a greater number of new shares.
Companies use stock splits to reduce market price per share of their outstanding stock.
The number of outstanding shares increase and par value is decreased proportionately.
Retained earnings is not affected.
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End of Chapter Eight
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