Financial accounting 9th kieso kimmel chapter 11
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Preview of Chapter 1
Financial Accounting
Ninth Edition
Weygandt Kimmel Kieso
11-1
Preview of Chapter 11
Financial Accounting
Ninth Edition
Weygandt Kimmel Kieso
11-2
11
Corporations: Organization,
Stock Transactions, Dividends,
and Retained Earnings
Learning Objectives
After studying this chapter, you should be able to:
[1] Identify the major characteristics of a corporation.
[2] Record the issuance of common stock.
[3] Explain the accounting for treasury stock.
[4] Differentiate preferred stock from common stock.
[5] Prepare the entries for cash dividends and stock dividends.
[6] Identify the items reported in a retained earnings statement.
[7] Prepare and analyze a comprehensive stockholders’ equity section.
11-3
The Corporate Form of Organization
An entity separate and distinct from its owners.
Classified by Purpose
Classified by Ownership
Not-for-Profit
Publicly held
For Profit
Privately held
►
Salvation Army
►
McDonald’s
►
American Cancer
Society
►
Nike
►
PepsiCo
►
11-4
►
Cargill Inc.
Alternative
Alternative Terminology
Terminology
Privately
Privately held
held corporations
corporations
are
are also
also referred
referred to
to as
as
closely
closely held
held corporations.
corporations.
LO 1
Characteristics of an Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-5
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Advantages
Disadvantages
LO 1
Characteristics of an Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
Corporation acts
Separate Legal Existence
under its own name
rather than in the
Limited Liability of Stockholders
name of its
Transferable Ownership Rights
stockholders.
Ability to Acquire Capital
11-6
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1
Characteristics of an Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-7
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Limited to their
investment.
LO 1
Characteristics of an Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-8
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Shareholders may
sell their stock.
LO 1
Characteristics of an Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-9
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Corporation can
obtain capital
through the issuance
of stock.
LO 1
Characteristics of an Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-10
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
stockholder,
employee, or officer.
LO 1
Characteristics of an Organization
Characteristics that distinguish corporations
from proprietorships and partnerships.
11-11
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Separation of
ownership and
management often
reduces an owner’s
ability to actively
manage the
company.
LO 1
Characteristics of an Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-12
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1
Characteristics of an Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-13
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Corporations pay
income taxes as a
separate legal entity
and in addition,
stockholders pay
taxes on cash
dividends.
LO 1
Characteristics of an Organization
Stockholders
Illustration 11-1
Corporation
organization chart
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General
Counsel/
Secretary
Vice President
Marketing
Treasurer
11-14
Vice President
Finance/Chief
Financial Officer
Vice President
Operations
Vice President
Human
Resources
Controller
LO 1
The Corporate Form of Organization
Forming a Corporation
Initial Steps:
Alternative
Alternative Terminology
Terminology
The
The charter
charter is
is often
often
referred
referred to
to as
as the
the articles
articles
of
of incorporation.
incorporation.
File application with the Secretary of State.
State grants charter.
Corporation develops by-laws.
Companies generally incorporate in a state whose laws are
favorable to the corporate form of business (Delaware, New Jersey).
Corporations engaged in interstate commerce must obtain a license
from each state in which they do business.
11-15
LO 1
11-16
LO 1
The Corporate Form of Organization
Stockholders Rights
Illustration 11-3
Ownership rights of
stockholders
1. Vote in election of board of
directors and on actions that
require stockholder approval.
2. Share the corporate earnings
through receipt of dividends.
11-17
LO 1
The Corporate Form of Organization
Stockholders Rights
Illustration 11-3
Ownership rights of
stockholders
3. Keep the same percentage ownership when new shares
of stock are issued (preemptive right).
* A number of companies have eliminated the preemptive right.
11-18
LO 1
The Corporate Form of Organization
Stockholders Rights
Illustration 11-3
Ownership rights of
stockholders
4. Share in assets upon liquidation in proportion to their
holdings. This is called a residual claim.
11-19
LO 1
The Corporate Form of Organization
Stock Issue Considerations
When a corporation decides to issue stock, it must resolve a
number of basic questions:
1.How many shares should it authorize for sale?
2.How should it issue the stock?
3.What value should the corporation assign to the stock?
11-20
LO 1
Stock Issue Considerations
Authorized Stock
11-21
Charter indicates the amount of stock that a corporation
is authorized to sell.
Number of authorized shares is often reported in the
stockholders’ equity section.
No formal accounting entry.
LO 1
Stock Issue Considerations
Prenumbered
Shares
Illustration 11-4
Name of corporation
Stockholder’s
name
Signature of
corporate official
11-22
LO 1
Stock Issue Considerations
Issuance of Stock
Companies issue common stock directly to investors or
indirectly through an investment banking firm.
Factors in setting price for a new issue of stock:
1. Company’s anticipated future earnings.
2. Expected dividend rate per share.
3. Current financial position.
4. Current state of the economy.
5. Current state of the securities market.
11-23
LO 1
Stock Issue Considerations
Market Price of Stock
11-24
Stock of publicly held companies is traded on organized
exchanges.
Interaction between buyers and sellers determines the
prices per share.
Prices tend to follow the trend of a company’s earnings
and dividends.
Factors beyond a company’s control may cause day-today fluctuations in market prices.
LO 1
11-25
LO 1
