Financial accounting IFRS 4 kieoso ch12 PPT

Financial Accounting
IFRS 4th Edition

Weygandt ● Kimmel ● Kieso

Chapter 12

Corporations: Organization, Share
Transactions, and Equity


Chapter Outline
Learning Objectives
LO 1 Discuss the major characteristics of a corporation.

LO 2 Explain how to account for ordinary, preference,
and treasury shares.
LO 3 Explain how to account for cash dividends, share
dividends, and share splits.
LO 4 Discuss how equity is reported and analyzed.

Copyright ©2019 John Wiley & Son, Inc.

2


Learning Objective 1
Discuss the Major Characteristics of a
Corporation

Copyright ©2019 John Wiley & Sons, Inc.

3


The Corporate Form of Organization
An entity separate and distinct from its owners.
Classified by Purpose


Not-for-Profit



Publicly held



For Profit



Privately held

International
Committee of the
Red Cross (CHE)
► Bill & Melinda Gates
Foundation (USA)
►

Classified by Ownership

► Cargill Inc.
Toyota (JPN)
► Siemens (DEU)
► Sinopec (CHN)
► General Electric (USA)
►

Copyright ©2019 John Wiley & Son, Inc.

4


Characteristics of Corporation (1 of 10)
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Advantages
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Disadvantages
Additional Taxes
Copyright ©2019 John Wiley & Son, Inc.

5

Characteristics of Corporation (2 of 10)
Characteristics that distinguish corporations from
proprietorships and partnerships.
Corporation acts
Separate Legal Existence
under its own
Limited Liability of Shareholders
name rather than
in the name of its
Transferable Ownership Rights
shareholders
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Copyright ©2019 John Wiley & Son, Inc.

6


Characteristics of Corporation (3 of 10)
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited to their
Limited Liability of Shareholders
investment

Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Copyright ©2019 John Wiley & Son, Inc.

7


Characteristics of Corporation (4 of 10)
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Shareholders may
Transferable Ownership Rights
sell their shares
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Copyright ©2019 John Wiley & Son, Inc.

8


Characteristics of Corporation (5 of 10)

Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Corporation can
obtain capital
Ability to Acquire Capital
through the
Continuous Life
issuance of shares
Corporate Management
Government Regulations
Additional Taxes
Copyright ©2019 John Wiley & Son, Inc.

9


Characteristics of Corporation (6 of 10)
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Continuance as a
Transferable Ownership Rights
going concern is
Ability to Acquire Capital
not affected by the
withdrawal, death,

Continuous Life
or incapacity of a
Corporate Management
shareholder,
employee, or
Government Regulations
officer
Additional Taxes
Copyright ©2019 John Wiley & Son, Inc.

10


Characteristics of Corporation (7 of 10)
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Separation of
Ability to Acquire Capital
ownership and
Continuous Life
management often
Corporate Management
reduces an owner’s
ability to actively
Government Regulations
manage the
Additional Taxes

company
Copyright ©2019 John Wiley & Son, Inc.

11


Characteristics
of Corporation

Shareholders

(8 of 10)

Corporation
organization
chart

Chairman and
Board of
Directors
President and
Chief Executive
Officer

General
Counsel/
Secretary

Vice President
Marketing

Treasurer

Vice President
Finance/Chief
Financial Officer

Vice President
Operations

Vice President
Human
Resources

Controller

Copyright ©2019 John Wiley & Son, Inc.

12


Characteristics of Corporation (9 of 10)
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
A corporation is

Corporate Management
subject to
numerous
Government Regulations
governmental
Additional Taxes
regulations
Copyright ©2019 John Wiley & Son, Inc.

13


Characteristics of Corporation (10 of 10)
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Shareholders
Transferable Ownership Rights
Corporations pay
income taxes as a
Ability to Acquire Capital
separate legal
Continuous Life
entity and in
Corporate Management
addition,
shareholders pay
Government Regulations
taxes on cash
Additional Taxes

dividends
Copyright ©2019 John Wiley & Son, Inc.

14


Forming a Corporation
Initial Steps:
File application with governmental agency in the jurisdiction
in which incorporation is desired
Government grants charter
Corporation develops by-laws
Companies generally incorporate in a state or country whose
laws are favorable to the corporate form of business.
Corporations engaged in commerce outside their state or
country must obtain a license from each government in which
they do business.
Copyright ©2019 John Wiley & Son, Inc.

15


Shareholder Rights
1. Vote in election of board of directors at annual
meeting and vote on actions that require
shareholder approval.
2. Share the corporate earnings through receipt of
dividends.
3. Keep the same percentage ownership when new
shares are issued (preemptive right).

4. Share in assets upon liquidation in proportion to
their holdings. This is called a residual claim.
Copyright ©2019 John Wiley & Son, Inc.

16


Share Issue Considerations (1 of 6)
When a corporation decides to issue shares, it must
resolve a number of basic questions:
1. How many shares should it authorize for sale?
2. How should it issue the shares?
3. What value should the corporation assign to the
shares?

Copyright ©2019 John Wiley & Son, Inc.

17


Share Issue Considerations (2 of 6)
Authorized Shares
Charter indicates amount of shares that a
corporation is authorized to sell
Number of authorized shares is often reported in
equity section
No formal accounting entry

Copyright ©2019 John Wiley & Son, Inc.

18


Share Issue Considerations (3 of 6)
Issuance of Shares
Companies issue ordinary shares directly to
investors or indirectly through an investment
banking firm
Factors in setting price for a new issue of shares:
1.
2.
3.
4.
5.

Company’s anticipated future earnings
Expected dividend rate per share
Current financial position
Current state of economy
Current state
of ©2019
securities
Copyright
John Wiley & Son,market
Inc.

19


Share Issue Considerations (4 of 6)

Market Price of Shares
Shares of publicly held companies are 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 dayto-day fluctuations in market prices
Copyright ©2019 John Wiley & Son, Inc.

20


Share Issue Considerations (5 of 6)
Par and No-Par Value Shares
Years ago, par value determined legal capital per
share that a company must retain in business for
protection of corporate creditors
Today many governments do not require a par value
No-par value shares is fairly common today
In many countries, the board of directors assigns a
stated value to no-par shares
Copyright ©2019 John Wiley & Son, Inc.

21


Share Issue Considerations (6 of 6)
Which of the following statements is false?
a. Ownership of ordinary shares gives the owner a

voting right.
b. The equity section begins with share capital.
c. The authorization of ordinary shares does not
result in a formal accounting entry.
d. Legal capital per share applies to par value
shares but not to no-par value shares.

Copyright ©2019 John Wiley & Son, Inc.

22


DO IT! 1a: Corporate Organization
Indicate whether each of the following statements is true or false.
False 1. Similar to partners in a partnership, shareholders of a
_______
corporation have unlimited liability.
True 2. It is relatively easy for a corporation to obtain capital
_______
through the issuance of shares.
False 3. The separation of ownership and management is an
_______
advantage of the corporate form of business.
False 4. The journal entry to record the authorization of
_______
ordinary shares includes a credit to the appropriate
share capital account.

Copyright ©2019 John Wiley & Son, Inc.

23


Corporate Capital (1 of 3)
Equity is identified by various names:
stockholders’ equity,
shareholders’ equity, or
corporate capital.
The equity section of a corporation’s statement of
financial position consists of two parts:
1. share capital and
2. retained earnings (earned capital).
Copyright ©2019 John Wiley & Son, Inc.

24


Corporate Capital (2 of 3)
Share Capital
Share capital is the total amount of cash and other
assets paid in to the corporation by shareholders in
exchange for shares.

Copyright ©2019 John Wiley & Son, Inc.

25