chapter 13 - corporations organization, stock transactions, and dividends

Corporations:

Corporations:

Organization,

Organization,

Stock Stock

Transactions,

Transactions,

and Dividends

and Dividends

Chapter 13Chapter 13Chapter 13Chapter 13

Learning Learning Objective

ObjectiveDescribe the nature of the

Describe the nature of the

corporate form of organization

corporate form of organization

11

Characteristics of a Corporation Characteristics of a Corporation

o A A _____________ _____________ is a _____________ entity, is a _____________ entity, _____________ and separate from the _____________ and separate from the _____________ who create and operate it. _____________ who create and operate it. As a legal _____________ , a _____________ As a legal _____________ , a _____________ may _____________ , _____________ , and may _____________ , _____________ , and dispose of property in its own dispose of property in its own _____________ ._____________ .

o A _____________ sells shares of A _____________ sells shares of _____________ , called __________________________ , called _____________ ..

Characteristics of a _____________ Characteristics of a _____________

o The _____________The _____________ or _____________ who or _____________ who own the _____________ own the corporation. own the _____________ own the corporation. They can buy and sell _____________ They can buy and sell _____________ without affecting the _____________ without affecting the _____________ _____________ or continued existence._____________ or continued existence.

Characteristics of a CorporationCharacteristics of a Corporation

o _____________ whose _____________ of stock _____________ whose _____________ of stock are traded in public markets are called are traded in public markets are called _____________ _____________ ._____________ _____________ .

Characteristics of a CorporationCharacteristics of a Corporation

o Corporations whose shares are Corporations whose shares are _____________ traded publicly are usually _____________ traded publicly are usually _____________ by a small group of _____________ by a small group of _____________ and are called _____________ _____________ and are called _____________ or _____________ corporations. The or _____________ corporations. The stockholders of all corporations have stockholders of all corporations have _____________ _____________ ._____________ _____________ .

Characteristics of a CorporationCharacteristics of a Corporation

o The stockholders control a corporation by The stockholders control a corporation by _____________ a ______ of ____________________ a ______ of _______ . This . This board meets _____________ to establish board meets _____________ to establish _____________ policy. It also _____________ _____________ policy. It also _____________ the _____________ _____________ the _____________ _____________ _____________ (CEO) and other major _____________ (CEO) and other major officers.officers.

CHARACTERISTICHARACTERISTICS OF A CS OF A

CORPORATIONCORPORATION

Characteristics of a CorporationCharacteristics of a Corporation

o ___________________________________________________________________________________________________________________________._________________________________________.

o ___________________________________________________________________________________________________________________________._________________________________________.

o ___________________________________________________________________________________________________________________________._________________________________________.

o ___________________________________________________________________________________________________________________________._________________________________________.

_____________ a Corporation_____________ a Corporation

o The first step in forming a corporation is to The first step in forming a corporation is to ________ an ________ an ________ ________ of_________of_________ with the with the state.state. __________________________________________________________________________

_____________________________________._____________________________________.

_______________________________________________________________________________________________________________._____________________________________.

Forming a CorporationForming a Corporation

o After the application is approved, the state After the application is approved, the state grants a grants a chartercharter or or articles of articles of incorporationincorporation,, which formally create the which formally create the corporation.corporation.

o Management and the board of directors Management and the board of directors then prepare then prepare bylawsbylaws which are operating which are operating rules and procedures for conducting the rules and procedures for conducting the corporation’s affairs.corporation’s affairs.

Forming a CorporationForming a Corporation

o _________ may be _________ in organizing a _________ may be _________ in organizing a corporation, such as ____ fees, _________ , corporation, such as ____ fees, _________ , __________ fees, and _________ costs . __________ fees, and _________ costs .

Learning Learning Objective

ObjectiveDescribe the two main sources

Describe the two main sources

of stockholders’ equity

of stockholders’ equity

22

Stockholders’ Equity Stockholders’ Equity

o The _____ equity in a _________ is called The _____ equity in a _________ is called _______ equity, _________ equity, _______ _______ equity, _________ equity, _______ investment, or investment, or __________________________..

STOCKHOLDERS’ EQUITYSTOCKHOLDERS’ EQUITY

Stockholders’ equity Stockholders’ equity is reported by its two is reported by its two main sources.main sources.

Capital contributed Capital contributed to the corporation to the corporation by the stockholders, by the stockholders, called paid-in capitalcalled paid-in capital or _________ capital.or _________ capital.

Net income retained Net income retained in the business, in the business, called _________ called _________ _________._________.

Stockholders’ EquityStockholders’ Equity

If there is only one class of stock, the account is

entitled _________ _________ or _________

_________.

Stockholders’ EquityStockholders’ Equity

o _________ _________ is a corporation’s _________ _________ is a corporation’s _________ net income that has not been _________ net income that has not been _________ as _________ ._________ as _________ .

o __________________ are _________ of a corporation’s are _________ of a corporation’s _________ to _________ ._________ to _________ .

Stockholders’ EquityStockholders’ Equity

o A _________ balance in _________ _________ A _________ balance in _________ _________ is called a deficit. Such a balance often is called a deficit. Such a balance often results from _________ _________ _________ . results from _________ _________ _________ .

o A _________ balance in Retained Earnings A _________ balance in Retained Earnings _________ _________ _________ surplus cash _________ _________ _________ surplus cash or _________ _________ _________ for or _________ _________ _________ for dividends.dividends.

Learning Learning Objective

ObjectiveDescribe and illustrate the

Describe and illustrate the

characteristics of stock, classes

characteristics of stock, classes

of stock, and entries for issuing

of stock, and entries for issuing stockstock

33

Characteristics of StockCharacteristics of Stock

o The _________ of _________ of stock that a The _________ of _________ of stock that a corporation is corporation is _________ _________ to _________ to _________ _________ is stated in the _________ ._________ is stated in the _________ .

o The term The term _________ _________ refers to the shares refers to the shares _________ to the _________ ._________ to the _________ .

o A corporation may _________ some of the A corporation may _________ some of the stock that has _________ _________ . The stock that has _________ _________ . The stock remaining in the _________ of stock remaining in the _________ of _________ is then called _________ _________ is then called _________ _________ ._________ .

Characteristics of StockCharacteristics of Stock

o Corporations may issue stock _________ to Corporations may issue stock _________ to stockholders to document their _________ .stockholders to document their _________ .

o Shares of stock are often assigned a Shares of stock are often assigned a _________ _________ , called __________________ _________ , called _________ value.value.

Characteristics of StockCharacteristics of Stock

o Stock issued _________ _________ is called Stock issued _________ _________ is called no-par stockno-par stock. Some states require the . Some states require the _________ of _________ to assign a _________ of _________ to assign a __________________ value to value to

____-_____ stock .____-_____ stock .

o Some state laws require that corporations Some state laws require that corporations maintain a _________ stockholder maintain a _________ stockholder _________ , called legal_________ , called legal______ ______ , to protect , to protect _________ ._________ .

Characteristics of StockCharacteristics of Stock

o The major _________ that accompany The major _________ that accompany _________ of a _________ of _________ are as _________ of a _________ of _________ are as follows:follows: ___________________________________________.___________________________________________.

___________________________________________.___________________________________________.

___________________________________________.___________________________________________.

Classes of StockClasses of Stock

o The two _________ _________ of paid-in The two _________ _________ of paid-in capital are _________ stock and _________ capital are _________ stock and _________ stock.stock.

o The _________ attractiveness ofThe _________ attractiveness of __________________ stock is that it is given a preference to stock is that it is given a preference to _________ over _________ stock._________ over _________ stock.

_________ of Stock_________ of Stock

o The payment of _________ is authorized by The payment of _________ is authorized by the corporation’s _________ of directors.the corporation’s _________ of directors.

o When _________ , the directors are said to When _________ , the directors are said to have have _________ _________ a dividend.a dividend.

Classes of StockClasses of Stock

o ____________ _________ _________ has a right ____________ _________ _________ has a right to receive regular dividends that were to receive regular dividends that were declared (_____) in _________ years. declared (_____) in _________ years. _________ _________ stock does _________ _________ _________ stock does _________

_________ this right._________ this right.

_________ _________ stock dividends that have _________ _________ stock dividends that have not been _________ in prior years are said to be not been _________ in prior years are said to be

___ ___ _________ _________ ..

Classes of StockClasses of Stock

o A corporation has issued the following A corporation has issued the following preferred and common stock:preferred and common stock:

1,000 shares of $4 cumulative preferred stock, $50 1,000 shares of $4 cumulative preferred stock, $50 par 4,000 shares of common stock, $15 parpar 4,000 shares of common stock, $15 par

o The corporation was organized on January The corporation was organized on January 1, 2012, and paid no dividends in 2012 and 1, 2012, and paid no dividends in 2012 and 2013. In 2014, the corporation paid $22,000 2013. In 2014, the corporation paid $22,000 in dividends, of which $12,000 was paid to in dividends, of which $12,000 was paid to preferred stockholders and $10,000 was preferred stockholders and $10,000 was paid to common stockholders.paid to common stockholders.

Classes of StockClasses of Stock

Dividends available to ________ stockholders

_________ Stock_________ Stock

o If the stock is _________ (sold) for a If the stock is _________ (sold) for a _________ that is _________ than its _________ that is _________ than its _________ , the stock has been sold at a _________ , the stock has been sold at a __________________ . .

o If the stock is _________ (sold) for a If the stock is _________ (sold) for a _________ that is _________ than its _________ that is _________ than its _________ , the stock has been sold at a _________ , the stock has been sold at a __________________ ..

_________ Stock_________ Stock

o Some states require that the entire Some states require that the entire _________ from the issue of _________ stock _________ from the issue of _________ stock be recorded as _________ _________ . In be recorded as _________ _________ . In other states, no-par stock may be other states, no-par stock may be _________ a _________ a _________ _________ _________ _________ per per _________ ._________ .

Learning Learning Objective

ObjectiveDescribe and illustrate the

Describe and illustrate the

accounting for cash dividends

accounting for cash dividends and stock dividends

and stock dividends

44

_________ Dividends_________ Dividends

o A cash distribution of earnings by a A cash distribution of earnings by a corporation to its stockholders is called a corporation to its stockholders is called a _________ _________ . The three conditions a _________ _________ . The three conditions a corporation must meet to pay a _________ corporation must meet to pay a _________ dividend are as follows:dividend are as follows: _____________________________ _____________________________

_____________________________ _____________________________

__________________________________________________________

Cash DividendsCash Dividends

o The _________ of _________ is the date the The _________ of _________ is the date the board of directors formally _________ the board of directors formally _________ the _________ of the dividend. On this date, the _________ of the dividend. On this date, the corporation incurs the _________ to pay the corporation incurs the _________ to pay the amount of the dividend.amount of the dividend.

Cash DividendsCash Dividends

o The _________ of _________ is the date the The _________ of _________ is the date the corporation uses to determine which corporation uses to determine which _________ will _________ the dividend. _________ will _________ the dividend.

Cash DividendsCash Dividends

o The _________ of _________ is the date the The _________ of _________ is the date the corporation will _________ the dividends to corporation will _________ the dividends to the _________ who owned the stock on the the _________ who owned the stock on the _________ of _________ ._________ of _________ .

_________ Dividends_________ Dividends

o A _________ of _________ to stockholders in A _________ of _________ to stockholders in the form of the firm’s own shares is called the form of the firm’s own shares is called a _________ _________. Stock dividends a _________ _________. Stock dividends normally are _________ only on _________ normally are _________ only on _________ stock and _________ to _________ stock and _________ to _________ stockholders.stockholders.

_____ + (_____ x __%)

Total shares issued

Before Stock Dividend

After __% Stock Dividend

Stock DividendsStock Dividends

o Before and After Stock Dividend Before and After Stock Dividend DistributionDistribution

Total shares issued 10,000 10,600Number of shares owned by one stockholder

_____ + (_____ x __%)

Before Stock Dividend

After 6% Stock Dividend

Stock DividendsStock Dividends

o Before and After Stock Dividend Before and After Stock Dividend DistributionDistribution

Total shares issued 10,000 10,600Number of shares owned by one stockholder 1,000 1,060Proportionate ownership ___% ___%

_____ ÷ _____ _____ ÷ _____

Before Stock Dividend

After 6% Stock Dividend

Stock DividendsStock Dividends

o Before and After Stock Dividend Before and After Stock Dividend DistributionDistribution

Learning Learning Objective

ObjectiveDescribe and illustrate the

Describe and illustrate the

accounting for treasury stock

accounting for treasury stock transactions

transactions

55

Treasury _________ TransactionsTreasury _________ Transactions

o _________ stock is stock that a corporation _________ stock is stock that a corporation has _________ and then _________ . A has _________ and then _________ . A corporation may _________ its own stock corporation may _________ its own stock for a variety of reasons, including the for a variety of reasons, including the following:following: _________________________________ _________________________________

__________________________________________________________________

__________________________________________________________________

Learning Learning Objective

ObjectiveDescribe and illustrate the

Describe and illustrate the

reporting of stockholders’ equity

reporting of stockholders’ equity

66

Reporting Stockholders’ EquityReporting Stockholders’ Equity

o Exhibit 4 Exhibit 4 shows two methods for reporting shows two methods for reporting stockholders’ equity for the December 31, stockholders’ equity for the December 31, 2014, balance sheet of Telex Inc.2014, balance sheet of Telex Inc.

o In the first method, _____ _____ of stock is In the first method, _____ _____ of stock is reported, followed by its _____ _____ _____ reported, followed by its _____ _____ _____ accounts. _____ _____ is then reported, accounts. _____ _____ is then reported, followed by a _____ for _____ _____ .followed by a _____ for _____ _____ .

Reporting Stockholders’ EquityReporting Stockholders’ Equity

o In the second method, the _____ accounts In the second method, the _____ accounts are reported, followed by the paid-in are reported, followed by the paid-in ________ reported as a _____ _____ , ________ reported as a _____ _____ , Additional paid-in capital. __________ Additional paid-in capital. __________ __________ is then reported, followed by a __________ is then reported, followed by a __________ for _________ stock. __________ for _________ stock.

Reporting Retained Earnings Reporting Retained Earnings

o Changes to _____ _____ may be reported Changes to _____ _____ may be reported using one of the following:using one of the following: ____________________________________________ ____________________________________________

________________________________________________________________________________________

________________________________________________________________________________________

RestrictionsRestrictions

o The _____ _____ _____ for use as dividends The _____ _____ _____ for use as dividends may be __________ by action of a may be __________ by action of a corporation’s _____ of _____ . corporation’s _____ of _____ .

o These amounts, called __________These amounts, called __________ or or appropriations, appropriations, remain part of the remain part of the _________ _______ . However, they must be _________ _______ . However, they must be _____ , usually in the _____ to the financial _____ , usually in the _____ to the financial statements.statements.

____________________________________

o Restrictions of retained earnings are _____ Restrictions of retained earnings are _____ as follows:as follows: _______:_______: State laws may require a _______ of State laws may require a _______ of

retained earnings.retained earnings.

__________:__________: A corporation may enter into _______ A corporation may enter into _______ that require _______ of retained earnings.that require _______ of retained earnings.

____________:____________: A corporation’s _______ of _______ A corporation’s _______ of _______ may restrict retained earnings voluntarily.may restrict retained earnings voluntarily.

_______ Period Adjustments_______ Period Adjustments

o Errors may _______ be _______ within the Errors may _______ be _______ within the same period in which they occur. The same period in which they occur. The _______ of this type of _______ , called a _______ of this type of _______ , called a prior _______ _______ , is reported in the prior _______ _______ , is reported in the _______ _______ statement as an _______ to _______ _______ statement as an _______ to the _______ balance of retained earnings.the _______ balance of retained earnings.

Statement of _______ EquityStatement of _______ Equity

o When the _______ change to stockholders’ When the _______ change to stockholders’ equity is due to net _______ or net _______ equity is due to net _______ or net _______ and _______ , a retained earnings and _______ , a retained earnings statement is sufficient.statement is sufficient.

o When a corporation also has changes in When a corporation also has changes in _______ and paid-in _______ accounts, a _______ and paid-in _______ accounts, a _______ of _______ _______ is normally _______ of _______ _______ is normally prepared.prepared.

Learning Learning Objective

ObjectiveDescribe the effect of stock

Describe the effect of stock

splits on corporate financial

splits on corporate financial statementsstatements

77

Stock _______ Stock _______

o A _______ split is a process by which a A _______ split is a process by which a corporation _______ the par or _______ corporation _______ the par or _______ _______ of its _______ stock and issues a _______ of its _______ stock and issues a _______ number of _______ shares._______ number of _______ shares.

Learning Learning Objective

ObjectiveDescribe and illustrate the use of

Describe and illustrate the use of

earnings per share in evaluating

earnings per share in evaluating

a company’s profitability

a company’s profitability

88

_______ per _______ _______ per _______

o _______ per _______ _______ (EPS), _______ per _______ _______ (EPS), sometimes called _______ _______ per _____, sometimes called _______ _______ per _____, is the net _______ per _______ of common is the net _______ per _______ of common stock _______ during a period.stock _______ during a period.

o _______ per _______ is computed as follows:_______ per _______ is computed as follows:

Earnings per Share =

Corporations:

Corporations:

Organization,

Organization,

Stock Stock

Transactions,

Transactions,

and Dividends

and Dividends

The EndThe EndThe EndThe End