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McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights

Stockholders Equity:Stockholders Equity:

Paid-In CapitalPaid-In Capital

Chapter 11

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Existence isseparate from

owners.

An entity created

by law.

Has rights and

privileges.

Privately, or

Closely Held

Publicly Held

Ownership

can be

CorporationsCorporations

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Heavy taxation

Greater regulation

Cost of formation

Separation of

ownership and

management

Disadvantages ofDisadvantages of

IncorporationIncorporation

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The costs associated with

incorporation are usually

expensed immediately, but

amortized over 5 years fortax purposes.

Formation of a CorporationFormation of a Corporation

Each corporation isformed according tothe laws of the statewhere it is located.

The application forcorporate status is

called the Articles ofIncorporation.

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Stockholders

Rights

Voting (in person

or by proxy).

Proportionatedistribution of

dividends.

Proportionatedistribution of

assets in a

liquidation.

Rights of StockholdersRights of Stockholders

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Publicly Owned CorporationsPublicly Owned Corporations

Face Different RulesFace Different Rules

By law, publicly owned corporations must:

Prepare financial statements in accordancewith GAAP.

Have their financial statement audited by anindependent CPA.

Comply with federal securities laws.

Submit financial information for SEC review.

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Stockholders usually meet once a year.

Stockholder ledgers are often maintained by a

stock transfer agent or stock registrar.

Stockholder Records in aStockholder Records in a

CorporationCorporation

Each unit of ownership is called a share of stock.

Stock certificates serve as proof that a

stockholder has purchased shares.

When the stock is sold, the stockholder signs a

transfer endorsement on the back of the stock

certificate.

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P a i d - i n

C o n t r i b u

i n v e s t o r s

f o r c a p i t a

R e t a i n e d

R e t e n t i o n

e a r n e d b

c o r p o r a

S t o c k h o l d

i n c r e a s e d

Stockholders Equity of aStockholders Equity of a

CorporationCorporation

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Preferred StockPreferred Stock

A separate class of stock, typically havingpriority over common shares in . . .

Dividend distributions (rate is usuallystated).

Distribution of assets in case ofliquidation.

Cumulative

dividend

rights.

Normally has

no voting

rights.

Usually

callable by

the company.

Other Features Include:

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Accounting by

the issuer.

Accounting bythe investor.

Common stock is

carried at original issue

price.

Investments in

marketable securitiesare carried at market

value.

Market ValueMarket Value

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Ice Cream Parlor

Stock Splits

Now

Available

Stock SplitsStock Splits

Companies usestock splits toreduce market

price.

Outstandingshares increase,

but par value isdecreasedproportionately.

Companies usestock splits toreduce market

price. Outstanding

shares increase,but par value isdecreasedproportionately.

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When stock is reacquired, the corporation

records the treasury stock at cost.

Treasuryshares are

issued

shares thathave beenreacquired

by the

corporation.

Treasury StockTreasury Stock

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Financial Analysis andFinancial Analysis and

Decision MakingDecision Making

Return on Common

Stockholders EquityNet Income Preferred Dividends

Average Common Stockholders Equity=

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End of Chapter 11End of Chapter 11