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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