chapter eight proprietorships, partnerships, and corporations © 2015 mcgraw-hill education
TRANSCRIPT
Chapter Eight
Proprietorships, Partnerships,
and Corporations
© 2015 McGraw-Hill Education.
• Corporate AdvantagesSeparate legal EntityLimited liability of stockholdersContinuous lifeManagement StructureEasily transferable ownership rightsAbility to raise capital
• Corporate DisadvantagesGovernmental regulationCorporate double taxation
• Corporate AdvantagesSeparate legal EntityLimited liability of stockholdersContinuous lifeManagement StructureEasily transferable ownership rightsAbility to raise capital
• Corporate DisadvantagesGovernmental regulationCorporate double taxation
Comparing Corporations with Proprietorships and Partnerships
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Appearance of Capital Structure in Financial
Statements
Sole Proprieterships Partnerships CorporationsOwnership interest
Single capital account for the owner
Capital account for each partner
1. Capital stock consisting of common stock and preferred stock 2. Separate retained earnings account
Distributions Withdrawals Withdrawals Dividends
The ownership interest (equity)in a business is composed of: Owner/investor
contributions. Retained earnings.
The ownership interest (equity)in a business is composed of: Owner/investor
contributions. Retained earnings.
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Legal capital is the amount of capital, required by the state of incorporation, that
must remain invested in the business.
Par Value
Nominal Amount
Legal capital
Characteristics of Capital stock
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Some states do not
require a par value to be
stated in the charter.
No-par Stock
Characteristics of Capital stock
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Par value is an arbitrary amount assigned to each
share of stock when it is authorized.
Par value is an arbitrary amount assigned to each
share of stock when it is authorized.
Market price is the amount that each share of stock will
sell for in the market.
Market price is the amount that each share of stock will
sell for in the market.
Characteristics of Capital stock
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Authorized, Issued, and Outstanding Capital Stock
The maximum number of shares of capital stock
that can be sold to the public.
Authorized
Shares
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Authorized, Issued, and Outstanding Capital Stock
Issued shares
are authorized shares of stock
that have been sold.
Unissued shares are authorized shares of stock
that never have
been sold.
Authorized
Shares
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Authorized, Issued, and Outstanding Capital Stock
Unissued
SharesTreasuryShares
Outstanding
SharesIssuedShares
Treasury shares are issued shares that
have been reacquired by the
corporation.
Outstanding shares are issued shares that are owned by
stockholders.
Authorized
Shares
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Common stockholders have the rights to: Buy and sell stock. Share in the distribution of profits. Share in the distribution of assets in
the case of liquidation. Vote on significant matters that affect
the corporate charter. Participate in the election of directors.
Common stockholders have the rights to: Buy and sell stock. Share in the distribution of profits. Share in the distribution of assets in
the case of liquidation. Vote on significant matters that affect
the corporate charter. Participate in the election of directors.
Classes of Stock – Common Stock
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• A separate class of stock, typically having priority over common shares in . . .
– Dividend distributions.– Distribution of assets in case of liquidation.
• A separate class of stock, typically having priority over common shares in . . .
– Dividend distributions.– Distribution of assets in case of liquidation.
Classes of Stock – Preferred Stock
25%
75%
Corporationswith preferredstock
Corporationswithoutpreferred stock
Usually has a stated dividend
rate.
Usually has a stated dividend
rate.
Normally has no voting rights.
Normally has no voting rights.
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NoncumulativeCumulativeDividends in arrears must be paid before
dividends may be paid on common
stock.
Dividends in arrears must be paid before
dividends may be paid on common
stock.
Undeclared dividends from current and
prior years do not have to be paid in future
years.
Undeclared dividends from current and
prior years do not have to be paid in future
years.
Most preferred stock is cumulative.
Most preferred stock is cumulative.
Preferred Stock Dividends
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Issuing Stock, $10 Par Value
Nelson, Incorporated issued 100 shares of$10 par value stock for $22 per share.
The effects on the financial statements would be:
Nelson, Incorporated issued 100 shares of$10 par value stock for $22 per share.
The effects on the financial statements would be:
Assets = Liabilities +
Cash = + Com.
Stk. + PIC in Excess Revenue - Expenses =
Net Income
Cash Flow
2,200 = n/a + 1,000 + 1,200 n/a - n/a = n/a 2,200 FA
Equity
100 shares × $22 per share = $2,200
100 shares × $10 par value = $1,000
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Issuing Stock, $20 Par Value
Assume that Nelson has another class ofcommon stock, $20 par value Class B.
The company issues 150 shares of Class Bcommon stock at $25 per share.
The effects on the financial statements would be as follows:
Assume that Nelson has another class ofcommon stock, $20 par value Class B.
The company issues 150 shares of Class Bcommon stock at $25 per share.
The effects on the financial statements would be as follows:
Assets = Liabilities +
Cash = + Com. Stk. + PIC in Excess Revenue - Expenses =
Net Income Cash Flow
3,750 = n/a + 3,000 + 750 n/a - n/a = n/a 3,750 FA
Equity
150 shares × $25 per share = $3,750
150 shares × $20 par value = $3,000 8-14
Assume that Nelson issues 100 shares of 7 percentcumulative preferred stock with a stated value of
$10 per share at a price of $22 per share.
The effects on the financial statements would be as follows:
Assume that Nelson issues 100 shares of 7 percentcumulative preferred stock with a stated value of
$10 per share at a price of $22 per share.
The effects on the financial statements would be as follows:
Issuing Stock, $10 Stated Value
Assets = Liabilities +
Cash = + Pfd. Stk. + PIC in Excess Revenue - Expenses =
Net Income Cash Flow
2,200 = n/a + 1,000 + 1,200 n/a - n/a = n/a 2,200 FA
Equity
100 shares × $22 per share = $2,200
100 shares × $10 par value = $1,000 8-15
Issuing Stock with No Par Value
Assume that Nelson issues 100 shares of nopar common stock at a price of $22 per share.
The effects on the financial statements would be as follows:
Assume that Nelson issues 100 shares of nopar common stock at a price of $22 per share.
The effects on the financial statements would be as follows:
Assets = Liabilities +
Cash = + Com. Stk. + PIC in Excess Revenue - Expenses =
Net Income Cash Flow
2,200 = n/a + 2,200 + n/a n/a - n/a = n/a 2,200 FA
Equity
100 shares × $22 per share = $2,200
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Financial Statement Presentation
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No voting or
dividend rights
Contra equity
account
When stock is reacquired, the corporation records the treasury stock at cost.
When stock is reacquired, the corporation records the treasury stock at cost.
Treasury shares are
issued shares that have been reacquired
by the corporation.
Treasury shares are
issued shares that have been reacquired
by the corporation.
Treasury Stock
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• Three important dates
Cash Dividends
Date of Record
No entryrequired.
Payment DateRecord payment of
cash to stockholders.
Declaration Date
Record liabilityfor dividend.
Dividends
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Stock Dividends
Distribution of additional sharesof stock to stockholders.
No change in total stockholders’ equity.
No change inpar values.
All stockholders retain same percentage ownership.
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Stock Splits Stock splits replace existing
shares with a greater number of new shares.
Companies use stock splits to reduce market price per share of their outstanding stock.
The number of outstanding shares increase and par value is decreased proportionately.
Retained earnings is not affected.
Stock splits replace existing shares with a greater number of new shares.
Companies use stock splits to reduce market price per share of their outstanding stock.
The number of outstanding shares increase and par value is decreased proportionately.
Retained earnings is not affected.
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End of Chapter Eight
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