Chapter
Eight
Proprietorships,
Partnerships,
and
Corporations
© 2015 McGraw-Hill Education.
LO 1
LO 1
Identify the primary
characteristics of
sole proprietorships,
partnerships, and
corporations.
8-2
Forms of Business Organizations
A sole proprietorship
is owned by a
single individual.
A corporation is a
separate legal entity
created by the authority
of a state government.
A partnership is
owned by two or
more individuals.
Each state has
separate laws governing
establishing corporations.
Partnerships require
clear agreements about
authority, risks, and
the sharing of profits
and losses.
8-3
Regulation
Few laws govern the operations
of proprietorships and partnerships.
Corporations are subject to regulations.
Large, publicly traded corporations
are much more heavily regulated than
smaller closely held corporations.
 SEC Acts of 1933 and 1934
 Sarbanes-Oxley Act of 2002
 Exchange listing requirements.
8-4
Comparing Corporations with
Proprietorships and Partnerships
•
Corporate Advantages
Separate legal Entity
Limited liability of stockholders
Continuous life
Management Structure
Easily transferable ownership rights
Ability to raise capital
• Corporate Disadvantages
Governmental regulation
Corporate double taxation
8-5
Corporate Management Structure
Stockholders
(Owners of voting shares)
Appointed
by directors
Elected by
shareholders
Board of Directors
Internal (managers) and
External (non-managers)
President
Vice President
(Production)
Vice President
(Marketing)
Vice President
(Finance)
Vice President
(Personnel)
8-6
LO 2
LO 1
Analyze financial
statements to
identify the different
types of business
organizations.
8-7
Appearance of Capital Structure in
Financial Statements
The ownership interest (equity)
in a business is composed of:
 Owner/investor contributions.
 Retained earnings.
8-8
LO 3
LO 1
Explain the
characteristics of
major types of stock
issued by
corporations.
8-9
Characteristics of Capital stock
Par Value
Nominal
Amount
Legal
capital
Legal capital is the amount of capital,
required by the state of incorporation, that
must remain invested in the business.
8-10
Characteristics of Capital stock
No-par Stock
Some states
do not
require a par
value to be
stated in the
charter.
8-11
Characteristics of Capital stock
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.
8-12
Authorized, Issued, and Outstanding
Capital Stock
Authorized
Shares
The maximum
number of shares of
capital stock that can
be sold to the public.
8-13
Authorized, Issued, and Outstanding
Capital Stock
Authorized
Shares
Issued
shares are
authorized
shares of
stock that
have been
sold.
Unissued
shares are
authorized
shares of
stock that
never have
been sold.
8-14
Authorized, Issued, and Outstanding
Capital Stock
Authorized
Shares
Issued
Shares
Outstanding shares are
issued shares that are
owned by stockholders.
Outstanding
Shares
Treasury
Shares
Unissued
Shares
Treasury shares are
issued shares that have
been reacquired by the
corporation.
8-15
Classes of Stock – Common Stock
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.
8-16
Classes of Stock – Preferred
Stock
• A separate class of stock, typically having
priority over common shares in . . .
– Dividend distributions.
– Distribution of assets in case of liquidation.
Usually has a stated
dividend rate.
Normally has no
voting rights.
25%
75%
Corporations
with preferred
stock
Corporations
without
preferred stock
8-17
Preferred Stock Dividends
Cumulative
Dividends in arrears
must be paid before
dividends may be
paid on common
stock.
Noncumulative
Undeclared dividends
from current and
prior years do not have
to be paid in future
years.
Most preferred stock
is cumulative.
8-18
Preferred Stock Dividends
• In addition to common stock, Dillion, Incorporated
has the following stock outstanding:
• Preferred stock, 4%, $10 par, 10,000 shares
Common stock, $10 par, 20,000 shares
• Dividends have not been paid in two years. In the
current year, the board of directors declared
dividends of $22,000.
• How much will each class of stock receive?
8-19
Preferred Stock Dividends
The distribution depends on whether the preferred stock
is cumulative or noncumulative. First, let’s assume the
preferred stock is cumulative.
Total dividend declared
Preferred stock (cumulative)
Arrearage
1st year ($10 par × 4% × 10,000 shares)
2nd year ($10 par × 4% × 10,000 shares)
Current Yr. ($10 par × 4% × 10,000 shares)
Remainder to common stockholders
$ 22,000
$ 4,000
4,000
4,000
12,000
$ 10,000
8-20
Preferred Stock Dividends
Now, let’s assume the preferred stock is noncumulative.
Total dividend declared
Preferred stock (noncumulative)
Arrearage
1st year
2nd year
Current Yr. ($10 par × 4% × 10,000 shares)
Remainder to common stockholders
$ 22,000
$
0
0
4,000
4,000
$ 18,000
8-21
LO 4
LO 1
Explain how to
account for different
types of stock issued
by corporations.
8-22
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:
Assets
Cash
2,200
= Liabilities +
=
=
n/a
+
+
Equity
Com.
Stk.
1,000
+
+
PIC in
Excess
1,200
Revenue
n/a
-
Expenses
n/a
=
=
Net
Income
n/a
Cash
Flow
2,200 FA
100 shares × $22 per share = $2,200
100 shares × $10 par value = $1,000
8-23
Issuing Stock, $20 Par Value
Assume that Nelson has another class of
common stock, $20 par value Class B.
The company issues 150 shares of Class B
common stock at $25 per share.
The effects on the financial statements would be as
follows:
Assets
Cash
3,750
= Liabilities +
=
=
n/a
Equity
+ Com. Stk. +
+
3,000 +
PIC in
Excess
750
Revenue
n/a
-
Expenses
n/a
=
=
Net
Income
n/a
Cash Flow
3,750 FA
150 shares × $25 per share = $3,750
150 shares × $20 par value = $3,000
8-24
Issuing Stock, $10 Stated Value
Assume that Nelson issues 100 shares of 7 percent
cumulative 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:
Assets
Cash
2,200
= Liabilities +
=
=
n/a
+
+
Equity
Pfd. Stk. +
1,000 +
PIC in
Excess
1,200
Revenue
n/a
-
Expenses
n/a
=
=
Net
Income
n/a
Cash Flow
2,200 FA
100 shares × $22 per share = $2,200
100 shares × $10 par value = $1,000
8-25
Issuing Stock with No Par Value
Assume that Nelson issues 100 shares of no
par common stock at a price of $22 per share.
The effects on the financial statements would be as follows:
Assets
Cash
2,200
= Liabilities +
=
=
n/a
Equity
+ Com. Stk. +
+
2,200 +
PIC in
Excess
n/a
Revenue
n/a
-
Expenses
n/a
=
=
Net
Income
n/a
Cash Flow
2,200 FA
100 shares × $22 per share = $2,200
8-26
Financial Statement Presentation
8-27
LO 5
LO 1
Show how treasury
stock transactions
affect a company’s
financial statements.
8-28
Treasury Stock
No voting
or
dividend
rights
Contra
equity
account
Treasury
shares are
issued
shares that
have been
reacquired
by the
corporation.
When stock is reacquired, the corporation
records the treasury stock at cost.
8-29
Treasury Stock
Why would
a company Common reasons include:
buy its
own stock?  Employee stock option plans.
 Preparation for a merger.
 To increase earnings per share.
 Supporting the stock price.
 To avoid a hostile takeover.
8-30
Treasury Stock
Assume that Nelson paid $20 per share to buy
back 50 shares of the $10 par value stock that
it originally issued at a price of $22 per share.
The effects on the financial statements would be as follows:
(since Treasury Stock is a contra-equity account, the accounting equation is in
balance)
Assets
= Liabilities +
Cash
=
(1,000) =
n/a
+
+
Equity
Other
Equity
Accts.
n/a
-
Treasury
Stk.
1,000
Revenue
n/a
-
Expenses
n/a
=
=
Net
Income
n/a
Cash Flow
(1,000) FA
50 shares × $20 per share = $1,000
8-31
Treasury Stock
Assume Nelson resells 30 shares of its treasury
stock at a price of $25 per share.
Cash
750
=
=
n/a
+
+
Other
Equity
Accts.
n/a
PIC from
Treasury
Treasury
Stk.
+
Stk.
+
150
(600)
Revenue - Expenses =
n/a
n/a
=
Net
Income
n/a
Cash
Flow
750 FA
30 shares × $25 per share = $750
30 shares × $20 cost = $600
No gain or loss is recognized on sale of treasury stock.
8-32
LO 6
LO 1
Explain the effects of
declaring and paying
cash dividends on a
company’s financial
statements.
8-33
Cash Dividends
• Corporations are not required to pay
dividends, but once declared, dividends
are legal obligations.
Stockholders
Corporation
Dividends
8-34
Cash Dividends
Declaration Date
Date of Record
Payment Date
Record liability
for dividend.
No entry
required.
Record payment of
cash to stockholders.
• Three important dates
8-35
Declaration Date
On October 15, 2015, Nelson’s Board of
Directors declared a cash dividend on the 100
outstanding shares of 7 percent, $10 par
preferred stock. The dividend will be paid on
December 15 to stockholders of record on
November 15. The effects on the financial
statements would be as follows:
Assets
Cash
n/a
= Liabilities +
Equity
Com.
Stk.
n/a
= Div. Pay. +
=
70 +
+
+
Ret.
Earn.
(70)
Revenue - Expenses =
n/a
n/a
=
Net
Income
n/a
Cash Flow
n/a
Declaration
Date
Record liability
for dividend.
0.07 × $10 par × 100 shares = $70
8-36
Date of Record
On October 15, 2015, Nelson’s Board of
Directors declared a cash dividend on the 100
outstanding shares of 7 percent, $10 par
preferred stock. The dividend will be paid on
December 15 to stockholders of record on
November 15. The effects on the financial
statements would be as follows:
Date of Record
No entry
required.
No entry required on
November 15.
8-37
Payment Date
On October 15, 2015, Nelson’s Board of
Directors declared a cash dividend on the 100
outstanding shares of 7 percent, $10 par
preferred stock. The dividend will be paid on
December 15 to stockholders of record on
November 15. The effects on the financial
statements would be as follows:
Payment Date
Assets
= Liabilities +
Cash
= Div. Pay. +
(70) +
(70) =
Equity
Com.
Stk.
n/a
+
+
Ret.
Earn.
n/a
Revenue - Expenses =
n/a
n/a
=
Net
Income
n/a
Cash Flow
(70) FA
Record payment of
cash to stockholders.
8-38
LO 7
LO 1
Explain the effects of
stock dividends and
stock splits on a
company’s financial
statements.
8-39
Stock Dividends
Distribution of additional shares
of stock to stockholders.
No change in total
stockholders’ equity.
No change in
par values.
All stockholders retain
same percentage
ownership.
8-40
Stock Dividends
Nelson’s Board of Directors decided to issue a 10 percent
stock dividend on the 150 outstanding shares of its $20 par
value, Class B common stock. Market value at the time of the
stock dividend was $30 per share. The effects on the
financial statements would be as follows:
Assets
n/a
= Liabilities +
=
=
n/a
+
+
Equity
Com.
PIC in
Stk.
+ Excess +
150 +
300 +
Ret.
Earn.
(450)
Revenue - Expenses =
n/a
n/a
=
Net
Income
n/a
Cash Flow
n/a
0.10 × 150 shares × $20 par = $300
0.10 × 150 shares × $30 per share = $450
An amount from
Retained Earnings is moved to other equity accounts.
8-41
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.
8-42
Stock Splits
Nelson’s Board of Directors declared a 2-for-1 stock split on
the 165 outstanding shares of its $20 par value, Class B
common stock.
Before
Split
Common Stock Shares
After
Split
165
Par Value per Share
$
20
Total Par Value
$ 3,300
8-43
Stock Splits
Nelson’s Board of Directors declared a 2-for-1 stock split on
the 165 outstanding shares of its $20 par value, Class B
common stock.
Before
Split
Common Stock Shares
After
Split
165
Par Value per Share
$
20
Total Par Value
$ 3,300
$
330
Increase
10
Decrease
$ 3,300
No Change
No journal entry required – Change par value
and number of shares authorized and outstanding.
8-44
LO 8
LO 1
Show how the
appropriation of
retained earnings
affects financial
statements.
8-45
Appropriation of Retained
Earnings
• A corporation’s directors can voluntarily limit dividends
because of a special need for cash.
• Assume that Nelson’s Board of Directors appropriated
$1,000 of retained earnings for future expansion. The
effects on the financial statements follow:
Assets
n/a
= Liabilities +
=
=
n/a
+
+
Com.
Stk.
n/a
+
+
Equity
Ret.
App. Ret.
Earn. + Earn.
(1,000) +
1,000
Revenue - Expenses =
n/a
n/a
=
Net
Income
n/a
Cash Flow
n/a
8-46
Financial Statement Presentation
Beginning Balance $
5,000
Net Income
6,000
Cash dividend
(70)
Stock dividend
(450)
Ending Balance
10,480
8-47
LO 9
LO 1
Explain some uses of
accounting
information in
making stock
investment
decisions.
8-48
The Financial Analyst
Stockholders benefit in two ways
when a company generates earnings.
Dividends
Increase in market
price per share
8-49
Exercising Control through
Stock Ownership
The greater the number of
stockholders, the more widely held a
company is.
Stock concentrated in the hands of a
few persons means that a company is
closely held.
The more influence an investor has over
the operations of a company, the more the
investor can benefit from owning stock.
8-50
End of Chapter Eight
8-51