Corporation
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Created by law
Legal entity
Has most of the rights and privileges
of a person
Classified by purpose and ownership
 Purpose - profit or nonprofit
 Ownership - publicly or privately held
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Publicly Held Corporation...
May have thousands of stockholders.
Its stock is regularly traded on national
securities markets.
Privately Held Corporation...
Usually has only a few stockholders and does
not offer its stock for sale to general public.
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Characteristics of a
Corporation
Separate legal existence
Limited liability of stockholders
Transferable ownership rights
Ability to acquire capital
Continuous life
Corporation management
Government regulations
Additional taxes
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Separate Legal Existence
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Separate and distinct from its
owners.
Acts under its own name.
May buy, own, sell property;
borrow money; enter into
legally binding contracts; may
sue or be sued; pays its own
taxes.
Owners (stockholders) cannot
bind corporation unless
owners are agents of the
corporation.
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Limited Liability of Stockholders
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Creditors have recourse only to
corporate assets to satisfy their
claims.
Liability of stockholders limited
to their investment in their
corporation.
Creditors have no legal claim
on personal assets of stockholders
unless fraud has occurred.
Stockholders’ losses limited to
amount of capital invested.
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Transferable Ownership Rights
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Ownership evidenced by shares of stock
Transfer of ownership among stockholders
has no effect on corporation’s operating
activities or assets,
liabilities and total
stockholders' equity.
Corporation does not
participate in transfer of
ownership rights
after original sale.
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Ability to Acquire Capital
Limited liability of stockholders
coupled with transferable ownership
rights make it easy to raise capital.
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Continuous Life
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Life of corporation is stated in its charter may be perpetual or limited to specific
number of years (can be extended).
Corporation is separate
legal entity, thus life
not affected by
withdrawal, death,
or incapacity of a stockholder.
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Corporation Management
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The corporation establishes by-laws
upon receipt of its charter from the
state of incorporation.
Stockholders manage corporation
indirectly through board of directors.
Board of directors
 formulates operating policies
 selects officers to execute policy and to
perform daily management functions.
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Corporate Organization Chart
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Additional Taxes
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Forming a Corporation
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A corporation can operate in
various states (must have a license
from each state in which it does
business) but can be incorporated
in only one state.
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Stockholder Rights
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Once chartered, the corporation sells
stock .
If only one class of stock - called
common stock.
Ownership rights specified in the
articles of incorporation or by-laws.
Proof of stock ownership is a printed
or engraved form known as a stock
certificate.
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Stockholders’ Equity Section of a
Corporation’s Balance Sheet
Two Parts:
 Paid-in (contributed) capital - Amount paid to
corporation by stockholders in exchange for shares
of ownership.
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Retained earnings (earned capital) Earned capital held for future use in the business.
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Hydro-Slide, Inc.
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Common stock
Paid-in capital in excess of par
Total paid-in capital
Retained earnings
Total stockholders' equity
$ 2,000
4,000
$ 6,000
27,000
$33,000
Mead, Inc.
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Common stock,$5par value,
100,000 shares issued and
outstanding
Retained Earnings
Total stockholders’ equity
$ 500,000
200,000
$ 700,000
BEFORE TREASURY STOCK TRANSACTION
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Treasury Stock...
Is a corporation's own stock
 that has been issued
 fully paid for
 reacquired by the corporation
 held in its treasury for future use.
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Corporations Acquire Treasury
Stock to...
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Reissue shares to officers and employees
under bonus and stock compensation plans.
Increase trading of company's stock in
securities market in hopes of enhancing
market value.
Have additional shares available for use in
acquisition of other companies.
Reduce number of shares outstanding thereby
increasing earnings per share.
Prevent a hostile takeover.
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Purchase of Treasury Stock
On February 1, 2007, Mead acquires
4,000 shares of its stock at $8 per share.
Treasury Stock
Cash
32,000
32,000
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Treasury Stock
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The Treasury Stock account would increase by
the cost of the shares purchased - $32,000.
The original paid-in capital account, Common
Stock, would not be affected because the
number of issued shares does not change.
Treasury stock is deducted from total paid-in
capital and retained earnings in the
stockholders' equity section of the balance
sheet.
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Mead, Inc.
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Common stock,$5par value,
100,000 shares issued and
96,000 outstanding
Retained Earnings
Total stockholders’ equity
Less: Treasury Stock
Total stockholders’ equity
$ 500,000
200,000
700,000
32,000
$ 668,000
AFTER TREASURY STOCK TRANSACTION
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Preferred Stock...
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Capital stock that has contractual
preferences over common stock in
certain areas.
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Dividends
Assets in the event of liquidation
Preferred stockholders do not have
voting rights.
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Preferred Stock
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Assume Corporation issues 10,000 shares of $10
par value preferred stock for $12 cash per share.
Cash
120,000
Preferred Stock
100,000
Paid-in Capital in Excess
20,000
of Par Value--Preferred Stock
(Preferred stock may have either a par value or no-par
value.)
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Dividend Preferences
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Preferred stockholders have the right to
share in the distribution of corporate
income before common stockholders.
The first claim to dividends does not
guarantee dividends.
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Cumulative Dividend...
Is a feature of preferred stock entitling
the stockholder to receive current and
unpaid prior-year dividends before
common stockholders receive any
dividends.
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Dividends in Arrears...
 Are preferred dividends that were
scheduled to be declared but were
not declared during a given period.
 Are not a liability. No obligation
exists until a dividend is declared
by the board of directors.
 Must be disclosed in the notes to
the financial statements.
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Liquidation Preference
Is a feature that gives preferred
stockholders preference to
corporate assets in the event of
liquidation.
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Retained Earnings...
Is net income that is retained in the
business.
The balance in retained earnings is
part of the stockholders' claim on the
total assets of the corporation.
Retained earnings does not represent
a claim on any specific asset.
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Deficit
Is a debit balance in retained
earnings and is reported as a
deduction in the stockholders'
equity section of the balance sheet.
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Retained Earnings Restrictions...
Are legal, contractual or voluntary
circumstances that make a
portion of retained earnings
currently unavailable for
dividends.
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Stockholders’ Equity with Deficit
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