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Chapter 11: The Corporate Form of Organization

corporation
created by law; has most of the rights and priviledges of a person
two common classifications of corporations
1. by purpose
2. by ownership
publicly held corporation
may have thousands of stockholders, and its stock is traded on a national securities market such as the New York Stock Exchange
privately held corporation
also known as a closely held corporation; usually has only a few stockholders and does not offer its tock for sale to the general public; much smaller than publicly hedl corporations
Separate Legal Existence
means that a corporation acts under its own name rather than in the name of its stockholders
Limited Liability of Stockholders
means that the liability of stockholders is limited to ther investment in the corporation; creditors have no legal claims on the personal assets of the stockholders unless fraud has occurred
Transferable Ownership Rights
means that stockholders may dispose of part or all of their interest in a corporation simply by selling their stock
Ability to Acquire capital
means that it is easy for a coporation to obtain captial through the issuance of stock
Continuous life
means that the life of a corporation, which is stated on the charter, can be renewed continuously
controller
Chief Accounting officer; (1) miantains the accounting records (2) maintains an adequate system of internal control (3) prepares financial statements, tax returns, and internal reports
treasurer
has custody of the corporation’s funds and maintains the company’s cash position
double taxation
corporate income is taxed at the corporate level and at the individual level
S corporation
a type of corporate from that allows for legal treatement as a corporation but tax treatment as a partnership but the size of the corporation is limited
charter
a grant that forms a corporation; a document that describes the name and prurpose of the corporation, the types and numbers of shares of stock that are authroized to be issued and the number of shares that theses individuals agreed to purchase
by-laws
establish the internal rules and procedures for conducting the affairs of the corporation
common stock
the kind of stock issued when a corporation has only one class of stock; gives the stockholder a vote in the way that the company is run
stock certificate
proof of stock ownership evidenced by a printed or engraved form
Stockholders have the right to…
1. vote in election of board of directors
2. receive dividends
3. preemptive right
4. share in assets upon liquidation
preemptive right
the stockholder’s right to keep the same percentage ownership when new shares of stock are issued
authorized stock
the amount of stock that a corporation is authorized to sell as indicated in its charter; the authorization of common stock does not result in a formal accounting entry
par value stock
capital stock that has been assigned a value per share in the corporate charter
legal capital
used to determine par value
market price
the actual price that stock is sold at
no-par value stock
capital stock that has not been assigned a value in the corporate charter
stated value
a value assigned by the board of directors to no-par shares
the stockholders’ equity section of a corporation’s balance sheet includes…
1. paid in (contributed) capital
2. retained earnings (earned capital)
paid-in capital
the amount stockholders paid to the corporation in exchange for shares of ownership
retained earnings
earned capital held for future use in the business; net income that a company retains in the business
treasury stock
a corporation’s own stock that has been reacquired by the corporation and is bein held for future use
Reasons a corporation may acquire treasury..
1. to reissue the shares to officers/ employees
2. to increase trading of the company’s stock in the securities market
3. to have additional shares available for use in acquiring other companies
4. to reduce the number of shares outstanding and increase earnings per share
outstanding stock
the number of shares of issued stock that are being held by stockholders
preferred stock
has contractual provisions that give it preference over common stock in certain areas like priority in relation to dividends and assets in the event of liquidation; no voting rights however
cumulative dividend
a feature often included in preferred stock contracts that stipulates that preferred stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders are paid dividends
dividends in arrears
preferred dividends not declared in a given period when preferred stock is cumulative
dividend
a distribution by a corporation to its stockholders on a pro rata basis
pro rata
means that if you own 105 of the common shares, you will receive 10% of the dividend
cash dividend
a pro rata distribution of cash to stockholders; not paid on treasury shares
for a corporation to pay a cash dividend it must have…
1. Retained earnings
2. Adequate cash
3. Declared dividends
three important dates in connection with dividends
1. the declaration date
2. the record date
3. the payment date
declaration date
date on which the board of directos formally authorizes the cash dividend and announces it to the stockholders; commits the corporation to a binding legal obligation
record date
date at which the company determines ownership of the outstanding shares for dividend purposes
payment date
date on which the company makes cash divdedn payments to the stockholders on record
stock dividend
a pro rata distribution of the corporation’s own stock to stockholders; paid in stock
stock split
involves the issuance of additional shares of stock to stockholders according to their percentage ownership; results in a reduction in the par or stated value per share
retained earnings restrictions
make a portion of the balance currrently unavailable for dividends
two classifications within paid-in capital
1. Capital Stock
2. Additional paid-in capital
payout ratio
measures the percentage of earnings a company distributes in the form of cash dividends to common stockholders; computed by dividng total cash dividens declared to common shareholders by net income
return on common stockholders’ equity (ROE)
a widely used ratio that measures profitability from the common stockholders’ viewpoint

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