First step to forming a corporation
File an application of incorporation.
More than 1/2 of the largest companies are
Incorporated in Delaware.
After an application is approved, the state grants
A Charter or Articles of Incorporation - which create the corporation.
Stockholders' Equity =
Contributed Capital + Retained Earnings
Contributed Capital
Amounts received from the sale of stocks to stockholders
Retained Earnings
Net income earned (not paid as dividends) since inception.
Capital Stock is
Preferred Stock + Common Stock
Common Stock
Basic stock of corporation; has voting rights; represents ownership interest.
Preferred Stock
Optional stock; no voting rights; carries superiority over common stock in payment of dividends.
Dividends
Distributed to preferred stockholders before common stockholders
Authorized Shares
Maximum shares which corporation is allowed to issue.
Issued Shares
Authorized shares which have been sold to stockholders.
Outstanding Shares
Issued Shares that are actually owned by stockholders. **Issued shares are not usually same amount as Outstanding shares
Stock Repurchase
AKA: Buyback program; held as treasury shares. Used to increase stock price.
Par Value
Arbitrary amount stated on the face of stock certificate. **Neither the value of the stock nor the issue price. Represents LEGAL CAPITAL.
Capital Stock =
Par value per share x # of shares issued
Additional paid-in capital
Amount received for stock in addition to par value.
Additional Paid-In Capital & Par Stock Value (Journal Entry)
Dr) Cash xxx
Cr) Common Stock xxx
APIC xxx
No Par Stock Value (Journal Entry)
Dr) Cash xxx
Cr) Common Stock xxx
Dividends
NOT AN EXPENSE!!
Date of Declaration
Date which firm declares it will pay dividends. Corporation incurs liability to pay amount of dividend
Date of Record
Stockholders holding shares on this date receive dividends.
Date of Payment
Dividends are actually paid.
Date of Payment (Journal Entry)
Dr) Cash Dividends Payable xxx
Cr) Cash xxx
Cash dividends require
Retained Earnings & Cash
Date of Declaration (Journal Entry)
Dr) Cash Dividends xxx
Cr) Cash Dividends Payable xxx (Current Liability)
Date of Record (Journal Entry)
No entry is necessary.
Cumulative Preferred Stock
Requires any past, omitted dividends must be paid to preferred stockholders, before common stockholders.
Cumulative Preferred Stock (Steps)
1) Distribute dividends in arrears, if any, to preferred stocks.
* If no dividends are declared in 1 year, dividend on preferred stock is considered to be "in arrears"
2) Distribute current dividends preferred stocks.
3) Distribute remainder to common sto
Stock Dividends
Companies issue additional shares of its own stock instead of paying cash dividends. 1) Insufficient Cash 2) Tax (Stocks aren't taxable to stockholders)
Stock Split
Reduces stock price and makes stocks more affordable to a wider range of investors. Reduces par value per share and results in additional issuance of shares.
Treasury Stock
When a company buys back its own stocks from stockholders after issuance. Main reason: Increase stock price. **No voting rights. When acquired, it's recorded at cost = historical cost principle. Contra-Equity Account (Debit Balance)
Treasury Stock Purchase (Journal Entry)
Dr) Treasury Stock xxx
Cr) Cash xxx
Treasury Stock Resell (Journal Entry)
Dr) Cash xxx
Cr) Treasury Stock xxx
APIC xxx
Earnings per share (EPS)
Most significant business indicator: one of the most widely used accounting statistics. Measures dollars earned by each share of "common" stock.
Earnings per share (Formula)
(Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding
Statement of Stockholders' Equity
Sometimes shown instead of statement of retained earnings. Shows changes in all stockholders' equity accounts.