Questions and Answers
What is a corporation?
A corporation can be held liable for its debts just like its stockholders.
False
What allows the transfer of ownership rights in a corporation?
Transferable shares
How long does a corporation continue to exist?
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What does the lack of mutual agency for stockholders imply?
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Corporations do not face government regulation.
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What type of taxes do corporations face?
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A corporation is created by obtaining a ______ from a state government.
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Who controls a corporation?
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Which of the following is a right of stockholders?
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What is authorized stock?
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What distinguishes market value per share?
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Par value is the same as market value.
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What is treasury stock?
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What is a stock split?
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What happens with cumulative preferred stock?
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Study Notes
Corporation Overview
- A corporation is a separate legal entity from its owners, possessing many rights and privileges similar to individuals.
- Owners are known as stockholders or shareholders.
Legal Structure
- Operates with rights and responsibilities akin to a person, executing actions through its officers and managers.
- Limited liability protects stockholders from being personally responsible for corporate debts and actions.
Ownership and Operations
- Stock ownership can be easily transferred, typically without disrupting corporate operations, unless it affects the board of directors.
- Corporate existence is continuous and not dependent on the lives of its owners.
Stockholder Rights and Management
- Stockholders do not have mutual agency; they cannot bind the corporation to contracts.
- Control is exercised through electing a board of directors, which governs the corporation’s operations.
Financial Aspects
- Corporations benefit from capital accumulation due to limited liability, ease of stock transfer, unlimited lifespan, and non-agent status of shareholders.
- Governed by state incorporation laws, corporations face more regulation than sole proprietorships.
Taxation
- Corporations incur various taxes, including property and payroll taxes, plus significant federal and state corporate income taxes, which can exceed 40% of pretax income.
Incorporation Process
- Establishing a corporation requires obtaining a charter from a state government, which details organized processes and requirements.
Costs of Organization
- Initial costs include legal fees, promoters’ fees, and payments for acquiring a charter, collectively known as organization expenses.
Stockholder Rights
- Rights include attending meetings, selling shares, purchasing additional stock, receiving dividends, and sharing in asset distribution upon liquidation.
Stock Characteristics
- Authorized stock limits the number of shares a corporation can sell based on its charter.
- Market value per share refers to the buying and selling price in the market, while par value is an arbitrary value assigned to shares not reflecting market price.
- No par value stock lacks an assigned value in the corporate charter, whereas stated value stock has an assigned value for legal capital considerations.
Equity and Retained Earnings
- Stockholders' equity includes paid-in capital (cash and assets received from stockholders) and retained earnings (cumulative net income not distributed as dividends).
- Premiums on stock occur when sold above par value, while discounts occur when sold below it.
Dividend Policies
- Cash dividends provide returns and require sufficient retained earnings, available cash, and board declaration.
- Stock dividends involve distributing additional shares without payment; categorized into small (25% or less) and large (more than 25%) stock dividends.
- Stock splits involve distributing additional shares based on ownership percentage without affecting total equity.
Types of Stock
- Preferred stock has priority in dividends and liquidations over common stock, with types including cumulative (dividends in arrears) and noncumulative (no obligation for undeclared dividends).
- Treasury stock represents shares repurchased by the corporation, which cannot receive dividends or exercise voting rights.
Retained Earnings Management
- Restricted retained earnings limit treasury stock purchases to retained earnings amounts.
- Appropriated retained earnings denote earmarked funds for special activities through voluntary transfers from retained earnings.
Stock Options
- Stock options grant the right to purchase common stock at a set price within a specified timeframe, increasing in value as stock prices rise above the option price.
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Description
Test your knowledge of key terms in Accounting Chapter 13 with these flashcards. Learn about important concepts like corporations and their legal status as separate entities. Perfect for students preparing for exams or refreshing their understanding of accounting principles.
