Accounting Chapter 13 Flashcards

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.