Corporations: Types and Characteristics

• Corporations can be classified by purpose as either not-for-profit or for-profit.
• Corporations can be classified by ownership as either publicly held or privately held.
• Publicly held corporations: McDonald's, Ford Motor Company, PepsiCo, Google
• Privately held corporations: Cargill Inc.

Characteristics of a Corporation

• Advantages of a corporation include separate legal existence, limited liability of stockholders, transferable ownership rights, ability to acquire capital, and continuous life.
• Disadvantages of a corporation include government regulations, additional taxes, and corporate management.
• A corporation acts under its own name rather than in the name of its stockholders, demonstrating separate legal existence.
• Stockholders' liability is limited to their investment.
• Shareholders can sell their stock, illustrating transferable ownership rights.
• Corporations can obtain capital through the issuance of stock.
• Forming a corporation involves filing an application with the Secretary of State, receiving a state charter, and developing by-laws.
• Many companies incorporate in states like Delaware and New Jersey due to favorable corporate laws.
• Organization costs are expensed as incurred.

Ownership Rights of Stockholders

• Stockholders have the right to vote in the election of the board of directors and on actions requiring stockholder approval.
• Stockholders can share in corporate earnings through dividends.
• Stockholders maintain the same percentage ownership when new shares are issued via preemptive rights.
• Stockholders share in assets upon liquidation in proportion to their holdings, known as a residual claim.

Stock Issue Considerations

• A corporate charter indicates the amount of stock a corporation can sell.
• The number of authorized shares is reported in the stockholders’ equity section.
• Factors influencing the price of a new stock issue: anticipated future earnings, expected dividend rate per share, current financial position, state of the economy, and state of the securities market.
• Stock of publicly held companies is traded on organized exchanges.
• Stock prices are determined by the interaction between buyers and sellers.
• Market prices tend to follow the trend of a company’s earnings and dividends.
• Market prices may experience fluctuations due to factors beyond the company’s control.
• Par value used to determine the legal capital per share that a company must retain to protect corporate creditors.
• Many states do not require par value, and no-par value stock is common.
• A board of directors assigns a stated value to no-par shares in many states.

Corporate Capital

• Paid-in capital includes common stock and preferred stock accounts.
• The sources of equity include paid-in capital and retained earnings accounts.
• Paid-in capital is the total amount of cash and assets paid into the corporation by stockholders in exchange for capital stock.
• Retained earnings is the net income a corporation retains for future use.
• Accounting for common stock issues involves identifying the specific sources of paid-in capital and maintaining the distinction between paid-in capital and retained earnings.
• The issuance of common stock affects only paid-in capital accounts.
• Common stock can be issued for services or noncash assets.
• The cost is determined by the fair market value of the consideration given up or received, whichever is more clearly determinable.

Treasury Stock

• Treasury stock is a corporation's own stock that it has reacquired but not retired.
• Corporations purchase their outstanding stock to reissue shares, enhance stock market value, have shares for acquisitions, increase earnings per share, and rid the company of disgruntled investors.
• Treasury Stock is debited for price paid to reacquire shares.
• Treasury is a contra stockholders' equity account, and not an asset.
• Purchase of treasury stock reduces stockholders' equity.
• Sales of treasury stock above or below cost increase total assets and stockholders’ equity.

Preferred Stock

• Dividends, assets during liquidation, and nonvoting rights are features often associated with preferred stock.
• Accounting for preferred stock issuance is similar to common stock.

Dividend Preferences

• Preferred stockholders have the right to receive dividends before common stockholders.
• The per-share dividend amount is a percentage of the preferred stock’s par value, or a specified amount.
• Cumulative dividends are paid to preferred stockholders, including any dividends in arrears, before common stockholders.

Statement Analysis and Presentation

• Book Value Per Share = Total Stockholders’ Equity / Number of Common Shares Outstanding
• Book value per share generally does not equal market value per share.
• When a company has preferred stock, the preferred stockholders' claim on net assets must be deducted from total stockholders’ equity.