Untitled Quiz

Accounting for Corporations - Lecture (1)

• Types of Business Entities:

  • Sole Proprietorship: Owned by one person, who manages the business.
  • Partnership: Relationship between two or more people to conduct business, sharing profits and losses.
  • Corporation: A separate legal entity, distinct from its owners, having rights and duties similar to a person. It owns assets, owes liabilities and pays income taxes.

• Types of Corporations (by Ownership):

  • Privately Held (Closely Held):
  • Publicly Held:

• Characteristics of Corporations:

  • Separation of Ownership and Management: Corporation is distinct from its owners.
  • Limited Liability of Shareholders: Shareholders' liability is limited to their investment.
  • Transferable Ownership Rights: Shares can be transferred easily.
  • Continuous Life: Not affected by death, withdrawal or incapacity of shareholders.
  • Ease of Raising Capital: Issuing stock enables easy capital raising.
  • Indirect Management: Shareholders manage indirectly through elected board of directors.
  • Government Regulations: Corporations must adhere to governmental regulations (business laws) like share issuance and dividend distribution.
  • Double Taxation: Corporations pay taxes on their income, and shareholders may pay taxes on dividends.

Forming a Corporation

• Initial Step: Filing application with the government.
• Application Information:
  • Company's name and purpose
  • Authorized shares (amount, type, and number)
  • Incorporators (founders) and their shares
• Charter (Certificate of Incorporation): Legal recognition as a corporation.

Types of Shares

• Common Stock (Ordinary Shares): Basic ownership interest, bearing ultimate risk.
• Preferred Stock (Preference Shares): Priority over common stock in dividends (usually at a stated value or percentage). May lose voting rights.

Equity

• Equity Definition: Residual interest in corporate assets after deducting liabilities.
• Categories:
  • Contributed Capital (Paid-in Capital): Initial capital contributions by shareholders.
  • Earned Capital (Retained Earnings): Capital generated by profitable operations.

Issuance of Shares

• Direct/Indirect Issuance: Directly to investors (closely held) or indirectly through an IPO (initial public offering)
• Factors in Setting Stock Price:
  • Expected future earnings
  • Expected dividend rate
  • Current financial position
  • Securities exchange market state
  • Local economy state

Capital Concepts

• Authorized Shares: Maximum number of shares a corporation is authorized to issue (shown in incorporation charter).

• Issued Shares: Number of shares distributed to shareholders.

• Treasury Shares: Shares reacquired by the corporation to reduce the number of outstanding shares.

• Outstanding Shares: Number of issued shares less treasury shares.

• Par Value Shares: Shares assigned a value per share in the certificate of incorporation.

• No-Par Value Shares: Shares not assigned a stated value in the certificate of incorporation. In some countries, the board can assign a value.

• Par value and stated value notes: The par value of a share represents a legal minimum capital; par and stated value do not reflect market value.