Accounting for Corporations Lecture Notes PDF

Accounting for Corporations Dr. Amr Hassan Lecture Notes Lecture (1)  Chapter 1 Corporations: Organization and Share Transactions Types of Business Entities: 1- Sole Proprietorship: is a business owned by one person. The owner is often the...

Accounting for Corporations Dr. Amr Hassan Lecture Notes Lecture (1)  Chapter 1 Corporations: Organization and Share Transactions Types of Business Entities: 1- Sole Proprietorship: is a business owned by one person. The owner is often the manager of the business. 2- Partnership: is the relationship between two or more people to do trade or business. Each person contributes money, property, labor or skill, and shares in the profits and losses of the business. 3- Corporation: is a legal entity, separate and distinct from its owners, has most of the rights and duties of a person. For example, it owns its assets and owes it liabilities, and it must pay income taxes. Types of Corporations (by ownership): 1- Privately held (closely held) corporations. 2- Publicly held corporations. Characteristics of Corporations: 1- Separation of Ownership and Management: by law, corporation is recognized as a legal entity separate and distinct from those who own it. 2- Limited liability of shareholders: The liability of shareholders is normally limited to the amount of their investment in the corporation. 3- Transferable ownership rights: Shareholders may transfer part or all of their ownership interest in a corporation simply by selling their shares. 4- Continuous life: that’s not affected by the death, withdrawal, or incapacity of a shareholder. 5- Ease of raising capital: by the issuance of capital stock. 6- Shareholders manage the corporation indirectly through a board of directors they elect. 7- Corporations are required to comply with the governmental regulations: For example: Business laws prescribe the requirements for issuing shares, and the distribution of dividends to shareholders. 8- Some corporations are subject to double taxation: As a legal entity, corporations must pay government taxes based on their income every year, and again the shareholders may pay taxes on cash dividends they receive. 1 Forming a corporation: The initial step in forming a corporation is to file an application with the governmental agency. The application includes various information such as: 1- The name and purpose (type of business) of the proposed company. 2- Amount, types, and number of shares to be authorized. 3- The names of the incorporators (founders) and the shares subscribed by each of them. After all government requirements are fulfilled and the application is approved, a charter (certificate of incorporation) is granted, and that’s means the corporation that is recognized as a legal entity. Types of Shares: 1- Common stock (ordinary shares): class of shares that represents the basic ownership interest, that bears the ultimate risk of gains and losses. 2- Preferred stock (preference shares): has contractual provisions that give a preference or priority over common stockholder in dividends, usually at a stated value or percentage, before distributing any amount to the common shareholders. In return for this preference, the preferred shareholders may lose the voting right. Equity: Equity is defined as “the residual interest in the assets of the corporation after deducting all liabilities”. Equity is often referred to as “shareholders' equity”. Equity is classified into two categories; 1- Contributed capital (paid-in capital): the total amount paid in on capital provided by shareholders to be invested in the corporation. 2- Earned capital (retained earnings): the capital that develops over time from profitable operations. Issuance of Shares: A corporation may issue shares directly to investors in closely held corporations or indirectly through an investment bank in an initial public offering (IPO). In setting the price of a new issue of stock, a corporation considers several factors such as: 1- The company's expected future earnings. 2- The company's expected dividend rate per share. 3- The company's current financial position. 4- The current state of the securities exchange market. 5- The current state of the local economy. 2 Capital Concepts: 1- Authorized shares: The maximum number of shares that a corporation is authorized to issue (sell), and this is shown in its certificate of incorporation (charter). 2- Issued shares: The shares that a corporation have been distributed to shareholders. 3- Treasury shares (Reacquired shares): The shares that a corporation bought back, to reduce the number of outstanding shares on the open market. 4- Outstanding shares: The number of issued shares after deducting of treasury shares. (Outstanding shares = Issued shares ― Treasury shares). Par value & No-Par value shares: 1- Par value share: is capital stock that has been assigned a value per share in the certificate of incorporation (charter). 2- No-par value share: is capital stock that has not been assigned a value per share in the certificate of incorporation (charter). In many countries the board of directors is permitted to assign a “stated value” to the no-par value shares, which becomes the legal capital per share. Notes: The par value share represents the minimum amount of legal capital that a company must maintain in the business to protect its creditors. Par value and stated value are not indicative of the market value of the shares. 3