ARBUS 102 February 2

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Accounting & Financial Management
AFM 333
Seth Brouwers

February 2, 2011 CHAPTER 11: REPORTING AND INTERPRETING SHAREHOLDER’S EQUITY Advantages of Corporate Ownership  Main advantages: ease of raising large amounts of money - Simple to become an owner - Easy to transfer ownership - Provides limited liability Characteristics of Corporations:  Act of creation is costly  Pays taxes as a separate entity - Often at rates lower than individuals -  Not all are public companies - There are a long more private corporations in Canada than public corporations Components of Shareholders’ Equity:  Two sources of financing: - Equity o Contributed capital  Common shares  Additional paid in capital o Retained earnings  Reports cumulative amount of net income  Portion of the net income that has been reinvested in the business rather then paid out as dividends - Debt Benefits of Share Ownership:  Dividends  Residual claim  Voting rights Authorize, Issued and Outstanding  Authorized shares are the maximum number of shares of stock that can be sold to the public.  Authorized shares can be classified as either issued or unissued.  Issued shares are shares of stock that have been sold to the public at some point. - Issued shares can be classified as either outstanding shares or treasury shares. - Outstanding shares are shares that are currently owned by shareholders. - Treasury shares are shares that were once owned by shareholders but the corporation purchased the shares in the stock market. Now, the corporation is the owner of those shares.  Unissued shares are shares of stock that have never been sold to the public. Common Shares:  All corporations must have at lease on type of shares, called common shares - Basic voting shares issued by a corporation to shareholders - One of the uses of voting rights is elect Directors to the Board Types of Common Share Transaction  Issuance  Repurchase  Dividends - Cash - Stock  Stock Splits  Preferred Shares Common Share Transactions:  Repurchase of shares - A corporation repurchases it shares to: o Reduce the number of shares outstanding in the market o Send a signal that the company believes its stock is undervalued  why?? o Other reasons but not in Canada; the Canada Business Corporations Act (CBCA) requires that all repurchased shares be cancelled; as a result, treasury shares are rare in Canada - Calculate the book value of the outstanding shares at the time of purchase - Compare the book value to the price received to determine if there was a gain (contributed surplus) or a loss (retained earnings Cash Dividends on Common Shares  There is no legal obligation to declare a cash dividend, but once declared, there is a legal obligation to pay the dividend. Most corporations that pay cash dividends pay them quarterly.  Cash dividends are declared by the board of directors.  To pay a cash dividend, a corporation must have two things: - Sufficient retained earnings to absorb the dividend without going negative - Enough cash to pay the dividend. Stock Dividends:  A stock dividend is a distribution of additional shares of stock to shareholders.  All shareholders retain the same percentage ownership. The shareholders h
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