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
Components of Shareholders’ Equity:
Two sources of financing:
o Contributed capital
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
Benefits of Share Ownership:
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
- 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.
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
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
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
- 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
- Enough cash to pay the dividend.
Stock Dividends: A stock dividend is a distribution of additional shares of stock to
All shareholders retain the same percentage ownership. The shareholders