chapter 13.docx

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Financial Accounting
Mark Fitzpatrick

Corporation - legal entity separate from owners - owners are known as share holders - shares most of the rights and privileges of a person - can be profit or not-for-profit and also an income trust - publicly traded corporations have shares that are often traded on a stock market such as the TSX - privately traded corporations, AKA closely held corporations, have few shareholders and shares that are not traded on the market Characteristics of a Corporation Separate Legal Existence – the corporation acts under its own name and as a single person – the acts of shareholders do not bind to the corporation Limited Liability of Shareholders – each shareholder is only liable for the amount they invested – the personal assets of shareholders are not at risk – huge advantage of a corporation, but creditors can demand personal guarantees from more powerful shareholders, putting their personal assets at risk Transferable Ownership of Rights – shareholders can transfer their ownership of the corporation at any time – does not require approval of the corporation – does not affect operation of corporation – transactions occur on a personal level Ability to Acquire Capital – corporation can simply issue shares to acquire capital from investors – large corporations will often be able to issue many shares – small corporations may find it tough to issue their shares Continuous Life – corporations continue operating even if there is a death/withdrawal of anybody associated with the corporation – corporations have unlimited life Corporation Management – board of directors selected by shareholders control the operations of the corporation – the board of directors can be comprised of anyone Government Regulations – corporations can be incorporated either federally or provincially – government laws regulate the issuing of shares, distribution of income and reacquisition of shares – increases costs to adhere to government regulations Income Tax – does not act similar to a proprietorship or partnership where income tax was paid personally by each owner – corporations pay federal and provincial taxes as a single person would – shareholders pay taxes on cash dividends but receive credit to reduce the amount of tax – shareholders don’t pay taxes on net income of the corporation until it is distributed Advantages of a Corporation - Corporation Management – professional board of directors - Separate Legal Existence – acts of owners do not bind to the corporation - Limited Liability of Shareholders – owners only liable for their investment - Income Tax – income tax can be reduced or deferred by corporations - Transferable Ownership of Rights – ownership is easily exchanged and does not affect the corporation - Ability to Acquire Capital – large corporations can easily acquire capital by simply issuing shares - Continuous Life – if anyone associated with the corporation withdraws/dies, the corporation continues to run as normal Disadvantages of a Corporation - Corporation Management – shareholders often have very little say in the management of the corporation - Government Regulations – can be costly to adhere to government regulations - Income Tax – corporations are initially taxed for their net income, and once distributed, shareholders are once again taxed Forming a Corporation - To form a corporation, certain documents must be filed - These files include: name and purpose of corporation, document regarding the share capital and number of shares, names and addresses of founders, and location of corporation headquarters - Corporations must get a license in every province they are active - Organization costs are any costs that incur while forming the corporation - Organization costs can include legal fees, accounting fees, and registration costs - Often expensed in the year of Ownership Rights of Shareholders - Common shares allow shareholders to: vote, acquire dividends, and claim liquidated assets - Shareholders can vote on the election of the board of directors or other large matters – each share is worth one vote - Shareholders receive dividends proportionate to the number of shares they have - Shareholders can claim liquidated assets proportionate to their shares – only occurs if all assets are sold and all liabilities paid Share Issues - Authorized shares – the number of shares a corporation can issue, is specified in the articles of incorporation – can be unlimited or a specified amount - Issued shares – number of shares actually sold by the corporation - No journal entry needed for authorization of share capital, but should be disclosed in the notes - Shares can be issued either directly or indirectly - Direct issuing means directly to the investor and usually happens in private corporations - Indirect issuing means the selling of shares to investors through a broker and usually happens in public corporations - Initial Public Offering (IPO) – first time shares are offered by the corporation to the public – assets and shareholder’s equity accounts increase - Market price per share changes depending on the speculation of the company’s operations - Share Capital: amount contributed by shareholders to the corporation - Retained Earnings: earned capital kept for future use – retained earnings = net income – losses and amounts distributed to shareholders - Retained earnings can be distributed to shareholders or kept on hold - Share capital cannot be distributed to shareholders – must stay in the corporation as protective measure for creditors of the c
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