Chapter 12: Reporting and Interpreting Owners’ Equity
Shareholders/ stockholder: when someone invest in a corporation
Receive shares that you can subsequently sell on established stock exchanges without affecting
o Management voice
o Residual claim
Management information circular (proxy): a notice of annual meetings that contained several pages of
information concerning the people who were nominated to be members of the board of directors
Authorized number of shares: the maximum number of shares that a corporation can issue, as specified
in the charter
Issued shares: refers to the number of shares that have been issued
Outstanding shares: refers to the total number of shares that are owned by shareholders on any
Earnings per Share = Profit / average number of common shares outstanding
Two Types of Shares: common shares and preferred shares
All corporations issue common shares, while only some issued preferred shares
Common shares: the basic voting shares used by a corporation; called residual equity because they rank
after preferred shares for dividend and liquidation distributions.
Par value: the nominal value per share specified in the charter; it serves as the basis for legal capital
No par value shares: shares that have no par value specified in the corporate charter
Legal capital: the permanent amount of capital, defined by law, that must remain invested in the
business; it serves as a cushion for creditors
Owners could not withdraw all of their capital in anticipation of a bankruptcy, which would leave
creditors with an empty corporate shell. When a corporation issues no par value shares, the legal capital
is the initial amount received from shareholders.
Initial Public Offering (IPO): involves the very first sale of a company’s shares to the public
Seasoned new issues/ secondary shares offerings: once the share of a company are traded on
established markets, additional sales of new shares to the public
Investors can sell shares to other investors without directly affecting the corporation. Shareholders
expect to earn money on their investment form both dividends and increases in the share price. MGTB06
Some companies often cannot afford to pay cash for needed assets and services; they sometimes issue
shares to people who can supply these assets and services. Many executives will join start-up
companies for very low salaries because they also earn compensation in the form of common shares.
When a company issues shares to acquire assets or services, the acquired items are recorded at the
market value of the shares issued at the date of the transaction in accordance with the cost principle. If
the market value of the shares issued cannot be determined, the market value of the consideration
received should be used.
One of advantages of the corporate form is the possibility to separate the management of a business
from its ownership. This separation can also be a disadvantage because some managers may not act in
the best interests of shareholders.
Stock options: permit managers to buy shares at a fixed price
A fair value of the options can