Chapter 12.docx

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University of Toronto Scarborough
Financial Accounting
G.Quan Fun

MGTB06 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 the corporation  Benefits: o Management voice o Dividends 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 particular date 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
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