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Chapter 12

Chapter 12 BU227.docx

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Wilfrid Laurier University
Carolyn Mac Tavish

BU227 Chapter 12 – Reporting and Interpreting Owners’ Equity Week 11 Ownership of a Corporation -The corporation is the only business form that the law recognizes as a separate entity -The corporation enjoys a continuous existence, separate and apart from its owners -To create a corporation an application for a charter must be submitted to the appropriate government authorities -The application must specify the name of the corporation, the purpose, the types and number o shares authorized and a minimum amount of capital that the owners must invest at the date of the organization Benefits of Share Ownership -When you invest in a corporation, you are known as a shareholder or stockholder -As a shareholder, you receive shares that you can subsequently sell on established stock exchanges without affecting the corporation -Owners of common shares receive the following: 1. Management voice – they may vote at the shareholder’s meeting 2. Dividends – they receive a proportionate share of the distribution of the corporation’s profits 3. Residual claim – They may also receive a proportionate share of the distribution of remaining assets upon the liquidation of the company -Shareholders have absolute authority in a corporation Authorized, Issued, and Outstanding Shares -Authorized number of shares – the maximum number of shares that a corporation can issue, as specified in the charter -Issued shares – the number of shares that have been issued -Outstanding shares – the total number of shares that are owned by shareholders on any particular date Common Share Transactions -Corporations issue common and preferred shares -All corporations issue common shares, while only some issue preferred shares -Common shares –basic voting shares issued by a corporation; called residual equity because they rank after preferred shares for dividend and liquidation distributions -The dividend rate for common shares is determined by the board of directors based on the company’s profitability No Par Value and Par Value Shares -Par value – the nominal value per share specified in the charter; it serves as the basis for legal capital -The original purpose of requiring corporations to specify a par value per share was to establish a minimum permanent amount of capital that the owners could not withdraw as long as the corporation existed -Thus owners could not withdraw all of their capital in anticipation of a bankruptcy -No par value shares – shares that have no par value specified in the corporate charter -When a corporation issues no par value shares, the legal capital is the initial amount received from shareholders -Legal capital – the permanent amount of capital, defined by law, that must remain invested in the business; it serves as a cushion for creditors BU227 Chapter 12 – Reporting and Interpreting Owners’ Equity Week 11 Initial Sale of Shares -An initial public offering involves the very first sale of a company’s shares to the public -Once the shares of a company are traded on established markets, additional sales of new shares to the public are called seasoned new issues or secondary share offerings Sales of Shares in Secondary Markets -When a company sells shares to the public, the transaction is between the issuing corporation and the buyer -Subsequent to the initial sale, investors can sell shares to other investors without directly affecting the corporation Shares Issued for Non-cash Assets or Services -One feature common to all start-up companies is a shortage of cash – because these 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 -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 fate 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 Shares Issued for Employee Compensation -Compensation packages can be developed to reward managers for meeting goals that are important to shareholders -Another strategy is to offer managers stock options which permit them to buy shares at a fixed price -The excessive use of stock options as a form of compensating key executives left the executives of some companies to manipulate reported financial information in an effort to increase the share price, allowing them to benefit at buying shares at fixed price an selling them at a higher price for a profit Repurchase of Shares -A corporation may want to purchase its own shares from existing shareholders for a number of reasons -One common reason is to increase the market price per share and the earnings per share that result from the reduction in the number of outstanding shares -Most Canadian companies cancel their shares when they buy them back from shareholders -When shares are cancelled, the appropriate share capital account is reduced by an amount that reflects the average issuance price per share Dr. Common shares Cr. Cash Cr. Contributed surplus Dividends on Common Shares -Investors buy common
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