Slide

1-1

STOCKHOLDERS’
EQUITY:
PAID-IN CAPITAL
Slide
1-2

Corporations
Corporations

An
An entity
entity
created
createdby
bylaw.
law.

Privately, or
Existence
Existenceis
is Closely, Held
Ownership
separate
separatefrom
from can be
owners.
owners.

Has
Hasrights
rightsand
and
privileges.
privileges.
Publicly Held
Slide
1-3

Advantages
Advantages of
of Incorporation
Incorporation
Limited
Limitedpersonal
personal
liability
liabilityfor
for
stockholders.
stockholders.

Transferability
Transferability of
of
ownership.
ownership.

Professional
Professional
management.
management.

Continuity
Continuity of
of
existence.
existence.
Slide
1-4

Disadvantages
Disadvantages of
of Incorporation
Incorporation

Heavy
Heavy taxation.
taxation.

Greater
Greater regulation.
regulation.

Cost
Cost of
of formation.
formation.

Separation
Separation of
of
ownership
ownershipandand
management.
management.
Slide
1-5
Publicly
Publicly Owned
Owned Corporations
Corporations Face
Face
Different
Different Rules
Rules
By
By LAW,
LAW, publicly
publicly owned
owned
corporations
corporations must:must:
Prepare
 Prepare financial
financial statements
statements
in
in accordance
accordance with with GAAP.
GAAP.
Have
 Have their
their financial
financial statement
statement
audited
audited by
by anan independent
independent
CA.
CA.
Comply
 Comply with
with SEBI
SEBI laws.
laws.
Slide
1-6

Formation
Formation of
of aa Corporation
Corporation

 Each corporation is The

Thecosts
costs associated
associatedwith
with
formed according to incorporation
incorporation are
areusually
usually
the laws of the state expensed
expensedimmediately,
immediately, but
but
amortized
amortized over
over55years
yearsfor
for
where it is located.
tax
taxpurposes.
purposes.
 The application for
corporate status is
called the Articles of
Incorporation.
Slide
1-7

Rights
Rights of
of Stockholders
Stockholders
❶ Voting (in person
or by proxy).
❷ Proportionate
Right distribution of
s dividends.
❸ Proportionate
Stockholders distribution of
assets in a
liquidation.
Slide
1-8

Rights
Rights of
of Stockholders
Stockholders

C o r p o r a t e O r g
Stockholder
Stockholder Stockholders
Stockholders
ledgersUltimate
Ultimate
are often
ledgers are often S t o c k h o l d usually
eusually
r s meet
meet
control
controlby
maintained
maintained byaa once
once aayear.
year.
stock
stock transfer
transfer
agent B o a r d o f D i r e c t o r s
agentor or stock
stock
registrar.
registrar.
P r e s i d e n t

S e c r e Tt a r er y a s Cu ro e n r t r Oo l t l he er r V i c
P r e s i d e n
Slide
1-9

Rights
Rights of
of Stockholders
Stockholders

Each unit of
ownership is
called a share of
stock.
A stock
certificate serves
as proof that a
stockholder has
purchased
shares.
Slide
1-10

Rights
Rights of
of Stockholders
Stockholders

When the stock

is sold, the
stockholder
signs a transfer
endorsement on
the back of the
stock certificate.
Slide
1-11

Functions
Functions of
of the
the Board
Board of
of Directors
Directors

C o r p o r a t e O r g
S t o c k h o l d e r s
Overall
Overall
Selected
Selected by
by aa responsibility
responsibility
vote
voteof
ofthe
the B o a r d o f D i for
r e managing
c t o r s
stockholders for managing
stockholders the
the company.
company.
P r e s i d e n t

S e c r e Tt a r er y a s Cu ro e n r t r Oo l t l he er r V i c
P r e s i d e n
Slide
1-12

Functions
Functions of
of the
the Corporate
Corporate Officers
Officers

C o r p o r a t e O r g
Contractual
Contractualand
andlegal
legal
representation
representation S t o c k h o l d e r s
Custodian Chief
Custodianof
of Chief
funds Accountant
Accountant
funds B o a r d o f D i r e c t o r s

P r e s i d e n t

S e c r e Tt a r er y a s Cu ro e n r t r Oo l t l he er r V i c
P r e s i d e n
Slide
1-13

Paid-In
Paid-In Capital
Capital of
of aa Corporation
Corporation

S t o c k h o l d e r s ' e q u
i n c r e a s e d i n t w o

C o n t r i b u t i oR n e s t e b n y t i o n o
i n v e s t o r s i n ee xa cr nh ea dn g b e y
f o r c a p i t a l s ct o o c r kp .o r a t i o

P a i d - i n C a Rp ei t ta a l i n e d E
Slide
1-14
Authorization
Authorization and
and Issuance
Issuance of
of
Capital
Capital Stock
Stock
Authorized
Authorized
Shares
Shares
The maximum
number of
shares of capital
stock that can be
sold to the
public.
Slide
1-15
Authorization
Authorization and
and Issuance
Issuance of
of
Capital
Capital Stock
Stock
Authorized
Authorized
Shares
Shares
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
Usually
Usually stock that stock that
shares
sharesare
are have been never have
sold
sold sold. been sold.
through
through an
an
underwriter.
underwriter.
Slide
1-16
Authorization
Authorization and
and Issuance
Issuance of
of
Capital
Capital Stock
Stock
Authorized Outstanding shares are
Authorized issued shares that are
Shares
Shares owned by
stockholders.
Outstanding
Unissued
Issued Shares
Issued Shares
Shares
Shares
Treasury shares are
Treasury issued shares that
Shares have been reacquired
by the corporation.
Slide
1-17

Stockholders’
Stockholders’ Equity
Equity
Par value is an
arbitrary
amount
assigned to
each share of
stock when it is
authorized.
Market
Market price
priceis is
the
theamount
amountthat that
each
eachshare
shareof of
stock
stockwillwill sell
sell
for
for in
in the
the
market.
market.
Slide
1-18

Stockholders’
Stockholders’ Equity
Equity

Common
Common stock
stock can
can be
be issued
issued in
in three
three forms:
forms:

Par
Par Value
Value No-Par
No-Par Stated
Stated Value
Value
Common
Common Common
Common Common
Common
Stock
Stock Stock
Stock Stock
Stock

Let’s
Let’sexamine
examine All
All proceeds
proceeds Treated
Treated like
like
this
thisform
form of
of credited
creditedto
to par
par value
value
stock.
stock. Common
CommonStock
Stock common
commonstock
stock
Slide
1-19

Issuance
Issuance of
of Par
Par Value
Value Stock
Stock
Record:
Record:
The
The cash
cash received.
received.
The
The number
numberofofshares
sharesissued
issued×× the
thepar
parvalue
value
per
per share
sharein
inthe
the Common
CommonStock
Stockaccount.
account.
The
The remainder
remainder is
is assigned
assignedto
to share
share perimum.
perimum.
Slide
1-20

Issuance
Issuance of
of Par
Par Value
Value Stock
Stock
The
The journal
journal entry
entry to
to record
record an
an issuance
issuance ofof 10,000
10,000
shares
shares of of RP2
RP2 par
par value
value stock
stock for
for RP25
RP25 perper
share
share onon September
September 1, 1, 2003,
2003, should
should include
include aa
credit
credit to
to common
common stockstock for
for the
the par
par value
value ofof the
the
shares
shares issued.
issued.
Slide
1-21

Preferred
Preferred Stock
Stock
AAseparate
separateclass
classof of stock,
stock, typically
typicallyhaving
havingpriority
priorityover
over
common
common sharesshares in in.. .. ..
Dividend

Dividenddistributions
distributions(rate
(rateisisusually
usuallystated).
stated).
Distribution

Distributionof
ofassets
assetsin
incase
caseof ofliquidation.
liquidation.

Other Features Include:

Cumulative
Cumulative Usually
Usually Normally
Normally has
has
dividend
dividend callable
callable by
by no
no voting
voting
rights.
rights. the
the company.
company. rights.
rights.
Slide
1-22

Cumulative
Cumulative Preferred
Preferred Stock
Stock

Cumulative Vs. Noncumulative

Dividends
Dividends in
in Undeclared
Undeclared
arrears
arrears must
must be
be dividends
dividends from
from
paid
paid before
before current
current and
and prior
prior
dividends
dividends may
may be
be years
years do
do not
not have
have
paid
paid on
on common
common to
to be
be paid
paid in
in future
future
stock.
stock. years.
years.
Slide
1-23

Convertible
Convertible Preferred
Preferred Stock
Stock
II just
just converted
converted100100 Gee,
Gee, II can’t
can’t
shares
sharesof ofpreferred
preferred stock
stock do
dothat
that with
with
into
into 1,000
1,000shares
sharesofof
common MY preferred
MY preferred
common stock stockand
and ended
ended stock!
up stock!
up with
withaa higher
higher dividend
dividend
yield!
yield!

Some preferred
stock is convertible
into shares of
common stock.
Slide
1-24
Stock
Stock Issued
Issued for
for Assets
Assets Other
Other Than
Than
Cash
Cash

Companies
Companiessometimes
sometimesissue
issue
stock
stock in
inexchange
exchange for
fornon-
non-
cash
cash assets.
assets.

Since
Sinceno
nocash
cash isisreceived,
received,
record
recordthe
thetransaction
transactionat at the
the
market
marketvalue
value of
of the
the goods
goods oror
services
servicesreceived.
received.
Slide
1-25

Market
Market Value
Value

Common
Common stock
stock isis
Accounting
Accounting by by carried
carried at
at original
original issue
issue
the
the issuer.
issuer. price.
price.

Investments
Investments inin
Accounting
Accounting by by marketable
marketable securities
securities
the
the investor.
investor. are
are carried
carried at
at market
market
value.
value.
Slide
1-26

Market
Market Price
Price of
of Preferred
Preferred Stock
Stock

Factors
Factors affecting
affectingmarket
market price
price The
Thereturn
returnbased
based on
on
of
ofpreferred
preferredstock:
stock: the
themarket
market value
valueis
is
●● Dividend
Dividend rate
rate called
calledthe
the“dividend
“dividend
●● Risk
Risk yield.”
yield.”
●● Level
Level of
ofinterest
interestrates
rates
Slide
1-27

Market
Market Price
Price of
of Common
Common Stock
Stock

Factors
Factors affecting
affecting Changes
Changesin
inmarket
market value
value
market
market price
price of of have
haveno
noimpact
impactononthe
the
common
common stock:
stock: books
booksof
ofthe
theissuer.
issuer.

●Investors’
● Investors’
expectations
expectations of of
future
future profitability.
profitability.
●Risk
● Risk that
that this
this level
level
of
of profitability
profitability will
will
not
not be
be achieved.
achieved.
Slide
1-28

Stock
Stock Splits
Splits

 Companies use stock

splits to reduce market
price.
 Outstanding shares
increase, but par value
is decreased
proportionately.
Slide
1-29

Stock
Stock Splits
Splits -- Example
Example
Assume that a corporation had 5,000 shares
of $1 par value common stock outstanding
before a 2–for–1 stock split.

Increase

Decrease

No
Change
Slide
1-30

Treasury
Treasury Stock
Stock
Treasury
Treasury
shares
shares are
No voting are
Contra issued
issued
or shares
sharesthat
that
equity
dividend have
have been
been
account reacquired
reacquired
rights by
bythe
the
corporation.
corporation.

When
When stock
stock is
is reacquired,
reacquired, the
the corporation
corporation
records
records the
the treasury
treasury stock
stock atat cost.
cost.
Slide
1-31

Treasury
Treasury Stock
Stock -- Example
Example
On May 1, 2003, East Corp. reacquired 3,000
shares of its common stock at $55 per share.
Prepare the journal entry for May 1.
Slide
1-32

Treasury
Treasury Stock
Stock -- Example
Example
On December 3, 2003, East Corp. reissued 1,000
shares of the stock at $75 per share.
Prepare the journal entry for December 3.
1,000
1,000shares
shares ××$75
$75== $75,000
$75,000

1,000
1,000shares
shares×× $55
$55 cost
cost == $55,000
$55,000
Slide
1-33

Stockholders’
Stockholders’ Equity
Equity -- Presentation
Presentation
Slide
1-34

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