Chapter 11 NotesContributed Capital

Corporationbusiness unit, chartered by the state and legally separate from its owners, that is its
stockholders
Stockholders equity- capital which is $ paid in by the stockholders contributed directly.

Corporate form of business in class
Advantages






Disadvantages








Equity Financingstocks are sold as certificates.
Par value-arbitrary mount assigned to each share of stock and represents the legal capita of corporation.
It is the amount recorded in the capital stock accounts.

Legal capital= # shares issued (sold) x par value

IPO-Initial public offering of stock
Underwriter-individual or firm ( investment banker) who for a fee facilitates the initial sale of stock.

Start up and organization costs-Expenses related to the formation of the corporation such as legal fees,
registrant fees paid to the state, underwriter fees etc. These costs are expensed.

Advantages of Equity Financing vs. Disadvantages ---in class






Dividend Policies
Dividenddistribution to shareholders by the corporation. Amounts are based on ownership
Declared by the board of directors
Most states dont allow dividends in excess of retained earnings
Liquidating Dividends are amounts paid to shareholders in excess of retained earnings and
represent a return of capital.

Dividend Dates
Date of Declaration
Date of record
Date of payment

Measuring Performance

Dividend yield= Dividend per share/Market price per share
Return of Equity=Net income/Average shareholders equity
P/E ratios=Market price per share/Earnings per share
Earnings per share=Net Income/Weighted average share of outstanding common stock

Stock options=right to buy stock

Components of Stockholders Equity
Contributed capital-stockholders investment
Retained Earnings
Treasury stock-shares of its own stock that the corporation bought back on the open market

Corporation has 2 types of stock

Common

Preferred

Shares of Stock Terms
Authorized=maximum number of shares a corporation can sell per its state charter
Issued=shares sold
Outstanding=shares sold that are still in circulation
Treasury=shares sold that have been bought back by the corporation and thus not in circulation

Preferred Stock
Preference to dividends
Noncumulative vs Cumulative

Dividend in arrears
Preference to Assets
Non voting
Convertible preferred stock
Callable preferred stock

Issuance of Common Stock
No par value stock-some states have stated value which means a share of stock cannot sell below this
amount. Occasionally board of directors will use stated value to specify a minimum amount that a share
of stock can be issued. If stated value exists, the accounting treatment is identical to par value.

Example par value or stated value
Cash = amount of proceeds
Common stock=# shares x par value or stated value
Additional paid in capital= excess of proceeds over par or stated value
Example no par value
Cash
Common Stock

Issuance for non cash assets
Use market value of stock issued if known otherwise fair market value of asset received

Accounting for Treasury Stock

Only responsible for Purchase entries

Why does a corporation buy back its own stock?



Purchase of treasury stock
Treasury Stock=cost of purchase
Cash

Treasury stock is a contra equity account which means that its normal general ledger balance is contra
to what is normal for equity accounts. It therefore has a debit balance. Treasury stock reduces
stockholders equity.