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Lecture Fundamental accounting principles (19/e) - Chapter 13: Accounting for corporations

After completing this chapter you should be able to: Identify characteristics of corporations and their organization; explain characteristics of, and distribute dividends between, common and preferred stock; explain the items reported in retained earnings; compute earnings per share and describe its use; compute price-earnings ratio and describe its use in analysis. | ACCOUNTING FOR CORPORATIONS Chapter 13 Chapter 13: Accounting for Corporations Privately Held Publicly Held Ownership can be CORPORATE FORM OF ORGANIZATION Existence is separate from owners An entity created by law Has rights and privileges C 1 Corporations are entities, created by law, that exist separately from their owners and that have rights and privileges. Corporations may be privately or publicly owned. Publicly owned corporations have additional reporting responsibilities beyond those of a privately held corporation. Advantages Separate legal entity Limited liability of stockholders Transferable ownership rights Continuous life Lack of mutual agency for stockholders Ease of capital accumulation Disadvantages Governmental regulation Corporate taxation CHARACTERISTICS OF CORPORATIONS C 1 The corporate form of organization has several advantages: It is a separate legal entity that can enter into contracts and sue and be sued. Stockholders’ losses are limited to the amount invested in the corporation. Ownership rights are transferable. The corporation continues in existence even when ownership changes. Stockholders are not agents of the corporation and can not enter into contracts on the corporation’s behalf. Capital needs can be met by selling more ownership in the corporation. Two disadvantages include extra governmental regulations imposed on corporations and corporate taxation of earnings. Corporations pay taxes on their earnings and then if they distribute a dividend to stockholders, the stockholders pay taxes on the dividends received. This is sometimes referred to as double taxation. Par value is an arbitrary amount assigned to each share of stock when it is authorized. Market price is the amount that each share of stock will sell for in the market. BASICS OF CAPITAL STOCK Classes of Stock Par Value No-Par Value Stated Value C 2 Part I. Par value is an arbitrary amount assigned to each share of stock in the corporate charter. Par . | ACCOUNTING FOR CORPORATIONS Chapter 13 Chapter 13: Accounting for Corporations Privately Held Publicly Held Ownership can be CORPORATE FORM OF ORGANIZATION Existence is separate from owners An entity created by law Has rights and privileges C 1 Corporations are entities, created by law, that exist separately from their owners and that have rights and privileges. Corporations may be privately or publicly owned. Publicly owned corporations have additional reporting responsibilities beyond those of a privately held corporation. Advantages Separate legal entity Limited liability of stockholders Transferable ownership rights Continuous life Lack of mutual agency for stockholders Ease of capital accumulation Disadvantages Governmental regulation Corporate taxation CHARACTERISTICS OF CORPORATIONS C 1 The corporate form of organization has several advantages: It is a separate legal entity that can enter into contracts and sue and be sued. Stockholders’ losses are limited to the