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. | Chapter 13 ACCOUNTING FOR CORPORATIONS Chapter 13: Accounting for Corporations CHARACTERISTICS OF CORPORATIONS 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 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 if they distribute a dividend to stockholders, the stockholders pay taxes on the dividends received. This is sometimes referred to as double taxation. Ultimate control Stockholders usually meet once a year Selected by a vote of the stockholders Overall responsibility for managing the company CORPORATE ORGANIZATION AND MANAGEMENT C 1 At their annual meeting, stockholders elect the board of directors and vote on important management issues facing the company. The board of directors has the ultimate responsibility for managing the company. The executive management team manages the day-to-day decisions for the corporation. RIGHTS OF STOCKHOLDERS Vote at stockholders’ meetings Sell stock Purchase additional shares of stock Receive dividends, if any Share equally in any assets remaining after creditors are paid in a liquidation C 1 In addition to voting on important issues at annual meetings, stockholders have the right to buy and sells shares of stock, to receive dividends . | Chapter 13 ACCOUNTING FOR CORPORATIONS Chapter 13: Accounting for Corporations CHARACTERISTICS OF CORPORATIONS 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 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 .
