Stockholders’ Equity:

Paid-In Capital
Chapter 11

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights

Corporations
An entity created
by law.

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

Has rights and

privileges.
Publicly Held

11-2
Advantages of
Incorporation
Limited personal
liability for
stockholders

Transferability of
ownership

Professional
management

Continuity of
existence

11-3
Disadvantages of
Incorporation
Heavy taxation

Greater regulation

Cost of formation

Separation of
ownership and
management

11-4
Formation of a Corporation

• Each corporation is The costs associated with

formed according to incorporation are usually
the laws of the state expensed immediately, but
where it is located. amortized over 5 years for
tax purposes.
• The application for
corporate status is
called the Articles of
Incorporation.

11-5
Rights of Stockholders
Voting (in person
or by proxy).
Proportionate
Rights distribution of
dividends.

Stockholders Proportionate
distribution of
assets in a
liquidation.
11-6
Publicly Owned Corporations
Face Different Rules
By law, publicly owned corporations must:
 Prepare financial statements in accordance
with GAAP.
 Have their financial statement audited by an
independent CPA.
 Comply with federal securities laws.
 Submit financial information for SEC review.

11-7
Stockholder Records in a
Corporation
Stockholder ledgers are often maintained by a
stock transfer agent or stock registrar.

Stockholders usually meet once a year.

Each unit of ownership is called a share of stock.

Stock certificates serve as proof that a
stockholder has purchased shares.

When the stock is sold, the stockholder signs a

transfer endorsement on the back of the stock
certificate.

11-8
Stockholders’ Equity of a
Corporation
S t o c k h o l d e r s ' e q
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
i n v e s t o r s i n ee x a c r nh ea dn g b e
f o r c a p i t a l s ct o o c r kp . o r a t

P a i d - i n C a R p ei t t a a l i n e d E

11-9
Preferred Stock
A separate class of stock, typically having
priority over common shares in . . .
 Dividend distributions (rate is usually
stated).
 Distribution of assets in case of
liquidation.

Other Features Include:

Cumulative Usually Normally has
dividend callable by no voting
rights. the company. rights.
11-10
Market Value

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

Investments in
Accounting by marketable securities
the investor. are carried at market
value.

11-11
Stock Splits
 Companies
Companies use
use
stock
stock splits
splits to
to
reduce
reduce market
market
Ice Cream Parlor
price.
price.
 Outstanding
Outstanding Stock Splits
shares
shares increase,
increase, Now
but
but par
par value
value is
is Available

decreased
decreased
proportionately.
proportionately.

11-12
Treasury Stock
Treasury
shares are
issued
shares that
have been
reacquired
by the
corporation.

When stock is reacquired, the corporation

records the treasury stock at cost.
11-13
Financial Analysis and
Decision Making

Return on Common Net Income – Preferred Dividends

Stockholders’ Equity = Average Common Stockholders’ Equity

11-14
End of Chapter 11

11-15