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THE CORPORATE FORM OF ORGANIZATION Characteristics of Corporations A corporation is a business entity that is legally separate from its owners. Ownership in a corporation by its stockholders is evidenced by owning shares of stock. The owners are called stockholders. The following are important characteristics of corporations: Stockholders have limited liability. Should the corporation go bankrupt the most a stockholder can lose is his investment. Stockholders may transfer their shares to someone else. Due to the limited liability feature of stock ownership, corporations can usually accumulate financing from stockholders more easily than other forms of business entities. Corporations pay a corporate income tax, in addition to payroll taxes and property taxes. Dividends paid to stockholders are not tax-deductible for the corporation, but are taxable to the shareholder recipient of the dividend. Stockholders vote for a Board of Directors. The directors have ultimate control of the corporation, and must act in the best interest of the stockholders.

Basics of Capital Stock


Capital stock refers to any shares issued to obtain funding from owners. The following are important terms associated with capital stock. 1. Authorized stockthe total amount of stock that the charter authorizes for sale. a. Outstanding stock refers to issued stock held by stockholders. b. No formal journal entry is required for stock authorization; the number of shares authorized is disclosed in the financial statements. 2. Selling (issuing) stockcan be sold directly or indirectly to stockholders a. To sell directly, the corporation advertises its stock issuance to potential buyers. b. To sell indirectly, a corporation pays a brokerage house (investment banker) to issue its stock. c. A brokerage house may underwrite issuance (buy the stock from the corporation and take all gains or losses from its resale).

3. Valeur marchande par action le prix auquel un stock est achet ou vendu. a. influenc par les bnfices futurs escompts, dividendes, croissance et autres compagnie et vnements conomiques. b. valeur de march actuelle des actions prcdemment mises n'influe pas sur les comptes de capital des actionnaires de la socit. 4. Classes d'a. stock commun stock est appele common stock lorsque toutes les classes ont les mmes droits et privilges. b. autres classes socit est parfois autorise mettre plus d'une catgorie d'actions, telles que des actions privilgies. 5. La valeur nominale stock la socit dans sa Charte attribue une valeur par action. a. imprim sur le certificat d'actions. b. tablit le capital minimum lgal. 6. Stock sans dsignation de valeur ne pas assign une valeur par action de la Charte de l'entreprise. 7. A dclar stock valeur non-par stock auquel est attribu une valeur prcise dilue par l'administration ; devient le capital lgal minimal par action. 8. Propres fonds a deux pices a. capital vers (ou apport) l'amo total...Stock Options A stock option is a right to purchase common stock at a fixed price over a specified period of time. Many corporations issue stock options to key employees. Recording stock options is explained in the Intermediate Accounting course. IMPORTANT EQUITY RATIOS The following table summarizes key equity ratios. Name Purpose Earnings per share The amount of income earned per each share of common stock. Price-earnings ratio Indicates how much the market is willing to pay for a companys earnings. Shows the annual amount of cash dividends relative to the stocks market value. How much equity each share of common stock owns.

Formula Net Income Preferred Stock Dividends / Weighted-avg. # of common shares Market Price of Stock / Earnings per Share Dividends per Share / Market Price of Stock Stockholders Equity / Number of Common Shares

Dividend yield

Book value per share (common only)

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