Lecture #1 Intermediate Accounting I

Intermediate Accounting I

By

Dr. Mohamed Abd Elfattah

Professor & Chairman  of Accounting & AuditingDept.

Ain Shams University – Faculty of Commerce

Text Book:

Jerry J. Weygandt, at al., Accounting Principles, 9^th Edition, John Wiley &Sons, 2010.

Syllabus:

Chapter 13:

Corporations: Organization and Capital Stock Transactions.

Chapter 14:

Corporations: Dividends, Retained Earnings, and Income Reporting.

Chapter 15:

Long-term Liabilities.

2013

Chapter 13

CORPORATIONS: Organization and Capital Stock Transactions

Learning Objective:

(1)         Identify the major characteristics of a Corporation.

(2)         Differentiate between paid-in capital and retained earnings.

(3)         Record the issuance of common stock.

(4)         Explain the accounting for treasury stock.

(5)         Differentiate preferred stock from common stock.

(6)         Prepare a stockholders’ equity section.

(7)         Compute book value per share.

Corporation:

An entity created by law separate and distinct from its owners continued existence is dependent upon the statutes of the state in which it is incorporated.

Classification of corporations:

       By Purpose                          By Ownership

To earn a profit   Non for profit

                                                    Publicly      Privately                             

                                                   held              held

Publicly-held corporations	Privately-held corporations
·      May have thousands of stockholders.    ·      Stock is regularly traded on a national securities exchange.	·      Often referred to as closely held corporations.    ·       Usually have only a few stockholders.    ·      Does not offer its stock for sale to the general public.

Characteristics of a Corporation:

·      Advantages of a Corporation:

            ·     Separate legal existence from its owners.

            ·     Stockholders have limited liability.

            ·     Ownership held in shares of capital stock      transferable units.

            ·     Ability to acquire capital through the issuance of stock.

            ·     Continuous life.

            ·     Professional management is at the discretion of the board of directors who are elected by the stockholders.

·      Disadvantages of a Corporation:

            ·     Subject to numerous government regulations.

            ·     Must pay an income tax on its earnings.

            ·     Stockholders required paying taxes on the dividends they receive: the result is double taxation.

Organization Costs:

            ·     Costs incurred in forming a corporation; include legal fees, state fees and promotional expenditures.

            ·     Expensed as incurred since it is so difficult to determine the amount and timing of future benefits.

Ownership Rights of Stockholders:

            ·     Vote on actions that acquired stockholder approval.

            ·     Share in corporate earnings through the receipt of dividends.

            ·     Maintain the same percentage ownership when additional shares of common stock are issued (Preemptive right).

            ·     Share in assets upon liquidation (Residual claim).

A Stock Certificate

Stock Issue Considerations:  Authorized stock:

            ·     Amount of stock a corporation is allowed to sell as indicated by its charter.

            ·     The authorization of capital stock does not result in a formal accounting entry.

            ·     This event has no immediate effect on either corporate assets or stockholders’ equity.

Issuance of Stock:

            ·     A Corporation can issue common stock directly to investors or indirectly through an investment-banking firm (brokerage house) which may agree to underwrite the entire stock issue.

            ·     Direct issue is typical in closely held companies.

            ·     Indirect issue is customary for a publicly held corporation.

Stock market price:

            ·     Publicly held companies traded on organized exchanges dollar prices per share are established by the interaction between buyers and sellers.

            ·     The prices set by the marketplace generally follow the trend of a company’s earnings and dividends.

Par Value & No-Par Value Stock:

Par value stock	No-par stock
Capital stock that has been assigned a value per share in the corporate charter represents the legal capital per share that must be retained in the business for the protection of corporate creditors.	Capital stock that has not been assigned a value in the corporate charter. In many states the board of directors can assign a stated value to the shares, which then becomes the legal capital per share. When there is no assigned stated value, the entire proceeds are considered to be legal capital.

Corporate Capital:

            ·     Stockholders’ equity, shareholders’ equity, or corporate capital is the same.

            ·     Owner’s equity in a corporation appears in Stockholders’ equity section of a corporation’s balance sheet.

Paid-in (contributed) capital:

Total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock shares both common and preferred.

Retained earnings:

Is net income that is retained in the corporation. Net income is recorded in Retained Earnings by a closing entry in which Income Summary is debited and Retained Earnings is credited.

Example:

If the net income for Delta Robotics is $130,000 in its first year of operations, the closing entry is:

Date	Account Titles and Explanation	Dr.	Cr.
	Income Summary       Retained Earnings (To close income summary and transfer net income to retained earnings)	130,000	130,000

Relationship of Authorized, Unissued, Issued, Outstanding, and Treasury Stock

·     Authorized stock:

Is the maximum number of shares a corporation is allowed to issue.

·     Issued stock:

Is the shares sold or otherwise transferred to stockholders.

·     Unissued stock:

Is number of shares of the authorized stock that are not issued yet. And it has no rights or privileges until issued.

·     Outstanding stock:

Is the shares that has been issued and is still in circulation.

 

·     Treasury stock:

Is the shares that has been issued and repurchased by the corporation.

Authorized stock
Issued		Unissued
outstanding stock	Treasury stock