General term referring to a corporation’s stock used in obtaining capital (owner financing). is a general term that refers to any shares issued to obtain capital (owner financing). This section introduces terminology and accounting for capital stock.
Authorized Stock Authorized stock
Total amount of stock that a corporation’s charter authorizes it to issue. is the number of shares that a corporation’s charter allows it to sell. The number of authorized shares usually exceeds the number of shares issued (and outstanding), often by a large amount. (Outstanding stock refers to issued stock held by stockholders.) No formal journal entry is required for stock authorization. A corporation must apply to the state for a change in its charter if it wishes to issue more shares than previously authorized. A corporation discloses the number of shares authorized in the equity section of its balance sheet or notes. Apple’s balance sheet in Appendix A reports 1.8 billion common shares authorized as of the start of its 2010 fiscal year.
Selling (Issuing) Stock
A corporation can sell stock directly or indirectly. To sell directly, it advertises its stock issuance to potential buyers. This type of issuance is most common with privately held corporations. To sell indirectly, a corporation pays a brokerage house (investment banker) to issue its stock. Some brokerage houses underwrite an indirect issuance of stock; that is, they buy the stock from the-corporation and take all gains or losses from its resale.
Market Value of Stock Market value per share
Price at which stock is bought or sold. is the price at which a stock is bought and sold. Expected future earnings, dividends, growth, and other company and economic factors influence market value. Traded stocks’ market values are available daily in newspapers such as The Wall Street Journal and online. The current market value of previously issued shares (for example, the price of stock in trades between investors) does not impact the issuing corporation’s stockholders’ equity.
Classes of Stock
When all authorized shares have the same rights and characteristics, the stock is called common stock. A corporation is sometimes authorized to issue more than one class of stock, including preferred stock and different classes of common stock. American Greetings, for instance, has two types of common stock: Class A stock has 1 vote per share and Class B stock has 10 votes per share.
Par Value Stock Par value stock
Class of stock assigned a par value by the corporate charter. is stock that is assigned a par value
Value assigned a share of stock by the corporate charter when the stock is authorized., which is an amount assigned per share by the corporation in its charter. For example, Palm’s common stock has a par value of $0.001. Other commonly assigned par values are $10, $5, $1 and $0.01. There is no restriction on the assigned par value. In many states, the par value of a stock establishes minimum legal capital Amount of assets defined by law that stockholders must (potentially) invest in a corporation; usually defined as par value of the stock; intended to protect creditors., which refers to the least amount that the buyers of stock must contribute to the corporation or be subject to paying at a future date. For example, if a corporation issues 1,000 shares of $10 par value stock, the corporation’s minimum legal capital in these states would be $10,000. Minimum legal capital is intended to protect a corporation’s creditors. Since creditors cannot demand payment from stockholders’ personal assets, their claims are limited to the corporation’s assets and any minimum legal capital. At liquidation, creditor claims are paid before any amounts are distributed to stockholders.
Point: Managers are motivated to set a low par value when minimum legal capital or state issuance taxes are based on par value.
Point: Minimum legal capital was intended to protect creditors by requiring a minimum level of net assets.
No-Par Value Stock No-par value stock
Stock class that has not been assigned a par (or stated) value by the corporate charter., or simply no-par stock, is stock not assigned a value per share by the corporate charter. Its advantage is that it can be issued at any price without the possibility of a minimum legal capital deficiency.
Point: Par, no-par, and stated value do not set the stock’s market value.
Stated Value Stock Stated value stock
No-par stock assigned a stated value per share; this amount is recorded in the stock account when the stock is issued. is no-par stock to which the directors assign a “stated” value per share. Stated value per share becomes the minimum legal capital per share in this case.
Stockholders’ Equity
A corporation’s equity is known as stockholders’ equity A corporation’s equity; also called shareholders’ equity or corporate capital., also called shareholders’ equity or corporate capital. Stockholders’ equity consists of (1) paid-in (or contributed) capital and (2) retained earnings; see Exhibit 13.3. Paid-in capital(See contributed capital.) is the total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock. Retained earnings Cumulative income less cumulative losses and dividends. is the cumulative net income (and loss) not distributed as dividends to its stockholders.
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Point: Paid-in capital comes from stock-related transactions, whereas retained earnings comes from operations.
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