Chapter 11 - Reporting and Interpreting Owners’ Equity
Chapter 11
Reporting and Interpreting Owners’ Equity
ANSWERS TO QUESTIONS
1. A corporation is a separate legal entity (authorized by law to operate as an individual).
It is owned by a number of persons and/or entities whose ownership is evidenced by shares of capital stock. Its primary advantages are: (a) transferability of ownership, (b) limited liability to the owners, and (c) the ability to accumulate large amounts of resources. 2. The charter of a corporation is a legal document from the state that authorizes its
creation as a separate legal entity. The charter specifies the name of the entity, its purpose, and the kinds and number of shares of capital stock it can issue. 3. (a) Authorized capital stock—the maximum number of shares of stock that can be
sold and issued as specified in the charter of the corporation.
(b) Issued capital stock—the total number of shares of capital stock that have
been issued by the corporation at a particular date. (c) Outstanding capital stock—the number of shares currently owned by the
stockholders.
4. Common stock—the usual or normal stock of the corporation. It is the voting stock
and generally ranks after the preferred stock for dividends and assets distributed upon dissolution. Often it is called the residual equity. Common stock may be either par value or no-par value.
Preferred stock—when one or more additional classes of stock are issued, the additional classes are called preferred stock. Preferred stock has modifications that make it different fromcommon stock. Generally, preferred stock has both favorable and unfavorable features in comparison with common stock. Preferred stock usually is par value stock and usually specifies a dividend rate such as ―6% preferred stock.‖