Corporations: Stock Ownership & Transactions

Understand how corporations manage stock, including ownership structures, share issuance, treasury stock, and stock dividends/splits, all impacting financial statements.

Core Principles

• Corporations own assets and incur liabilities.
• Stock ownership grants management voice, profit share, and residual claim.
• Issued shares are sold; unissued are available; authorized is the maximum.
• Treasury shares are reacquired by the corporation.
• Earnings Per Share (EPS) reflects profitability per outstanding share.
• Stock dividends distribute new shares, not cash.
• Stock splits increase share count and decrease par value proportionally.

Action Steps

• Record cash received from issuing common stock.
• Record the par value of issued stock in the Common Stock account.
• Record the excess over par in Additional Paid-In Capital (APIC).
• Account for treasury stock purchases at cost.
• Record treasury stock reissuance above or below cost.
• Calculate and record stock dividends based on market value or par value.
• Adjust share counts and par values for stock splits.

Formulas

• Weighted Avg Shares = (Beg Outstanding + End Outstanding) / 2
• Shares Issued = Authorized Shares - Unissued Shares
• Total Outstanding Shares = Issued Shares - Treasury Shares
• New Shares (Stock Dividend) = Outstanding Shares * Stock Dividend %
• Stock Split Ratio: e.g., 4 for 3 means 4 new shares for every 3 old shares.

Key Terms

• Authorized Shares: The maximum number of shares a corporation is legally allowed to issue.
• Issued Shares: The total number of shares that have been sold to the public.
• Outstanding Shares: Shares currently held by investors (issued shares minus treasury shares).
• Treasury Shares: Shares that a company has repurchased from the open market.
• Stock Dividend: A distribution of additional shares of stock to existing shareholders.
• Stock Split: An action by a company to divide its existing shares into multiple new shares.
• APIC: Additional Paid-In Capital; the amount paid by investors over the stock's par value.

Real World Examples

• A company issues 1,000 shares at $10 par value for $50 per share.: Cash increases by $50,000. Common Stock increases by $10,000 (1,000 * $10). APIC increases by $40,000 (1,000 * ($50 - $10)).
• A company repurchases 100 shares of its own stock for $60 per share.: Treasury Stock account is debited $6,000. This reduces total equity.
• A company declares a 10% stock dividend when shares are trading at $20, with a $1 par value.: Common Stock increases by (Outstanding Shares * 0.10 * $1). APIC increases by (Outstanding Shares * 0.10 * ($20 - $1)).
• A company executes a 2-for-1 stock split.: The number of outstanding shares doubles. The par value per share is halved. Total equity remains unchanged.

Timeline

• Incorporation: Corporation is legally formed, authorized shares are determined.
• Initial Public Offering (IPO): First sale of stock to the public; shares become issued and outstanding.
• Subsequent Stock Issuances: Company sells more authorized shares.
• Share Repurchases: Company buys back its own stock, creating treasury stock.
• Stock Dividend/Split Declaration: Board approves distribution of new shares or a split.
• Stock Dividend/Split Distribution: New shares are issued to stockholders.

People

• Stockholders: Owners of the corporation, entitled to profits and residual claims.
• Board of Directors: Oversees corporation, authorizes stock transactions.