Financial Accounting: Tools for Business Decisions

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Group 7 - Communication Activity
Chapter 11

December 11, 2012

Hi Uncle Jim,

I am glad that you came to me for advice on how to incorporate and to help you understand the following stock terms. As you know I am an accounting major at U.N.O and am familiar with stockholders’ equity. “Authorized stock” is the amount of stock that a corporation is authorized to sell. All shares of the corporation are authorized however have not necessarily been issued. If your corporation were to sell all of its authorized stock, then you must obtain permission from the state to change its charter before you can issue additional shares. “Issued stock” is the number of shares that the corporation has sold. It includes treasury stock which is a corporation’s own stock that has been reacquired by the corporation and is being held for future use. A corporation can issue common stock directly to investors or indirectly through investment banking firms. Typically direct issue is in closely held companies and indirect issue is for a publicly held corporation. New issues of stock may be offered for sale to the public through organized U.S. or foreign securities exchanges such as the NY Stock Exchange. “Outstanding stock” is the number of shares of issued stock that is being held by stockholders. It does not include treasury stock. Outstanding stock is only the amount of shares that have been sold to the stockholders and remains out on the market. “Preferred stock” has contractual provisions that give it preference over common stock such as the ability to receive paid dividends, a share of the company’s profits, before common stockholders. Dividends that are overdue are not considered a liability. No obligation exists until the board of directors formally “declares” that the corporation will pay a dividend. Preferred stockholders also have the ability to collect assets in the event of liquidation, which provides security. However, they sometimes do not have voting rights. Like...
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