Corporations - Another business structure is to incorporate your business. This can be done at the federal or provincial level.

When you incorporate your business, it is considered to be a legal entity that is separate from the owners and shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or act of the company. Advantages - Limited liability - Ownership is transferrable - Continuous existence - Separate legal entity - Easier to raise capital - Possible tax advantages as taxes may be lower for an incorporated business Disadvantages - A corporation is closely regulated - More expensive to incorporate than a partnership or sole proprietorship - Extensive corporate records required, including shareholder and director meetings, and documentation filed annually with the government. - Possible conflict with director and shareholders. - Possible problem with residency of directors, if they are in another province or the majority are not Canadian Forming a Corporation 1) Articles of incorporation pg 652 2) Set of bylaws international rules and procedures for operations 3) Organizational costs Organizational Costs - Costs incurred in forming a corporation are called organization costs - These costs include fees to underwriters, legal fees, incorporation fees, and promotional expenditures. - Organization costs are normally expensed in the year the organization cost is incurred. Classification of Corporations - FOR PROFIT: Public, Private - NOT FOR PROFIT: Charitable Coporation - A charitable corporation must be set up to carry out activities in one or all of these areas. They are: 1) Relief of poverty 2) Advancement of education 3) Religion Charities: tax privileges: charities have exemption from, and reduced liability for, some municipal, provincial, federal taxes. Registered charities under the Federal Income Tax Act can issue income tax donation receipts so that donors can obtain tax credits. SOLICITING VS NONSOLICITING CORPORATION - Nonsoliciting: no public funds or less than $10,000 in public funds in each of 3 previous years. - Soliciting: asking for something. More than $10,000 in income from public sources in 1 year. Crown Corporation - Hybrid entities: between government body + private enterprise. Owned by state but operates at arms length from government. - Fills a need not being met by private sector (either unwilling or its in national interest) - Sometimes not economically feasible or profitable Canada Business Corporations Act: accountable to Parliament Provincial Crown corporations behave similarly.

Common Types of Share Classes - Common shares: refer to share class that gets remaining property of corporation if it is dissolved. Voting Rights. - Non Voting Shares: no vote in normal running of corporation. Often paid dividends but at the sale discretion of the board of directors. - Preferred shares: preferance attached to shares, such as the right to get dividends before holders of common shares. CBCA: Certain requirements for details regarding shares, including the following: - All shares must be without nominal or par value - Gives incorporations broad discretion to designate a class of shares as common, preferred or Class A or B shares, or any other designation. Some designate classes of shares simply as Class A, class B, and other. - Authorized to issue an unlimited number of shares. - Where theres more than 1 class of shares, the rights, privileges, restrictions and conditions attaching to each class must be specified. At least 1 class of shares it to be voting, there must be a class that carries the right to receive dividends and one class that carries the right to receive dividends and one class that carries the right to receive the remaining property of the corporation on dissolution. If only one class of shares is created, that class will carry all the rights. Other information: - Authorized shares: total number of shares a company is allowed to sell. - Unlimited or certain number - Issued shares: the authorized shares that have been sold - Initial public offering (IPO): the company receives the cash from the sale of the IPO shares. - Shares trade on secondary market after + not recorded as transaction for company. Corporate capital Shareholders equity (owners equity) The shareholders equity section of a corporations balance sheet consists of: Contributed capital (share capital, additional contributed capital) Retained earnings (can be distributed as dividends while capital cannot) If you pay dividends out of share capital, youre just moving money around (not allowed by law)

No Par share values No assigned legal capital value Legal capital equals issue price (proceeds) Must retain legal capital. No-par value has NO relationship to market value once issued.

Issuing no par value common shares for cash Shares are most commonly issued for cash. When no par value common shares are issued, the entire proceeds from the issue becomes legal capital DR CASH 1,000. CR COMMON SHARES 1,000. To record issue of 1000 shares. Illustration 14.6: shareholders equity section Stated and Par Share Values Seldom used stated value assigned value to no par value shares

par value assigned legal capital value issued in the US prohibited for companies incorporated federally and in most Canadian provinces. (dont have to know the debit credit transaction in textbook) Must retail legal capital. Stated and par values have NO relationship to market value

Share Subscription Shares sold on subscription basis: people sign up the full price is not received immediately. Partial Payment is made + share is not issued until the full price is received. At date of issuance: 10,00010,000-

Subscriptions Receivable (10 x $20 x 50) Common Shares Subscribed To record Receipt of subscriptions for 500 shares. Later: Cash Subscriptions Receivable To record receipt of 1st installation representing 50% of total due in shares Contra equity accounting = subscriptions receivable

5,0005,000-

Cash Subscriptions Receivable To record receipt of 1st installation representing 50% of total due in shares Preferred Shares Priority over common shares: 1) Dividends 2) Assets in liquidation No voting rights Shown first in the share capital section of shareholders equity. Preferred Share Preferences Liquidation, preference Cumulative (dividends in arrears) Convertible (book value) Redeemable (company has right to buy it back)/ callable (company option) Retractable (shareholder option: right to sell it back)

5,0005,000-

Dividend preferences cumulative dividend A cumulative dividend requires that preferred shareholders be paid both current and prior year dividends before common shareholders receive any dividends. Preferred dividends not declared in a given period are called dividends in arrears. Dividends in arrears are not considered a liability, but the amount of the dividend in arrears should be disclosed in the notes to financial statements Dividends in Arrears ($30,000 x 2) Current Year Dividends Total Preferred Dividends $60,00030,000$90,000-

Convertible Preferred Shares 1) Convertible preferred share that allow the exchange of preferred shares into commons hares at a specified ratio

2) 3) 4) 5) -

Investors who want the greater security of a preferred share, but also the added option of conversion Recording the conversion, the book value of preferred shares is used. Conversion is not a gain + loss to corporation Market value is not considered Book value of preferred share 100,000100,000-

Preferred Shares Common Shares To record conversion of 1,000 preferred shares into 10,000 common shares.

Redeemable Preferred Redeemable (callable) preferred shares grant the issuing corporation the right to purchase the shares from shareholders at specified future dates and prices. This call feature allows some flexibility to a corporation by enabling it to eliminate this type of equity when it is advantageous to do so. While convertible shares are for the benefit of the share holder, redeemable shares are for the benefit of the corporation Retractable Preferred (behaves like liability) Similar to redeemable preferred shares except that the shareholders can redeem shares at their option instead of the corporations. + debit have many similarities Both offer a rate of return to the investor, and with the redemption of the shares they both offer a repayment of the principal investment Retractable preferred shares are presented in the liability section of the balance sheet rather than in the equity section because it has more of the features of debt than equity. (statement presentation of shareholders equity section): Ill 14.10 Additional contributed capital (reacquired common shares)

Return on Equity Return one equity (or return on investment) is considered to be the most important measure of a firms profitability and efficiency Evaluates how many dollars were earned for each dollar invested by the owners Net income / Average Shareholders Equity = Return on Equity Book Value Per Share Book value per share represents the equity a common share holder has in the net assets of the corporation from owning 1 share The formula for calculating book value per share when a corporation has only one class of shares is: Total Shareholders Equity / # of common shares = book value per share Book Value vs. Market Value Book value per share seldom equals market value Book value (historical costs): market value (subjective judgment of thousands of shareholders and prospective investors about the companys potential for future earnings + dividends) Market value per share may > book value per share, but the fact does not necessarily mean that the shares are overpriced. CHAPTER 15:

DIVIDENDS Distribution by a corporation its shareholders on a pro rata (equal) basis

Cash or shares (normally common) CASH DIVIDENDS Pro rata distribution of cash to shareholders To occur, a company must have (1) retained earnings, (2) adequate cash, (3) declared dividends Entries for Cash Dividends 3 dates are important in connection with dividends: Declaration date Record date Payment date On Page 692: What happens on declaration date + record + payment At date of declaration: DR RETAINED EARNINGS (Cash Dividends Declared) CR DIVIDENDS PAYABLE liability In the textbook, it says Cash Dividends Common instead of Retained Earnings. Allocating cash dividends between preferred and common shares Cash dividends must first be paid to preferred shareholders before common When preferred shares are cumulative, any dividends in arrears must be paid to preferred shareholders before allocating any dividends to common shareholders When preferred shares are non cumulative, only the current years dividend must be paid to preferred shareholders before paying any dividends to common shareholders. Stock Dividends A stock dividend is a pro rata distribution of the corporations own shares to its shareholders A stock dividend results in a decrease in retained earnings + an increase in share capital since a portion of retained earnings is transferred to legal capital In most cases, the fair market values assigned to dividend shares Total shareholders equity + legal capital per share remains the same * retained Stock dividends change composition of shareholders equity because a portion of retained earnings is transferred to contributed capital. However, total shareholders equity remains the same. The number of shares increases and this means that the book value per share increases. Ill: before stock dividend, after Purposes and Benefits of stock Dividends For company To satisfy shareholders dividend expectations without spending cash To increase marketability of its shares by increasing number of shares and decreasing market price per share To reinvest and restrict a portion of shareholders equity Purposes and Benefits of Stock Dividends For shareholders More shares with which to earn additional dividend income More shares Stock Splits Issue of additional shares to shareholders according to their percentage of ownership Number of shares is increased in the same proportion that legal capital per share is decreased. No effect on total share Illustration 15-5 Stock Split Effects

A stock split does not affect total share capital, retained earnings, or shareholders equity. However, the number of share increases and book value per share decreases. Shareholders Equity : Before Stock Split, After Stock Split Illustration 15-6 Stock split, stock dividend, cash dividend Retained Earnings Retained earnings is the cumulative net earnings (less losses) that is retained in the business (ie, not distributed to shareholders) Retained earnings, opening balance + net earnings (or net loss) dividends: retained earnings ending balance Statement of retained earnings corrections ADD: Net income LESS: Dividends Deficit: Shareholders Equity Share Capital Common Shares Retained Earnings (deficit) Total Shareholders Equity Retained Earnings Restrictions In some cases there may be retained earnings restrictions that make a portion of the balance currently unavailable for dividends Restrictions result from one or more of the following cases: Legal, contractual, voluntary Prior Period Adjustments A prior period adjustment results from: 1. Correction of a material error in reporting net income in previously issued financial statements, or 2. Changing by accounting principle Prior Period Adjustments (before Jan 1, readjusted) Correction of error: after books closed, relates to prior period Change in accounting principle when one used in current year is different from preceding year Contd Cumulative effect of correction and change (net of income tax) should be: Made directly to retained earnings Reported in current years retained earnings statement as an adjustment of the beginning balance of retained earnings Disclosed in a footnote to the financial statements Corrected + restated in a prior period financial statement presented, and The corrected amount or new principle should be used in reporting the results of operations of the current year. Ill 15-12 Debits (decreases) 6. Reacquisition of Shares

Decreases: 1 and 2 is before Jan 1 (fiscal period, 3 and 4 and 5 and 6 after Increases: 1 and 2 before Jan 1, 3 after Corporation Income Statements Same sections Diff: income tax expense Tax purposes: separate legal entity * Things that happen outside of normal course of operations: Other Revenues and Gains, Other Expenses and Losses Ill 15-15 Earnings Per Share Earnings per share (EPS) indicates the net amount earned by each common share Companies report earnings per share in income statement The formula to calculate earnings per share when there has been no change in shares during the year is as follows: Net income / Number of Camera Shares = Earnings per share Preferred Dividends Ill-15-20 When I.S. contains non typical item, EPS should be disclosed for each component

Price Earnings Ratio The price earnings (p/e) ratio helps investors determine whether the shares are a good investment in relation to earnings. It is a per share calculation, calculated by dividing the market price of the shares by its earnings per share Market price per share / Earnings per share = Price Earnings Ratio High: indicator that investors believe the company has future growth potential

P 712 Payout Ratio, Dividend Yield