Accounting Basic 2014
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SABBIR AHMMED SOHEL [email protected] What is retained earnings? Generally, retained earnings is a corporation's cumulative earnings since the corporation was formed minus the dividends it has declared since it began. In other words, retained earnings represents the corporation's cumulative earnings that have not been distributed to its stockholders. The amount of retained earnings as of a balance sheet's date is reported as a separate line item in the stockholders’ equity section of the balance sheet. A negative amount of retained earnings is reported as deficit or accumulated deficit. What are the stockholders' equity accounts? The stockholders' equity accounts are balance sheet accounts and a part of the accounting equation Assets = Liabilities + Stockholders' Equity. In this light you can view the stockholders' equity accounts (along with the
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Transcript of Accounting Basic 2014
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What is retained earnings?Generally, retained earnings is a corporation's cumulative earnings since the corporation was formed minus the dividends it has declared since it began. In other words, retained earnings represents the corporation's cumulative earnings that have not been distributed to its stockholders.
The amount of retained earnings as of a balance sheet's date is reported as a separate line item in the stockholders’ equity section of the balance sheet.
A negative amount of retained earnings is reported as deficit or accumulated deficit.
What are the stockholders' equity accounts?The stockholders' equity accounts are balance sheet accounts and a part of the accounting equation Assets = Liabilities + Stockholders' Equity. In this light you can view the stockholders' equity accounts (along with the liability accounts) as sources of the amounts reported in the asset accounts.
If the source of an asset was an investor purchasing new shares of common stock, the corporation would credit the stockholders' equity account Common Stock and perhaps Paid-in Capital in Excess of Par--Common Stock, or Premium on Common Stock. If the source of an asset was an investor purchasing new shares of preferred stock, the corporation would credit the stockholders' equity account Preferred Stock and perhaps Paid-in Capital in Excess of Par--Preferred Stock, or Premium on Preferred Stock.
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If the source of an asset was the net income earned by the corporation, the stockholders' equity account Retained Earnings would be credited. If a corporation reduces its assets by purchasing its stock from its stockholders, the contra-stockholders' equity account Treasury Stock is debited.
What is the difference between par and no par value stock?Some states' laws require or may have required common stock issued by corporations residing in their states to have a par value. The par value on common stock has generally been a very small amount per share. Other states might not require corporations to issue stock with a par value. So the par value on common stock is a legal consideration.
From an accounting standpoint, the par value of an issued share of common stock must be recorded in an account separate from the amount received over and above the amount of par value. For example, if a corporation issues 100 new shares of its common stock for a total of $2,000 and the stock's par value is $1 per share, the accounting entry is a debit to Cash for $2,000 and a credit to Common Stock—Par $100, and a credit to Paid-in Capital in Excess of Par for $1,900. In total the Cash account increased by $2,000 and the paid-in capital reported under stockholders' equity increased by a total of $2,000 ($100 +$1,900).
If a corporation is not required to have a par value or a stated value and the corporation issues 100 shares for $2,000, then the accounting entry will be a debit to Cash for $2,000 and a credit to Common Stock for $2,000.
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In other words, when the issued stock has a par value, the proceeds from the issuance gets divided between two of the paid-in capital accounts within stockholders' equity. If the issued stock does not have a par value, the proceeds from the issuance goes into just one paid-in capital account within stockholders' equity.
What is the difference between stockholder and shareholder?There is no difference between stockholder and shareholder. The terms are used interchangeably. Both terms mean the owner of shares of stock in a corporation and a part owner of a corporation.
What is the difference between net income and comprehensive income?The difference between net income and comprehensive income is known as other comprehensive income.
Other comprehensive income includes unrealized gains and losses on certain investments in securities, foreign currency items, and certain pension liability adjustments.
Net income is reported on the income statement and is included in the retained earnings section of stockholders' equity. Other comprehensive income items are not reported on the income statement, and are included in the accumulated other comprehensive income section of stockholders' equity.
The accounting for comprehensive income is provided in the Statement
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of Financial Accounting Standards No. 130, Reporting Comprehensive Income, available for reading at www.FASB.org/st.
What is the book value per share of stock?If a corporation does not have preferred stock outstanding, the book value per share of stock is a corporation's total amount of stockholders' equity divided by the number of common shares of stock outstanding on that date.
For example, if a corporation without preferred stock has stockholders' equity on December 31 of $12,421,000 and it has 1,000,000 shares of common stock outstanding on that date, its book value per share is $12.42.
Keep in mind that the book value per share will not be the same as the market value per share. One reason is that a corporation's stockholders' equity is simply the difference between the total amount of assets reported on the balance sheet and the total amount of liabilities reported. Long term assets are generally reported at original cost less accumulated depreciation and some valuable assets such as trade names might not be listed on the balance sheet.
What is capital surplus?In the past, capital surplus was used to describe what is now referred to as paid-in capital in excess of par.
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For example, when a corporation issues shares of its common stock and receives more than the par value of the stock, two accounts are involved: 1) the account Common Stock is used to record the par value of the shares being issued, and 2) the amount that is greater than the par value is recorded in an account entitled Paid-in Capital in Excess of Par—Common Stock, or Premium on Common Stock.
Many years ago, the account Paid-in Capital in Excess of Par—Common Stock and the account Premium on Common Stock were referred to as capital surplus.
What is the meaning of equity?Equity is used in accounting in several ways. Often the word equity is used when referring to an ownership interest in a business. Examples include stockholders' equity or owner's equity.
Occasionally, equity is used to mean the combination of liabilities and owner's equity. For example, some restate the basic accounting equation from Assets = Liabilities + Owner's Equity to Assets = Equities.
Equity is also used to indicate an owner's interest in a personal asset. The owner of a $200,000 house that has an $80,000 mortgage loan is said to have $120,000 of equity in the house.
Outside of accounting, the word equity is also used to indicate fairness or justice.
What is the definition of capital market?
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Often, capital market refers to the structured market for trading stocks and bonds. Examples are the New York Stock Exchange, the American Stock Exchange, NASDAQ, and the New York Bond Exchange.
However, capital market can also include less structured markets such as private placements for stocks, bonds, and other debt.
What is callable stock?Callable stock is an ownership interest in a corporation that can be "called-in" by the corporation at a specified price.
For example, a corporation might issue 9% $100 Preferred Stock. The stock agreement (indenture) states that the stock is callable by the corporation after three years at $109 per share plus any accrued interest. If in the fourth year, market interest rates decline to say 7%, the corporation can call-in the preferred stock by paying the call price of $109 plus any accrued interest.
The callable feature allows the corporation to get out of the preferred stock agreement requiring it to pay 9% interest. In turn, the stockholders will be deprived of receiving the 9% interest in a 7% market. The call price has the effect of limiting how high the market value of preferred stock will rise.
What is the meaning of arrears?In accounting we use the word arrears in at least two ways. One use involves the omitted dividends on cumulative preferred stock. For example, if a corporation has cumulative preferred stock and due to a
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shortage of cash decides to omit the dividend on those preferred shares, the preferred dividend is in arrears. The result of having these dividends in arrears is that the owners of the common stock cannot receive a dividend until the preferred stock's dividends in arrears are paid and the preferred stock's current year dividend is also paid. Having dividends in arrears also requires a disclosure in the notes to the financial statements.
Arrears is also used in the context of annuities. When an annuity's equal payments occur at the end of each period, the annuity is said to be an annuity in arrears or an ordinary annuity.
Arrears is also used to simply mean past due, or behind in payments.
How do cash dividends affect the financial statements?When a corporation declares a cash dividend on its stock, its retained earnings are decreased and its current liabilities (Dividends Payable) are increased. When the cash dividend is paid, the Dividends Payable account is decreased and the corporation's Cash account is decreased.
The net result of the declaration and payment of the dividend is that the corporation's assets and stockholders' equity have decreased. Specifically, the balance sheet accounts Cash and Retained Earnings were decreased.
The income statement is not affected by the declaration and payment of cash dividends on common stock. (The cash dividends on preferred stock are deducted from net income to arrive at net income available for common stock.)
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The cash dividends will be reported as a use of cash in the financing activities section of the statement of cash flows.
What is the difference between dividends and interest expense?Dividends are a distribution of a corporation's earnings to its stockholders. Dividends are not an expense of the corporation and, therefore, dividends do not reduce the corporation's net income or its taxable income. When a dividend of $100,000 is declared and paid, the corporation's cash is reduced by $100,000 and its retained earnings (part of stockholders' equity) is reduced by $100,000.
Interest on bonds and other debt is an expense of the corporation. The interest expense will reduce the corporation's net income and its taxable income. When interest expense occurs and is paid, the corporation's cash is reduced by the interest payment, but some cash will be saved by the reduction in income taxes. The corporation's retained earnings will also be reduced by less than the amount of interest expense. For example, if a corporation has an incremental tax rate of 40%, interest expense of $100,000 will result in $40,000 less in income tax expense and income tax payments. This means that an interest payment of $100,000 will reduce the corporation's cash and retained earnings by the net amount of $60,000 ($100,000 of interest minus $40,000 of tax savings).
Since interest is formally promised to the lenders, accountants must accrue interest expense and the related liability Interest Payable. If the payment for interest is not made, the corporation will face legal consequences.
Dividends on common stock are not legally required. Therefore, if the corporation does not declare a dividend there is no liability for the
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omitted dividends.
What is premium on common stock?The premium on common stock involves the amount the issuing corporation receives when it issues common stock having a par value. The premium on common stock is the dollar amount that is in excess of the common stock's par value.
To illustrate the premium on common stock, let's assume that a corporation issues one share of its common stock having a par value of $0.10 per share. If the corporation receives $20 in exchange for the share, $19.90 will be recorded as the premium on common stock.
Accounting textbooks often refer to the premium on common stock as paid-in capital in excess of par value–common stock or as contributed capital in excess of par value–common stock.
What are the journal entries for a stock split?The only journal entry needed for a stock split is a memo entry to note that the number of shares has changed and that the par value per share has changed (if the stock has a par value). However, a typical journal entry with debits and credits is not needed since the total dollar amounts for the par value and other components of paid-in capital and stockholders' equity do not change.
For example, if a corporation has 100,000 shares of $1.00 par value stock and it declares a 2-for-1 stock split, the corporation will have
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200,000 shares with a par value of $0.50 per share. Before and after the stock split, the total par value is $100,000. Other account balances within stockholders' equity also remain the same.
Where is treasury stock reported on the balance sheet?Under the cost method of recording treasury stock, the cost of treasury stock is reported at the end of the Stockholders' Equity section of the balance sheet. Treasury stock will be a deduction from the amounts in Stockholders' Equity.
Treasury stock is the result of a corporation repurchasing its own stock and holding those shares instead of retiring them.
In the general ledger there will be an account Treasury Stock with a debit balance. (At the time of the purchase of treasury stock, the corporation will debit the account Treasury Stock and will credit the account Cash.)
What is "deficit" appearing in stockholders' equity?The term deficit is used instead of retained earnings when the retained earnings is a negative amount.
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What is preferred stock?Preferred stock is a type of capital stock issued by some corporations. Preferred stock is also known as preference stock.
The word "preferred" refers to the dividends paid by the corporation. Each year, the holders of the preferred stock are to receive their dividends before the common stockholders are to receive any dividend. In exchange for this preferential treatment for dividends, the preferred stockholders (or shareholders) generally will never receive more than the stated dividend. For example, the holder of 100 shares of a corporation's 8% $100 par preferred stock will receive annual dividends of $800 (8% X $100 = $8 per share X 100 shares) before the common stockholders are allowed to receive any cash dividends for the year. Unless the preferred stock has a participating feature, this preferred stockholder will never receive more than $8 per share no matter how successful the corporation becomes.
The features of preferred stocks can vary. Examples include cumulative, convertible, callable, participating, and more.
Since the dividend on preferred stock is usually a fixed amount forever, once the preferred stock is issued its market value is likely to move in the opposite direction of inflation. The higher the rate of inflation, the less valuable is the fixed dividend amount. If the inflation rate declines, the value of the preferred stock is likely to increase, but no higher than the stock's call price.
Most corporations do not issue preferred stock. Typically, corporations will issue only common stock and use debt.
What is the cost of capital?
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The cost of capital is the weighted-average, after-tax cost of a corporation's long-term debt, preferred stock, and the stockholders' equity associated with common stock. The cost of capital is a percentage and it is often used to compute the net present value of the cash flows in a proposed investment. It is also considered to be the minimum after-tax internal rate of return to be earned on new investments.
For a profitable corporation, the costs of bonds and other long-term loans are usually the least expensive components of the cost of capital. One reason is that the interest will be deductible for U.S. income taxes. For example, a corporation paying 6% on its loans may have an after-tax cost of 4% when its combined federal and state income tax rate is 33%. On the other hand, the dividends paid on the corporation's preferred and common stock are not tax deductible.
The cost of common stock (paid-in capital and retained earnings) is considered to be the most expensive component of the cost of capital because of the risks involved.
Let's compute the cost of capital by assuming that a corporation has $40 million of long-term debt with an after-tax cost of 4%, $10 million of 7% preferred stock, and $50 million of common stock and retained earnings with an estimated cost of 15%. Its weighted-average, after-tax cost of capital is: ($40 million X 4% = $1.6 million) + ($10 million X 7% = $0.7 million) + ($50 million X 15% = $7.5 million) = $9.8 million divided by $100 million = 9.8%.
Do corporations issue both common stock and preferred stock?
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Some corporations issue both common stock and preferred stock. However, most corporations issue only common stock. In other words, it is necessary that a business corporation issue common stock, but it is optional whether the corporation will decide to also issue preferred stock.
Usually the holders or owners of a corporation's common stock elect the corporation's directors, vote on significant matters, and enjoy increases in the value of their shares of common stock when the corporation becomes successful.
On the other hand, the holders of preferred stock usually receive only a fixed dividend, which must be paid before the common stock is paid a dividend. Because of that fixed dividend, the preferred stock will not increase in value as the corporation becomes increasingly successful.
Which financial statement shows a corporation's worth?Not one of the financial statements will show a corporation's worth. The balance sheet, income statement, statement of cash flows, and stockholders' equity statement merely provide information to assist financial experts in forming an opinion of a corporation's worth.
In the past, some people mistakenly thought that a corporation's stockholders' equity was the corporation's worth. However, stockholders' equity (or the owner's equity of a proprietorship) is merely the result of subtracting the reported amount of liabilities from the reported amount of assets. Since the reported amounts reflect the cost principle and other accounting principles, the net result cannot be assumed to be the company's worth.
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What is capital stock?Capital stock is the combination of a corporation's common stock and preferred stock (if any).
Common stock is usually the first and only capital stock issued by corporations. However, some corporations will also issue preferred stock.
The amount received by the corporation when it issued shares of its capital stock is reported in the stockholders' equity section of the balance sheet.
Why is there a large difference between share value and stockholders' equity?There can be many reasons why the market value of a corporation's stock is much greater than the amount of stockholders' equity reported on the balance sheet. Let's start by defining stockholders' equity as the difference between the assets amounts reported on the balance sheet minus the liability amounts. Next, the accountant's cost principle requires that only the cost of items purchased can be reported as an asset. This means that valuable trade names that were never purchased (but were developed over time) are not reported on the balance sheet. The same holds for a great management team and an amazing reputation. The cost principle also means that many long-term assets are reported at cost (and not at their current higher market value). Many
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plant assets are reported at minimal amounts because their costs have been reduced by the cumulative amount of depreciation taken over the years.
Other factors contributing to a high market value might be a corporation's earnings and dividends that are consistently growing and/or a special niche for its products or services that is recognized by the market.
Lastly, a corporation's stockholders' equity may have been reduced from the purchase of treasury stock at a high cost.
Does the income statement explain the change in the equity section of a balance sheet?The income statement could explain the change in the equity section of a balance sheet. However, there are likely to be some other explanations as well.
Here is a list of the items that would cause an increase in the total amount of a corporation's stockholders' equity:
1. Positive net earnings or net income reported on the corporation's income statement.
2. Some positive Other Comprehensive income items occurred but they are not to be reported on the income statement.
3. Additional shares of stock were issued in exchange for cash or other assets.
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4. Donated capital was received.
Here is a list of items that could cause a decrease in the total amount of a corporation's stockholders' equity:
1. Negative net earnings or a net loss reported on the corporation's income statement.
2. Some negative Other Comprehensive Income items occurred but they are not to be reported the income statement.
3. The corporation declared cash dividends.
To see all of the explanations for the change in the equity section of a balance sheet, you should review the statement of stockholders' equity. This financial statement should be issued along with a corporation's balance sheet, income statement, and statement of cash flows.
What is a dividend and why is it needed?A dividend paid by a corporation is a distribution of profits to the owners of the corporation. The owners of a corporation are known as stockholders or shareholders. (In a sole proprietorship, the distribution of profits to the owner is referred to as a draw.)
A corporation's board of directors, which is elected by the stockholders, decides if a cash dividend is needed. The considerations for paying or not paying a dividend include the stockholders' wishes, the stock market's reaction, and the corporation's needs and opportunities for cash in the present and in the future.
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Where do preferred stocks go on the P&L?The amount received from issuing preferred stock is reported on the balance sheet within the stockholders' equity section.
Only the annual preferred dividend is reported on the income statement. The annual preferred dividend requirement is subtracted from a corporation's net income and the remainder is described as the Income Available for Common Stock.
What is stock?In accounting there are two common uses of the term stock. One meaning of stock refers to the goods on hand which is to be sold to customers. In that situation, stock means inventory.
The term stock is also used to mean the ownership shares of a corporation. For example, an owner of a corporation will have a stock certificate which provides evidence of his or her ownership of a corporation's common stock or preferred stock. The owner of the corporation's common or preferred stock is known as a stockholder.
What is the difference between stocks and bonds?
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Stocks, or shares of stock, represent an ownership interest in a corporation. Bonds are a form of long-term debt in which the issuing corporation promises to pay the principal amount at a specific date.
Stocks pay dividends to the owners, but only if the corporation declares a dividend. Dividends are a distribution of a corporation's profits. Bonds pay interest to the bondholders. Generally, the bond contract requires that a fixed interest payment be made every six months.
Every corporation has common stock. Some corporations issue preferred stock in addition to its common stock. Many corporations do not issue bonds.
The stocks and bonds issued by the largest corporations are often traded on stock and bond exchanges. Stocks and bonds of smaller corporations are often held by investors and are never traded on an exchange.
issued share capital
DefinitionThe total of a company’s shares that are held by shareholders. A company can, at any time, issue new shares up to the full amount of authorized share capital. Also called subscribed capital, or subscribed share capital.
Debenture - What is a debenture?
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Defintion: A debenture is a medium to long-term debt format that is used by large companies to borrow money.
Debentures are the most common form of long-term loans that can be taken by a company.
Debentures are usually loans that are repayable on a fixed date, but some debentures are irredeemable securities (these are sometimes called perpetual debentures).
Most debentures pay a fixed rate of interest. It is required that this interest is paid prior to dividends being paid to shareholders. Furthermore, most debentures are secured on the borrower’s assets, although some are not (these can be known as naked or unsecured debentures – most debentures in the USA are unsecured).
Debentures are most often used by large companies to borrow money
Debenture holdersDebenture holders (investors) do not have any rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures.
The interest paid to debenture holders is calculated as a charge against profit in the company's financial statements.
AdvantagesThe main advantage of debentures to companies is the fact that they have a lower interest rate than e.g. overdrafts. Also, they are usually repayable at a date far off in the future.
For an investor, their main advantages are that they are often easy to sell in stock exchanges and they contain less risk than e.g. equities.
Convertible vs. non-convertibleThere are two types of debentures:
Convertible debentures: Convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time.
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Convertible bonds are more attractive to investors since the bonds have the ability to convert and also attractive to companies since they typically have lower interest rates than non-convertible corporate bonds.
Non-convertible debentures: regular debentures which cannot be converted into equity shares of the liable company. Since they are not able to convert, they usually carry higher interest rates than convertible debentures.
capital reserve
DefinitionA resource created by the accumulated capital surplus (not revenue surplus) of an organization, such as by an upward revaluation of its assets to reflect their current market value after appreciation. Allocating such sums to capital reserve means they are permanently invested and will not be paid as dividends.
What is Capital Redemption Reserve?Capital Redemption Revere is an reserve created when a company buys it owns shares which reduces its share capital. This reserve is not distributable to shareholders and can be used to pay bonus shared issued.
capital redemption reserve
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DefinitionA fund which exists both on the financial statements of a company and also as part of the company's internal accounts. A business with a capital redemption reserve fund is legally mandated by the U.S. Securities and Exchange Commission to make capital redemptions for certain transactions acting as a hedge against capital reductions.
Read more: http://www.businessdictionary.com/definition/capital-redemption-reserve.html#ixzz1m4HGlVTn
What Is Stock?A Beginner's Guide to Understanding and Investing in Stock
To raise money, companies divide themselves into pieces and sell these pieces, called shares of stock, to investors. Each share of stock is entitled to a proportional cut of the profits or losses the company generates from its daily operations.
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Shares of Stock Represent Pieces of a Business
Imagine you wanted to start a retail store with members of your family. You decide you need $100,000 to get the business off the ground so you incorporate a new company. You divide the company into 1,000 pieces, or "shares" of stock. (They are called this because each piece of stock is entitled to a proportional share of the profit or loss). You price each new share of stock at $100. If you can sell all of the shares to your family
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members, you should have the $100,000 you need (1,000 shares x $100 contributed capital per share = $100,000 cash raised for the company).*
If the store earned $50,000 after taxes during its first year, each share of stock would be entitled to 1/1,000th of the profit. You'd take $50,000 and divide it by 1,000, resulting in $50.00 earnings per share (or EPS as it is often called on Wall Street). You could call a meeting of the company's Board of Directors (these are the people the stockholders elected to watch over their interest since they couldn't run the business) and decide to use the money to pay cash dividends, repurchase stock, or expand the company by reinvesting in the retail store.
At some point, you may decide you want to sell your shares of the family retailer. If the company is large enough, you could trade on a stock exchange. That's what is happening when you buy or sell shares of a company through a stock broker. You are telling the market you are interested in acquiring or selling shares of a certain company and Wall Street matches you up with someone and takes fees and commissions for doing it. Alternatively, shares of stock could be issued to raise millions, or even billions, of dollars for expansion. When Sam Walton formed Wal-Mart Stores, Inc., the initial public offering that resulted from him selling newly created shares of stock in his company gave him enough cash to pay off most of his debt and fund Wal-Mart's nationwide expansion.
Shares of Stock on Wall Street Are No Different
It doesn't matter if you invest in shares of stock of multi-billion dollar conglomerates or tiny publicly traded retailers, when you buy share of stock, you are purchasing a pro-rata piece of a company. For instance, McDonald's Corporation has divided itself into 1,079,186,614 shares of common stock. Over the past twelve months, the company earned net income of $4,176,452,196.18 so management took that profit and divided it by the shares outstanding, resulting in earnings per share of $3.87. Of that, the company's Board of Directors voted to pay $2.20 out in the form of a cash dividend, leaving $1.67 per share for the company
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to devote to other causes such as expansion, debt reduction, share repurchases, or whatever else it decides is necessary to produce a good return for its owners, the stockholders.
The current stock price of McDonald's is $61.66 per share. The stock market is nothing more than an auction. Individual investors, just like you, are making decisions with their own money in a real-time auction. If someone wants to sell their shares of McDonald's and there are no buyers at $61.66, the price would have to continually fall until someone else stepped in and placed a buy order with their broker. If investors thought McDonald's was going to grow its profits faster than other companies, they would be willing to bid up the price of the stock (which is affected by supply and demand because there are only a fixed amount of shares in existence, in this case 1,079,186,614 shares). Likewise, if a large investor were to dump his or her shares on the market, the supply could temporarily overwhelm the demand and drive the stock price lower.
Keep Perspective on Stocks and Never Forget What They Represent
What happens if you believe McDonald's will generate far higher earnings per share of stock within five years, you buy 1,000 shares at $61.66 (for a total investment of $61,660), and the very next day, the stock falls to $30 per share? Should you be upset?
In this situation, you need to remember that the stock market is an auction. If you still believe the company will generate the earnings per share you calculated several years from now, to be upset that the stock price got cheaper would be, in the words of the legendary Benjamin Graham, to allow yourself to get upset by "other peoples' mistakes in judgment". The share price may move around wildly as millions of investors throughout the world make decisions about how much they are willing to pay, but the ultimate value of your shares will come from the profit the company generates.
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If McDonald's did reach, say, $8 in per share earnings within five years, and kept the same dividend policy, your shares would collect $4.55 in cash dividends each year. That means you'd be earning 15.17% in cash dividend yield on the stock you purchased when it fell to $30 per share. This is why you see many successful investors completely unemotional about stock market crashes; they view the events as nothing more than the opportunity to buy a greater stake in businesses they like that generate lots of cash.
More Information About Investing in Stocks
For more information about investing in stocks, read Complete Beginner's Guide to Investing in Stock.
* Footnote: These days, due to changes in state laws, most startups and private businesses are likely to opt to issue units, instead of shares, because they prefer the limited liability company structure.
Authorised capitalThe authorised capital of a company (sometimes referred to as the authorised share capital, registered capital or nominal capital, particularly in the United States) is the maximum amount of share capital that the company is authorised by its constitutional documents to issue (allocate) to shareholders. Part of the authorised capital can (and frequently does) remain unissued. This number can be changed by shareholders' approval. The part of the authorised capital which has been issued to shareholders is referred to as the issued share capital of the company.
In the United Kingdom, the concept of authorised share capital was abolished under the Companies Act 2006.[1]
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authorized share capital
Definition
The maximum value of securities that a company can legally issue. This number is specified in the memorandum of association (or articles of incorporation in the US) when a company is incorporated, but can be changed later with shareholders' approval.
Authorized share capital may be divided into (1) Issued capital: par value of the shares actually issued. (2) Paid up capital: money received from the shareholders in exchange for shares. (3) Uncalled capital: money remaining unpaid by the shareholders for the shares they have bought. Also called authorized capital, authorized stock, nominal capital, nominal share capital, or registered capital.
Share forfeiture
Share forfeiture is the process by which the directors of a company cancel the power of shareholder if he does not pay his call money when the company demands for it. Company will give 14 days' notice; after 14 days if shareholder does not pay then company will forfeit his shares and cut off his name from the register of shareholder. Company will not pay
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his received funds from shareholder. In order to do a share forfeiture the Articles of Association of the company should contain provision for that.
Suppose Mr. A buys 100 shares of a company but for the time being the company asks him to pay only 50% amount. The company makes a deal with Mr. A that whenever needed the rest of the money will be asked for. Now some months later when the company asks for the remaining 50% amount, Mr. A says that he is incapable of paying. The company gives him some more time to pay but he still can't pay. So the company seizes his shares and he no longer remains a shareholder of the company! He even loses the 50% amount that he had paid. This seizure of shares is called share forfeiture. But as explained above, share forfeiture rules have to be mentioned in the company's Articles of Association compulsorily.
What Is Share Forfeiture?Share forfeiture is a phenomenon in which an investor fails to honor all commitments connected with the ownership of stock issued by a particular company. When those commitments are not settled in full within the time frame allowed, the issuer of the shares has the right to cancel all ownership privileges extended to the investor, including the right to collect dividend payments. Unless the situation is corrected, the shares are forfeited and the name of the investor is removed from the shareholder register maintained by the issuer.
The possibility of share forfeiture occurs when an investor fails to comply with specific responsibilities outlined in the contract governing the original purchase of those shares. One common example is the failure of the shareholder to tender what is known as call money to the issuer of the stocks. Call money is money that is borrowed to manage short-term investments and may be demanded by the issuer under certain
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circumstances. If the investor does not tender the money within the time frame allotted, usually 14 calendar days, then the company has the right to take back the investor’s shares.
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Specific criteria must be met before a share forfeiture can be processed. Unless the conditions surrounding the forfeiture are in full compliance with the conditions set forth in the bylaws and founding documents of the issuer, taking away the investor shares may be impossible. In addition, the forfeiture must result in some sort of definite benefit to the issuer. As a final requirement, the share forfeiture cannot proceed unless the issue has made what is considered a reasonable effort to resolve the problem with the investor. Depending on the reasons behind the failure to comply, it is often within the discretionary powers of the issuer to create some sort of alternative solution that does allow the investor to retain the shares, possibly by allowing upcoming dividends to be utilized as payment of the call money.
Share forfeiture is often a serious loss for the investor. Once the forfeiture is processed and the shares are taken away, the opportunity to receive any further dividend payments is invalidated. Depending on the laws that prevail in the jurisdiction in which the issuer is based, the investor may or may not receive some sort of final compensation for those forfeited shares. In some nations, the investor will receive nothing other than a formal notification that the forfeiture is complete and advising that the investor no longer has any claim on the shares or any of the benefits connected with the stock.
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