tailieunhanh - Ebook Financial accounting (6th edition): Part 2

(BQ) Part 2 book "Financial accounting" has contents: Reporting issues for affiliated and international companies, additional issues in liability reporting, a framework for financial statement analysis, additional dimensions of financial reporting,.and other contents. | 10 c h a p t e r Shareholders’ Equity LEARNING OBJECTIVES 1. Understand why large business firms prefer to organize as corporations. 2. Comprehend the types of transactions and events that affect the components of shareholders’ equity. 3. Interpret shareholders’ equity ratios that are helpful in analyzing financial statements. INTRODUCTION Corporations are the dominant form of business organization in advanced industrial nations such as the United States. Although they only represent about 25 percent of business firms, they generate about 80 percent of business revenues. A corporation is an entity that is owned by its shareholders and raises equity capital by selling shares of stock to investors. Equity capital is an ownership interest in the corporation and each share of stock represents a fractional interest in the issuing firm. It’s important to note that equity capital is not a liability to be repaid at a future date. Most major corporations’ stock is traded (bought and sold) on major security exchanges, such as the New York and American Stock Exchanges. For business managers, a primary advantage of the corporate form of organization is the capability to raise large amounts of cash by selling shares of stock to many different individuals and institutions (such as mutual funds, insurance companies, and pension plans), rather than relying on the investments of a few owners and lenders. Stockholders expect to earn returns on their investments in the form of dividends and capital gains. Dividends are distributions of assets, usually cash, that the corporation elects to make periodically to its stockholders. Capital gains (or losses) result from increases (or decreases) in the market price of stocks over the period during which an investor holds them. Neither the payment of dividends nor the appreciation in stock prices is guaranteed to the equity investor. Instead, the capability of a corporation to generate cash through profitable operations determines its .