Basics of Capital Stock
Capital stock is a general term that refers to any shares issued to obtain capital (owner financing). This section introduces terminology and accounting for capital stock.
Authorized Stock: Authorized stock is the number of shares that a corporation’s charter allows it to sell. The number of authorized shares usually exceeds the number of shares issued (and outstanding), often by a large amount. No formal journal entry is required for stock authorization. A corporation must apply to the state for a change in its charter if it wishes to issue more shares than previously authorized. A corporation discloses the number of shares authorized in the equity section of its balance sheet or notes. Selling (Issuing) Stock: A corporation can sell stock directly or indirectly. To sell directly, it advertises its stock issuance to potential buyers. This type of issuance is most common with privately held corporations. To sell indirectly, a corporation pays a brokerage house (investment banker) to issue its stock. Some brokerage houses underwrite an indirect issuance of stock; that is, they buy the stock from the corporation and take all gains or losses from its resale.
Market Value of Stock: Market value per share is the price at which a stock is bought and sold. Expected future earnings, dividends, growth, and other company and economic factors influence market value. Traded stocks’ market values are available daily in newspapers such as The Wall Street Journal and online. The current market value of previously issued shares (for example, the price of stock in trades between investors) does not impact the issuing corporation’s stockholders’ equity.
Classes of Stock: When all authorized shares have the same rights and characteristics, the stock is called common stock. A corporation is authorized to issue more than one class of stock, including preferred stock and different classes of common stock.
Par Value Stock: Par value stock is...
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