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10,000 shares stock were originally issued for one
dollar per share $10,000
Net income of the corporation for this first year
of operations 42,500
Before the end of the year, the corporation paid a dividend of $.25 per share to the stockholders.
That, in effect, transfers $2,500 of equity from the
corporation to the stockholders. 2,500
Equity at the end of the year 50,000
Total liabilities and equity $95,000
You should be aware of some interrelationships between the income statement and the balance sheet. First, total assets should add to the same amount as the total of liabilities and equity. Thatís why itís called a balance sheet. Also, the net income of the corporation as computed on the income statement shows up on the balance sheet in the equity section. Why these interrelationships exist we will leave to the accounting theory courses, but it is important to know that they do exist and that if they do not exist in a set of financial statements, those statements should be viewed as unreliable.
alternative minimum tax A computation of income tax that must be made by most corporations with annual gross revenue of $5 million or more. The income tax computed by the regular tax rules is that compared to the income tax computed by the alternative minimum tax rules and the higher tax is what the corporation must pay to the IRS.
assets Refer to the Short Course in Corporate Finance Terms in this Appendix.
balance sheet Refer to the Short Course in Corporate Finance Terms in this Appendix.
bond A formal document that indicates the holder thereof is owed a certain amount by the corporation and what interest rate will be paid. Generally, a bond is issued when the bondholder loans cash to the corporation by purchasing a bond. It should be noted that interest paid to bondholders by a corporation is usually tax deductible, whereas dividends paid to stockholders (both common and preferred) are not deductible by the corporation.
bondholder An owner of a corporate bond; in essence, a creditor of the corporation.
C corporation A term brought about by federal tax law and the IRS. This type of corporation pays its own tax on the income it earns. Its rate
of tax and other tax factors have no relationship to the tax picture of the owners (stockholders) of the corporation. (See S corporation.)
chairman of the board The chairperson of the board of directors. He or she is elected by the members of the board.
chief executive officer (CEO) The individual responsible for the total operation of the company. Generally synonymous with the title of president and is appointed by majority vote of the directors.
chief financial officer (CFO) The individual responsible for the financial records of the corporation and financial planning for the future of the business. May also hold title of treasurer.
chief operating officer (COO) The individual responsible for the day to day operations of the whole corporation. He or she may also hold a formal title such as executive vice president.
class of stock a means of separating stock in which some stockholders have certain rights and privileges that are denied to other stockholders.
close corporation A means of streamlining corporate management hierarchy permitted by many states. It is designed for corporations with few stockholders, where most of the stockholders are also active as employees of the corporation (example: a family business). There is no board of directors, as stockholders operate as such, directly electing the corporate officers and participating in major management decisions. In other words, it recognizes the fact that a board of the directors interposed between stockholders and officers is often merely a formality and allows the elimination of such.
common stock The most common class of stock. The owners of common stock share, pro rata to their percentage of ownership, with
other common stockholders in dividends and other manifestations of the success of the corporation. Usually, but not always, owners of common stock have voting rights in the election of directors. (See voting rights and directors.)
convertible bond Like convertible preferred stock, this type of bond can be converted to common stock under certain circumstances. Because of the fact that this bond (a corporate debt) may become stock (corporate ownership), there is always a question of whether the income paid to bondholders is deductible as interest or is really a disguised dividend and therefore not deductible.
convertible preferred stock Under certain circumstances, and at the option of the preferred stockholder, this class of stock may be converted into common stock. The conversion rate (how many shares of common stock equal how many shares of preferred stock) should be set forth in the preferred stock certificates when they are issued.