Common Stock

1. Identify the rights normally held by the owners of common stock.

2. Describe the responsibilities of a corporation’s board of directors.

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3. Define and explain the terms “authorized,” “outstanding,” “issued,” and “par value” in relationship to common stock.

4. Record the issuance of common stock for cash.

5. Record the issuance of common stock for a service or for an asset other than cash.

Question: Several accounts frequently appear in the shareholders’ equity section of a balance sheet reported by

a corporation. Each has its own particular meaning. For example, as of January 3, 2009, Kellogg Company

reported the following information (all numbers in millions).

Some of these terms have been examined previously, others have not. For example, “retained earnings” was

described in early chapters as the increase in net assets generated by net income over the life of a company less

any amounts distributed as dividends during that same period.


What Information Is Conveyed about Equity Investments?”, “accumulated other comprehensive income” was

discussed because it was utilized to record changes in the fair value of available-for-sale securities. Gains and

losses in the worth of these investments were not included within net income. Rather, they were reported under

this heading within stockholders’ equity and subsequently used in computing comprehensive income.

Common stock has also been mentioned in connection with the capital contributed to a company by its owners.

However, Kellogg communicates additional information about its common stock such as the number of authorized

and issued shares as well as its par value. What is common stock? That seems the logical first step in analyzing

the information provided by a company about its capital shares.

Answer: Common stock represents the basic ownership of a corporation. One survey in 2007 found that common

stock is the only type of capital stock issued by approximately 90 percent of corporations (Iofe & Calderisi, 2008).

Obtaining ownership of a company’s common stock provides several distinct rights. However, the specific rights

are set by the laws of the state of incorporation and do vary a bit from state to state1.

Typical Corporate Ownership StructureTypical Corporate Ownership Structure

• Based on state laws and the corporation’s own rules, the owners of common stock are allowed to vote on a

few specified issues. By far the most prevalent is the election of the board of directors. “Why Is Financial Accounting Important?”, these individuals represent the ownership of the

corporation in overseeing the management. The board of directors meets periodically (annually, quarterly,

or as necessary) to review operating results and the future plans created by management. The board

provides guidance and changes where necessary. A list of the individuals (often ten to twenty-five) who

serve in this capacity is usually included in a corporation’s annual report, often just after its financial