Chapter 11 Corporation

Retained profit is when the money is re-invested back into the business leading to improve or expand the business. This is when the business generates profit, but it is kept in the corporate rather than dividing among the shareholders or between the partners. This finance is considered as long-term source of investment for an organisation. Retained profit has advantages and disadvantages. Advantages for this type of finance are;

a) Profit Sharing: return of some company’s profit to employees in the form of cash bonus or retirement supplement.

A company’s ultimate goal is to be profitable, maintain a loyal customer base, and remain in business for a long time. Unfortunately, there are unforeseen incidences that can alter a company’s present and future plans. The economy has a downfall, a company loses some major clients, or improper business practices to name a few, can result in a company venturing into bankruptcy. Bankruptcy exists as a court procedure where a judge and court appointee analyzes the assets and liabilities of individuals and businesses who cannot afford to pay their obligations (Debt.org, 2017). The judge and court appointee have the task of deciding whether these individuals or businesses will be legally exempt from settling their debts with their creditors. The laws that are accompanied with bankruptcy are; statutory law and administrative law.

A company is made up of stocks. The company then sells its stocks to people who are willing to buy it. A shareholder of a business is someone who owns part of the company. They own a stock of the company and in turn then they are somewhat in charge of that company and are invested in it. The old business motto is that a company must keep its shareholders happy and wealthy in order for a business to succeed. A shareholders investment needs to be maximized so they get the most value out of it. Since they are technically part owners of the company they need to be kept pleased. A shareholders return on investment is measured by the stock price of the company. Since the stock prices rises and fall every day the investment is always changing and the company is always trying to maximize it every day. Lynn Stout challenges this old motto in “The Shareholder Value Myth”. She challenges every part of this old motto and in fact she calls it a myth. In “The Shareholder Value Myth” Stout breaks down why the old way of doing things is not correct and she gives a

shareholders make a cash payment to the firm, just the opposite of a cash dividend

Corporate Profits (CP). A corporate profit summarizes the net income of corporations in the National Income and Product Accounts (NIPA), using several measures such as Operating Profits, Book Profits, and After-Tax Profits. Increasing profits means increased corporate spending, growth in retained earnings or increased dividend payments to shareholders, all good signs to an investor. Investors would use this number in a comparative analysis of an individual company's profits against that of the overall corporate profits (“Dictionary,” n.d.).

The article raises the investment management issue as to whether companies use dividends as capital for investment purposes

The percentage of the earnings made and kept by the company which can be used to pay any debts or be reinvested in the business, however it’s

From the practitioner’s viewpoint dividend policy of a firm has an implication for investors, managers, lenders and other stakeholders. For investors, dividends whether declared today or accumulated and provided at a later date are not only a means of regular income, but also an important input in valuation of a firm. Similarly, manager’s flexibility to invest in projects is also dependent on the

Stock dividend: Shareholders receive new stock form the firm as a form of a dividend. The number of shares the shareholder own in the firm is

Dividends are distributions of an entity’s equity to its shareholders and therefore are not expenses hence cannot be considered to reduce the entity’s profits. The amount of dividends paid is however dependent on several factors such as cash flow uncertainty where entities with high cash flow uncertainty will tend to pay lower dividends and vice versa (Matusin and Pamela, 2014, p.3). As a result, dividends are not included in the income statement but rather appear as liabilities on the balance sheet. On paying the dividends, the retained earnings line on the balance sheet is reduced. Poor management of dividends such as paying out large dividends can however affect profits in the long term. This may be due to starvation of an entity’s cash hence reducing cash available for business growth although this is rare since the profits also need to exceed the entity’s cost of capital. Additionally, equity may be applied to determine the long run performance hence eliminating chances of such an error (Brown, 2013, p.152). However, it is worth noting that in most cases dividends are issued by established entities that do not have to reinvest their cash into their operations.

• Profit is represented by an increase in company assets (refer to the definition for revenue), but not necessarily cash

The origins of the ideas shaping shareholder theory might be more than 200 years old, with roots in Adam Smith’s The Wealth of Nations (1776). In general, shareholder theory encompasses the idea that the main purpose of business lies in generating profits and increasing shareholder wealth. According to the theory of shareholder, the main goal might be stated as the ‘the primary responsibility of a company is to maximise the wealth of its shareholders’ (Friedman, 1962). As Zhang (2011) stated that the

In case of profit generation, every firm has two options; whether to retain the money for future investments, and in this case it would be called retained earnings, or distribute it to Shareholders in one of the forms of dividends described below.

- The excess of cost to the Parent Company of its investment in the Subsidiary over the Company’s portion of equity of the Subsidiary is recognized in the financial statement as Goodwill.