Authorized Stock
Authorized stock is the maximum number of shares that a company can offer to an investor to obtain cash to relate the organization's goals. The number of authorized shares is binding and specified in the company's statute. Can only be increased by shareholder voting. Authorized stock is the entire of issued and unissued stock. Because issuing shares is expensive, corporations can only issue a small portion of authorized shares to reduce expenses. The authorization of common stock does not result in a formal accounting entry. The reason is that the situation has no immexliate impact on corporate assets or stockholders' equity. Be that as it may, the organization must uncover within the stockholders value segment of the balance sheet the number of shares authorized[1][2].
Division of authorized stock
The issued stock is divided into[3]:
- Stock that is owned by investors - these are shares that have been issued and outstanding.
- Stock that is owned by the corporation - these is treasury stock that were sold and then repurchased as part of a stock buyback.
Demand for authorized stock
The full number of authorized shares, and the whole number of issued and out - standing shares, at the time of the company's arrangement is to a great extent self-assertive and, within the conclusion, not of high significance. In any case, clients ought to be empowered to authorize more shares than they at first expect issuing, so there's authorized stock accessible for future transaction (making it conceivable, in most cases, for the board of directors to enter into such transactions without the need of shareholder endorsement to alter the company's articles or certificate of incorporation). The want for parts of authorized stock may ought to be adjusted against the company's crave to maintain a strategic distance from superfluous fees in states like Delaware, where the number of authorized shares and the expressed standard esteem of such shares may be utilized to decide the company's yearly establishment assess expense within the state[4].
A lot of information about the company can be found in the section on shareholders' equity in the corporate balance sheet. This is in accordance with the full disclosure convention. As part of the contributed capital, types of inventories are recorded and the number of:
- authorized shares
- issued shares
- outstanding shares.
"Figure 1 shows the relationship of authorized shares to issued unissued, outstanding, and treasury shares. In this regard, Google is an interesting example The company has 9 billion authorized shares of stock and only about 309 million shares issued. With its excess of authorized shares, Google obviously has plenty of flexibility for future stock transactions" [5]
Examples of Authorized Stock
- Common stock: Common stock is the most common type of authorized stock. It gives shareholders the right to vote on matters of corporate policy and the right to receive dividends.
- Preferred Stock: Preferred stock is a form of authorized stock that has a higher priority than common stock in the event of a liquidation. In addition, preferred shareholders have the right to receive a fixed dividend before common shareholders.
- Restricted Stock: Restricted stock is a form of authorized stock that has certain restrictions attached. These restrictions could include a vesting period, the inability to sell the stock until certain conditions are met, or a requirement that the stock be held until a specified date.
- Warrants: A warrant is a form of authorized stock that gives the holder the right to buy a certain number of shares at a predetermined price. Warrants are typically issued as a way to raise capital without having to issue new shares.
Advantages of Authorized Stock
Authorized stock offers a range of advantages to companies, including:
- Increasing the flexibility of the company, as it can issue additional shares as needed to raise capital or to incentivize employees.
- Providing the company with the ability to issue equity, which can be used to purchase assets or make other investments.
- Allowing the company to issue shares to employees to reward their performance and incentivize them to stay with the company.
- Giving the company the ability to issue stock options to employees, allowing them to purchase shares in the company at a discounted price.
- Offering a way to attract investors, as they may be more likely to invest in a company with a large number of authorized shares.
Limitations of Authorized Stock
Authorized stock can be a limiting factor for corporations as it has several potential drawbacks. These include:
- Expansion issues - Companies may have difficulty raising additional capital through issuing more shares as the number of authorized shares is limited. This can hamper the growth of the business if capital is not available to make necessary investments.
- Cost - Companies must incur additional costs when issuing shares. This cost can be prohibitive for small businesses, and can be a major financial burden for larger corporations.
- Dilution - Issuing more shares can lead to dilution of ownership, as the existing shareholders will own a smaller percentage of the company. This can weaken the voting power of the shareholders, and can also reduce the overall value of the stock.
- Risk - Companies that issue more shares may be subject to additional risks, as the proceeds must be used to finance the company’s operations. If the proceeds are not invested wisely, the company may face financial difficulties.
In relation to Authorized Stock, there are several other approaches to consider:
- Issued Stock: This is the number of shares that have been distributed and purchased by investors. It is a subset of the authorized stock and affects the accounting as it requires the recognition of revenue when the stock is issued.
- Treasury Stock: This is stock that has been issued and then bought back by the company. It is accounted for as a reduction of the shareholders' equity and does not affect the total number of authorized shares.
- Unissued Stock: This is the number of authorized shares that have not been issued to investors yet. It has no immediate impact on the accounting, but the number of unissued shares must be disclosed in the shareholders' equity section of the balance sheet.
In conclusion, Authorized Stock is the maximum number of shares that a company can offer to obtain cash. Issued, Treasury, and Unissued Stock are all related to the Authorized Stock, as they all have an impact on the number of shares available and the accounting of the company.
Footnotes
| Authorized Stock — recommended articles |
| Dividend Recapitalization — External sources of finance — Issued share capital — Asset sales — Property Dividend — Redeemable shares — Contingent consideration — Paid in capital — Mezzanine capital |
References
- Batman J. L. (2007), Advising the Small Business: Forms and Advice for the Legal Practitioner, American Bar Association, USA
- Groz M. M. (2009), Forbes Guide to the Markets: Becoming a Savvy Investor, John Wiley & Sons, Inc., Hoboken, New Jersey
- Kimmel P. D. , Weygandt J. J. , Kieso D. E. (2010), Accounting: Tools for Business Decision Makers, John Wiley & Sons, Inc.
- Needles B. E., Powers M., Crosson S. V. (2010), Principles of Accounting, Cengage Learning, South-Western
Author: Monika Wójcik
