Deck 11: Reporting and Analyzing Stockholders Equity

Question 1

Most companies in Canada have an unlimited amount of authorized shares.

Answer 1

True

Question 2

Record share transactions.

Answer 2

If only one class of shares is issued, they are considered to be common shares.When shares are issued for noncash goods or services in a company using IFRS, the fair value of the goods or services received is used to record the transaction if it can be reliably determined.If not, the fair value of the common shares is used.For a private company following ASPE, the more reliable of the two fair values should be used, which is usually also the fair value of the goods or services received.

Question 3

Prepare the entries for cash dividends, stock dividends, and stock splits, and understand their financial impact.

Answer 3

Entries for both cash and stock dividends are required at the declaration date and the payment or distribution date.There is no entry (other than a memo entry) for a stock split.The overall impact of a cash dividend is to reduce assets (cash) and shareholders' equity (retained earnings).Stock dividends increase common shares and decrease retained earnings but do not affect assets, liabilities, or shareholders' equity in total.Stock splits also have no impact on assets, liabilities, or shareholders' equity.The number of shares increases with both stock dividends and stock splits.

Question 4

The trading of a corporation's shares on the secondary market has no impact on the corporation's financial position.

Question 5

A corporation acts under its' own name rather than in the name of its shareholders.

Question 6

The number of common shares authorized can never be greater than the number of shares issued.

Question 7

A company can control the market value of its shares.

Question 8

The market capitalization of a company is calculated by multiplying the number of shares authorized by the share price at any given date.

Question 9

Evaluate dividend and earnings performance.

Question 10

Identify and discuss the major characteristics of a corporation.

Question 11

One of the reasons a company may reacquire its own shares is to reduce the market value to make the shares more affordable.

Question 12

The sale of shares in a corporation by one shareholder to another affects the total capital of the corporation.

Question 13

A corporation is not an entity that is separate and distinct from its owners.

Question 14

Contributed capital is the amount shareholders paid or contributed to the corporation in exchange for shares of ownership.

Question 15

Indicate how shareholders' equity is presented in the financial statements.

Question 16

An initial public offering occurs the first time a corporation sells shares to the public.

Question 17

The liability of a shareholder is usually limited to the shareholder's investment in the corporation.

Question 18

The issue of common shares affects both share capital and retained earnings.

Question 19

A shareholder owning common shares has the right to vote in the election of the board of directors.

Question 20

Legal capital cannot be distributed to the shareholders, but must remain invested in the corporation for the protection of its creditors.

Question 21

The payout ratio is calculated by dividing the cash dividends paid on common shares by retained earnings.

Question 22

Preferred shares are generally issued to appeal to a larger segment of potential investors.

Question 23

Cash dividends are not a liability of the corporation until they are declared by the board of directors.

Question 24

Accumulated other comprehensive income is reported in the shareholders' equity section of the statement of financial position for a publicly-traded company.

Question 25

Declaration and distribution of a stock dividend does not affect the total amount of shareholders' equity.

Question 26

A debit balance in the Retained Earnings account is called a deficit.

Question 27

Total comprehensive income equals profit plus other comprehensive income.

Question 28

Corporations reporting under IFRS have the option of preparing either a statement of changes in equity or a statement of retained earnings.

Question 29

A stock split results in a transfer at market value from retained earnings to share capital.

Question 30

The statement of changes in equity discloses changes in total shareholders' equity for the period as well as changes in each shareholders' equity account.

Question 31

Return on common shareholders' equity is calculated by dividing profit by ending shareholders' equity.

Question 32

If a corporation reports a profit, it should be closed to retained earnings.If it reports a loss, it should be closed to a contributed capital account.

Question 33

$3 cumulative preferred shares means that each preferred shareholder is eligible to receive a quarterly dividend of $3 per share.

Question 34

Retained earnings represents the amount of cash available for dividends.

Question 35

The main purpose of a stock split is to increase the marketability of the shares.

Question 36

Stock Dividends Distributable is reported as a liability on the statement of financial position.

Question 37

Retained earnings that are restricted are unavailable for dividends.

Question 38

The liability for a cash dividend is recorded on the date of record, because it is on that date that the shareholders who will receive the dividend are identified.

Question 39

Preferred shares have a contractual preference over common shares in certain areas, but do not have the right to vote.

Question 40

When preferred shares are cumulative, preferred dividends not declared in a given period are called dividends in arrears.

Question 41

Which of the following statements is considered an advantage of the corporate form of organization?
(a)additional income tax
(b)government regulations
(c)limited liability of shareholders
(d)increased disclosure requirements

Question 42

Which of the following would not be true of a privately held corporation?
(a)It is sometimes called a closely held corporation.
(b)Its shares are regularly traded on the Toronto Stock Exchange.
(c)It does not offer its shares for sale to the general public.
(d)It is usually smaller than a publicly held company.

Question 43

Which one of the following would not be considered an advantage of the corporate form of organization?
(a)limited liability of shareholders
(b)separate legal existence
(c)continuous life
(d)government regulation

Question 44

Ford Harrison has invested $650,000 in a corporation.The corporation does not do well and must declare bankruptcy.What amount does Harrison stand to lose?
(a)up to his total investment of $650,000
(b)zero
(c)the $650,000 plus any personal assets the creditors demand
(d)$325,000

Question 45

Limited liability of shareholders means
(a)dividends will be paid regardless of profits.
(b)creditors have no legal claim on a shareholder's personal assets.
(c)the life of the corporation is limited.
(d)deferral or reduction of taxes.

Question 46

A disadvantage of the corporate form of organization is
(a)its status as a separate legal entity.
(b)continuous existence.
(c)government regulation.
(d)ease of transfer of ownership.

Question 47

Which of the following factors does not affect the initial market price of a share?
(a)the company's anticipated future profit
(b)the legal value of the share
(c)the current state of the economy
(d)the expected dividend rate per share

Question 48

Companies reporting under ASPE must disclose earnings per share, but companies reporting under IFRS do not.

Question 49

Shareholders directly elect the corporation's
(a)president.
(b)board of directors.
(c)controller.
(d)auditor.

Question 50

Which of the following is not true of a corporation?
(a)It may buy, own, and sell property.
(b)It may sue and be sued.
(c)The acts of its shareholders bind the corporation.
(d)It may enter into binding legal contracts in its own name.

Question 51

The ability of a corporation to obtain capital is
(a)enhanced because of limited liability and ease of share transferability.
(b)less than a partnership.
(c)restricted because of the limited life of the corporation.
(d)about the same as a proprietorship.

Question 52

Investors tend to buy shares with low payout ratios and dividend yields if they are looking for more capital appreciation from the shares.

Question 53

Under the corporate form of business organization
(a)a shareholder is personally liable for the debts of the corporation.
(b)a shareholder's acts can bind the corporation even though he/she has not been appointed as an agent of the corporation.
(c)the corporation's life is continuous.
(d)shareholders wishing to sell their shares must get the approval of other shareholders.

Question 54

The two ways that a corporation can be classified by ownership are
(a)publicly held and privately held.
(b)shares and non-shares.
(c)federal and provincial.
(d)majority and minority.

Question 55

Which of the following statements reflects the transferability of ownership rights in a corporation?
(a)If a shareholder decides to transfer ownership, he/she must transfer all of his/her shares.
(b)A shareholder may dispose of part or all of his/her shares.
(c)A shareholder must obtain permission of the board of directors before selling shares.
(d)A shareholder must obtain permission from at least three other shareholders before selling shares.

Question 56

Which one of the following is not an ownership right of a common shareholder?
(a)to vote in the election of officers
(b)to declare dividends on the common shares
(c)to share in assets upon liquidation
(d)to share in corporate profits

Question 57

Earnings per share is calculated by dividing the profit available to common shareholders by the number of common shares issued at year end.

Question 58

A corporate board of directors does not generally
(a)select officers.
(b)formulate operating policies.
(c)declare dividends.
(d)execute policy.

Question 59

All of the following are advantages of the corporate form of organization except
(a)government regulation.
(b)reduced income tax.
(c)ease of transfer of ownership.
(d)continuous life.

Question 60

Those most responsible for the major policy decisions of a corporation are the
(a)shareholders.
(b)board of directors.
(c)management.
(d)employees.

Question 61

Use the following information for questions
Air Ace Corporation issues 5,000 preferred shares for $40 per share.
In the statement of financial position, the effects of the above transaction will be reported under
(a)Liabilities.
(b)Retained Earnings.
(c)Share Capital.
(d)Accumulated Other Comprehensive Income.

Question 62

Dividends in arrears on cumulative preferred shares
(a)are considered to be a non-current liability.
(b)are considered to be a current liability.
(c)only occur when preferred dividends have been declared.
(d)should be disclosed in the notes to the financial statements.

Question 63

Legal capital
(a)cannot be distributed to shareholders.
(b)reflects the most recent market price.
(c)is voted on by the shareholders.
(d)is indicative of the worth of the share.

Question 64

Dividends in arrears are dividends on
(a)cumulative preferred shares that have been declared but have not been paid.
(b)non-cumulative preferred shares that have not been declared for a given period of time.
(c)cumulative preferred shares that have not been declared for a given period of time.
(d)common dividends that have been declared but have not been paid.

Question 65

For a corporation reporting under IFRS, when shares are issued for a non-cash consideration and a ready market for the shares exists, they are recorded at
(a)zero.
(b)the fair value of the shares.
(c)the fair value of the assets acquired.
(d)the average of the fair value of the shares and the fair value of the assets acquired.

Question 66

Mrs.Exe sold 200 shares of Tee Corp.to Mrs.Wye for $3,150.As a result of this transaction, Tee Corp.'s
(a)shareholders' equity did not change.
(b)shareholders' equity increased by $3,150.
(c)shareholders' equity decreased by $3,150.
(d)assets increased by $3,150.

Question 67

The board of directors of Wessex Inc.declared a cash dividend on November 15, 2015, to be paid on December 15, 2015, to shareholders owning shares on November 30, 2015.Given these facts, the date of November 30, 2015, is referred to as the
(a)declaration date.
(b)record date.
(c)payment date.
(d)authorization date.

Question 68

The authorization of common shares
(a)must be approved by Canada Revenue Agency.
(b)does not require a journal entry.
(c)increases shareholders' equity.
(d)decreases shareholders' equity.

Question 69

If Valley Corporation issues 2,000 common shares for $140,000, which account will be credited?
(a)Common Shares
(b)Retained Earnings
(c)Contributed Capital
(d)Cash

Question 70

Dividends in arrears on cumulative preferred shares
(a)never have to be paid, even if common dividends are paid.
(b)must be paid before common shareholders can receive a dividend.
(c)should be recorded as a current liability until they are paid.
(d)enable the preferred shareholders to share equally in corporate profits with the common shareholders.

Question 71

Which of the following usually represents the largest number of common shares?
(a)restricted shares.
(b)issued shares.
(c)treasury shares.
(d)authorized shares.

Question 72

A company may reacquire its own shares for all of the following reasons except to
(a)enhance market value.
(b)reduce market value.
(c)increase earnings per share.
(d)have additional shares available for use.

Question 73

The sale of common shares should be recorded as a
(a)debit to Retained Earnings and a credit to Cash.
(b)debit to Cash and a credit to Retained Earnings.
(c)debit to Cash and a credit to Common Shares.
(d)debit to Common Shares and a credit to Cash.

Question 74

When setting the price of a new share issue, a corporation does not need to consider
(a)future profit.
(b)expected dividend rate.
(c)current financial position.
(d)future trading on the secondary market.

Question 75

Authorized shares of a corporation
(a)are the minimum amount of shares that must be issued.
(b)increase shareholders' equity.
(c)are specified in its articles of incorporation.
(d)must be recorded by a formal accounting entry.

Question 76

Retractable preferred shares are
(a)included in contributed capital on the statement of financial position.
(b)callable at the corporation's option.
(c)never issued.
(d)presented under liabilities on the statement of financial position.

Question 77

Use the following information for questions
Air Ace Corporation issues 5,000 preferred shares for $40 per share.
The entry to record the transaction will consist of a debit to Cash for $200,000 and a credit or credits to
(a)Preferred Shares for $200,000.
(b)Preferred Shares for $150,000 and Share Capital for $50,000.
(c)Preferred Shares for $150,000 and Retained Earnings for $50,000.
(d)Investment in Preferred Shares for $200,000.

Question 78

The number of shares that may be issued according to the corporation's articles of incorporation is referred to as the
(a)authorized shares.
(b)issued shares.
(c)unissued shares.
(d)redeemable shares.

Question 79

The date on which a cash dividend becomes a binding legal obligation is on the
(a)declaration date.
(b)date of record.
(c)payment date.
(d)last day of the fiscal year.

Question 80

Which of the following is not a right or preference associated with preferred shares?
(a)the right to vote
(b)first claim to dividends
(c)preference to corporate assets in case of liquidation
(d)to receive dividends in arrears before common shareholders receive dividends