Deck 11: Reporting and Analyzing Shareholders Equity

Question 1

If common shares are reacquired at a price less than their average cost and retired, the difference is credited to contributed capital.

Answer 1

True

Question 2

The actual cost of reacquired and retired shares is credited to the common share account.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

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

When a company reacquires and retires its own shares, the shares are effectively restored to authorized but unissued status.

Question 8

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

Question 9

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

Question 10

A corporation can be organized for the purpose of making a profit or it may be not-for-profit.

Question 11

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

Question 12

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

Question 13

If a corporation pays income tax on its profit, then shareholders will not have to pay income tax on any dividends received.

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

A company can control the market value of its shares.

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

Retained earnings represents the amount of cash available for dividends.

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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 30

Total comprehensive income equals profit plus other comprehensive income.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

Treasury shares consist of a corporation's own shares that have been reacquired and are being held for future reissue.

Question 36

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

Question 37

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 38

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 39

Retained earnings that are restricted are unavailable for dividends.

Question 40

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

Question 41

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 42

Which of the following is not a common shareholder right?
(a)To declare dividends
(b)To vote for the board of directors
(c)To keep the same percentage ownership when new shares are issued
(d)To share in assets upon liquidation

Question 43

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

Question 44

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 45

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

Question 46

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)Separation of ownership and management

Question 47

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

Question 48

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

Question 49

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 50

The two ways that a corporation can be classified by purpose are
(a)general and limited.
(b)profit and not-for-profit.
(c)federal and provincial.
(d)publicly held and privately held.

Question 51

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 52

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

Question 53

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

Question 54

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 55

It is not possible for diluted earnings per share to be higher than basic earnings per share.

Question 56

Which of the following statements reflects the transferability of ownership rights in a corporation?
(a)If a shareholder decides to transfer ownership, he must transfer all of his shares.
(b)A shareholder may dispose of part or all of his 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 57

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

Question 58

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 59

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 60

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 61

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 62

Authorized shares of a corporation
(a)reflect the initial capital needs of the company.
(b)increase shareholders' equity.
(c)are specified in its articles of incorporation.
(d)must be recorded by a formal accounting entry.

Question 63

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 64

The perception of double taxation results from
(a)taxation by both the federal and the provincial government.
(b)taxation of dividends both personally and on profit at the corporate level.
(c)taxation by the board of directors and employees.
(d)GST and PST.

Question 65

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 66

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 67

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 68

A disadvantage of the corporate form of organization is
(a)professional management.
(b)additional income tax.
(c)ease of transfer of ownership.
(d)unlimited life.

Question 69

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 70

The term residual claim refers to a shareholder's right to
(a)receive dividends.
(b)share in assets upon liquidation.
(c)acquire additional shares when offered.
(d)vote.

Question 71

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.

Question 72

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 73

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 74

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 75

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 76

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 77

Following is the shareholders' equity section of the statement of financial position of Brownlow Corporation: The entry to record Brownlow's repurchase and retirement of 1,000 of its common shares at $2 per share includes:
(a)a debit to Common Shares for $2,000.
(b)a debit to Common Shares for $1,000.
(c)a credit to Contributed Capital-Reacquisition of Shares for $1,000.
(d)a debit to Contributed Capital-Reacquisition of Shares for $1,000.

Question 78

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 79

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 80

Sherbrooke Ltd has 100,000 authorized shares and 80,000 issued shares. After it reacquires and retires 5,000 shares, it will have
(a)105,000 authorized shares and 85,000 issued shares.
(b)95,000 authorized shares and 80,000 issued shares.
(c)100,000 authorized shares and 75,000 issued shares.
(d)80,000 authorized shares and 75,000 issued shares.