Deck 11: Reporting and Analyzing Shareholders Equity

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

A company can control the market value of its shares.

Question 21

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

Question 22

Retained earnings represents the amount of cash available for dividends.

Question 23

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

Question 24

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 25

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

Question 26

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 27

Retained earnings that are restricted are unavailable for dividends.

Question 28

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

Question 29

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

Question 30

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

Question 31

If a corporation reports a net income, it should be closed to retained earnings.If it reports a loss, it should be closed to the contributed surplus account.

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

Legal capital
(a)can be distributed to shareholders.
(b)does not need to remain invested in the corporation.
(c)can be distributed to shareholders up to the limit of their investment.
(d)cannot be distributed to the shareholders but must remain invested in the corporation.

Question 37

Basic earnings per share is calculated by dividing the net income available to common shareholders by the number of common shares issued at year end.

Question 38

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 39

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

Question 40

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

Question 41

Limited liability of shareholders means
(a)dividends will be paid regardless of net income.
(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 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

If a company repurchase shares for a price less than the average price of the shares then the difference in price will be a
(a)debit to retained earnings.
(b)credit retained earnings.
(c)debit to contributed surplus.
(d)credit to contributed surplus.

Question 44

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

Question 45

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

Question 46

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 47

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 48

Authorized shares of a corporation
(a)are the minimum number 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 49

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 50

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 51

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 52

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 53

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 54

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 55

When shares are traded on the secondary market it means
(a)it's the first time a corporation's shares are offered for sale to the public.
(b)that the public can purchase shares directly from the company.
(c)that investors can purchase and sell shares from each other using a stock exchange.
(d)that this is the same thing as an initial public offering.

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 net income

Question 57

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 58

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 59

Mr.Gold sold 100 shares of Delia Corp.to Mrs.Silver for $2,200.As a result of this transaction, Delia Corp.'s
(a)shareholders' equity did not change.
(b)shareholders' equity increased by $2,200.
(c)shareholders' equity decreased by $2,200.
(d)assets increased by $2,200.

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

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 62

The board of directors of Wessex Inc.declared a cash dividend on November 15, 2022, to be paid on December 15, 2022, to shareholders owning shares on November 30, 2022.Given these facts, the date of November 30, 2022, is referred to as the
(a)declaration date.
(b)record date.
(c)payment date.
(d)authorization date.

Question 63

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

Question 64

For a corporation reporting under IFRS, when shares are issued for a noncash 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 65

Use the following information for questions
On July 15, 2022, the board of directors of George Easton Limited declared a cash dividend of $0.50 per share on 84,000 common shares.The dividend is to be paid on August 15, 2022, to shareholders of record on July 31, 2022.
The journal entry to be recorded on July 15, 2022, will include a
(a)debit to Dividends Payable.
(b)debit to Dividends Declared.
(c)credit to Cash.
(d)credit to Retained Earnings.

Question 66

Dividends in arrears are dividends on
(a)cumulative preferred shares that have been declared but have not been paid.
(b)noncumulative 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 67

The effect of the declaration of a cash dividend is to

Question 68

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 69

Use the following information for questions
Fair Corporation issues 7,500 preferred shares for $25 per share.
The entry to record the transaction will consist of a debit to Cash for $187,500 and a credit or credits to
(a)Preferred Shares for $187,500.
(b)Preferred Shares for $100,000 and Share Capital for $87,500.
(c)Preferred Shares for $100,000 and Retained Earnings for $87,500.
(d)Investment in Preferred Shares for $187,500.

Question 70

If Tools Corporation issues 5,000 common shares for $200,000, which account will be credited?
(a)Common Shares
(b)Retained Earnings
(c)Contributed Surplus
(d)Cash

Question 71

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 72

$3 cumulative preferred shares means that each preferred shareholder is eligible to receive
(a)a quarterly dividend of $3 per share.
(b)an annual dividend of $3 per share.
(c)a monthly dividend of $3 per share.
(d)no dividend.

Question 73

Baria Inc.is repurchasing 10,000 common shares.The price is $5.00/share and the average price is $5.10.Assuming that there is a contributed surplus balance of $5,000, which accounts will be affected by the transaction?
(a)Common shares, Contributed Surplus, Retained Earnings and Cash
(b)Common shares, Contributed Surplus and Cash
(c)Common shares, Retained Earnings and Cash
(d)Common shares and Cash

Question 74

Use the following information for questions
Fair Corporation issues 7,500 preferred shares for $25 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 75

Retractable preferred shares are
(a)included in shareholders' equity on the statement of financial position.
(b)callable at the corporation's option.
(c)never issued.
(d)very rare in Canada.

Question 76

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

Question 77

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 78

Apricot Inc.is repurchasing 25,000 common shares.The price is $4.25/share and the average price is $4.00.Assuming that there is a contributed surplus balance of $5,000, the entry to record the transaction would be
(a)debit to Common shares, Contributed Surplus, and Retained Earnings and credit to Cash
(b)debit to Common shares and Contributed Surplus and credit to Cash
(c)debit to Common shares and Retained Earnings and credit to Cash
(d)debit to Common shares and credit to Cash

Question 79

The cumulative effect of the declaration and payment of a cash dividend on a company's financial statements is to
(a)decrease both total liabilities and shareholders' equity.
(b)increase both total expenses and total liabilities.
(c)increase both total assets and shareholders' equity.
(d)decrease both total assets and shareholders' equity.

Question 80

Which of the following is the appropriate general journal entry to record the declaration of cash dividends?
(a)Dividends Declared Cash
(b)Dividends Payable Cash
(c)Share Capital Dividends Payable
(d)Dividends Declared Dividends Payable