Deck 15: Companies: Capital Management and the Income Statement

Question 1

Which of the following would be included in the entry to record a 2-for-1 share split?

A)Retained earnings would be debited.
B)Ordinary share capital would be credited.
C)Retained earnings would be credited.
D)There is no journal entry to record a share split.

Answer 1

D

Question 2

Which of the following will decrease the balance in Retained earnings?

A)Share issue
B)Purchase of non-current assets
C)Share split
D)Cash dividend

Answer 2

D

Question 3

Which of the following occurs when a 2-for-1 share split is declared?

A)The balance in ordinary share capital doubles.
B)The balance in ordinary share capital is reduced to half the original amount.
C)The balance in retained earnings doubles.
D)The balance in ordinary share capital remains the same.

Answer 3

D

Question 4

Which of the following is a TRUE statement?

A)A share dividend will increase total shareholders' equity but a share split will not.
B)A share split will increase total shareholders' equity but a share dividend will not.
C)Neither a share split nor a share dividend will increase total shareholders' equity.
D)A share split will decrease retained earnings but a share dividend will not.

Question 5

Which of the following will decrease the amount of Total shareholders' equity?

A)Repayment of debenture principal
B)Cash dividend
C)Share dividend
D)Share split

Question 6

Which of the following statements is TRUE?

A)A share buy-back decreases assets and increases shareholders' equity.
B)A share buy-back decreases assets and decreases shareholders' equity.
C)A share buy-back increases assets and decreases shareholders' equity.
D)A share buy-back increases assets and increases shareholders' equity.

Question 7

Which of the following statements is TRUE?

A)Both a share dividend and a share split reduce retained earnings.
B)Neither a share dividend nor a share split will result in net gains or losses.
C)Both a share dividend and a share split increase the balance in the ordinary share account.
D)A share split increases the market value of the share.

Question 8

Which of the following will decrease the balance in Retained earnings?

A)Share split
B)Share issue
C)Share dividend
D)Repayment of debenture principal

Question 9

Which of the following will happen to a shareholder's percentage ownership in the share of a company when the company declares a share dividend?

A)The shareholder's percentage ownership decreases.
B)The shareholder's percentage ownership stays the same.
C)The shareholder's percentage ownership increases.
D)The shareholder's percentage ownership can increase or decrease.

Question 10

Which of the following is a TRUE statement?

A)Both a share split and a share dividend will decrease total assets.
B)Neither a share split nor a share dividend will affect total assets or total liabilities.
C)Both a share split and a share dividend will increase total liabilities.
D)A share split will increase total assets but a share dividend will not.

Question 11

Which of the following does NOT require a formal journal entry?

A)Share dividend
B)Share split
C)Issue of new shares
D)Cash dividend

Question 12

Share dividends are declared by the:

A)board of directors of the company.
B)shareholders of the company.
C)chief financial officer of the company.
D)chief executive officer of the company.

Question 13

A 3-for-1 share split will:

A)cut the market price by one-third and triple the number of issued shares.
B)triple the market price and drop the number of issued shares by one-third.
C)have no effect on the market price but will affect the number of issued shares.
D)have no effect on the number of issued shares but will affect market price.

Question 14

The account to be debited when a share dividend is declared and distributed on the same date would be:

A)Dividends.
B)Cash.
C)Retained earnings.
D)Ordinary share capital.

Question 15

Which of the following is a reason why a company would do a share split?

A)To reduce the market price at which the share is trading
B)To defend against a hostile takeover
C)To provide the shareholders with something of value when the company cannot afford a cash dividend
D)To generate additional sales revenues

Question 16

Which of the following occurs when a company distributes a share dividend?

A)Shareholders' equity increases.
B)Shareholders' equity remains unchanged.
C)Total liabilities increase.
D)Total assets decrease.

Question 17

Which of the following is a common reason for companies to buy back shares?

A)To make a profit on the retirement of shares
B)To reward the shareholders
C)To return surplus cash to shareholders when few profitable investment opportunities exist
D)To increase shareholders' equity

Question 18

Which of the following is NOT true of share dividends?

A)Share dividends affect only shareholders' equity accounts.
B)Share dividends have no effect on total shareholders' equity.
C)Share dividends increase dividends payable and reduce cash.
D)Share dividends have no effect on assets or liabilities.

Question 19

Which of the following occurs when the board of directors declares a 3-for-1 share split on 16,000 outstanding shares of $25 per ordinary share?

A)The number of outstanding shares remains at 16,000.
B)The price of the shares increases to $50 per share.
C)The number of outstanding shares increases to 48,000.
D)The price of the shares remains the same.

Question 20

Gordon Company reported the following equity section on its current balance sheet.The ordinary share is currently selling for $12.50 per share. $$\begin{array} { | l | l | } \hline \text { Prdinary share at } \$ 5 \text { per share, } 154,000 \text { shares issued } & \$ 770,000 \\\hline \text { Paid-up capital } & 137,000 \\\hline \text { Retained earnings } & 290,000 \\\hline \text { Total shareholders' equity } & \$ 1,197,000 \\\hline\end{array}$$ After a 2-for-1 stock split,what would be the number of issued shares?

A)308,000
B)137,000
C)274,000
D)291,000

Question 21

Which of the following BEST describes profit from continuing operations?

A)The profit or loss generated from unusual or infrequent events
B)The gains and losses from transactions that are not part of the normal operations of the business
C)The profit or loss from segments of the business that have been sold or terminated
D)The profit or loss generated from the normal operations of the business

Question 22

Petra Sales Company has issued 200 000 ordinary shares for $4 per share.The directors decide to undertake a share buy-back of 10 000 shares at $5 per share.This will have no overall effect on total shareholders' equity.

Question 23

Absolute Company decides to transfer $300 000 of its retained earnings to a general reserve.What is the journal entry for this appropriation?

A) $$\begin{array} { | c | r | r | } \hline \text { Retained earnings } & 300000 & \\\hline \text { Ordinary share capital } & & 300000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Retained earnings } & 300000 & \\\hline \text { General reserve } & & 300000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { General reserve } & 300000 & \\\hline \text { Ordinary share capital } & & 300000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { General reserve } & 300000 & \\\hline \text { Retained earnings } & & 300000 \\\hline\end{array}$$

Question 24

Unrealised gains or losses on certain investments,foreign currency translation adjustments,gains and losses from superannuation and deferred gains and losses from derivatives are subject to specialised accounting treatment.These items would normally be found on the:

A)balance sheet under liabilities.
B)statement of comprehensive income.
C)income statement,included with extraordinary items.
D)statement of net cash flow.

Question 25

Which of the following would be a reason for a company to appropriate a portion of retained earnings?

A)To increase the amount of earnings available for dividends
B)To limit the amount of retained earnings available for dividends in order to retain sufficient funds for growth
C)To ensure that the business does not take on too much debt
D)To help the company control levels of operating expenses

Question 26

Which of the following best describes discontinued operations on the income statement?

A)The gains and losses from transactions that are not part of the normal operations of the business
B)The profit or loss generated from the normal operations of the business
C)The profit or loss from segments of the business that have been sold or terminated
D)The profit or loss generated from unusual or infrequent events

Question 27

Comprehensive income is equal to the profit for the period,excluding the effects of discontinued operations and extraordinary items.

Question 28

RT Company shows a loss from flooding of $235 000 for the year.This loss will be included in profit for the period.

Question 29

Revival Company's annual report is as follows. $\begin{array}{|l|l|l|} \hline& 31 \text { March 2016 } & \text { 31 March 2017 } \\\hline \text { Net profit } & \$ 350,000 & \$ 438,500 \\\hline \text { Preference dividends } & & \\\hline \text { Total shareholders'equity } & \$ 4,350,000 & \$ 5,222,000 \\\hline\text { Shareholders' equity attributable to }\\\text { preference shares }&0&0\\\hline \text { Number of ordinary shares outstanding } & 275,464&195,168 \\\hline\end{array}$ Based on the information provided above,find the earnings per share of Revival Company as of 31 March 2017.

A)$1.86
B)$1.48
C)$2.25
D)-$2.25

Question 30

The entry to record an appropriation of retained earnings requires a debit to Retained earnings and a credit to Cash.

Question 31

One of the reasons for a share buy-back is to avoid a hostile takeover by an outside party.

Question 32

If a company buys back shares,which of the following is TRUE?

A)Total equity will decrease.
B)Total equity will increase.
C)The number of issued shares will increase.
D)The company records a gain or loss on the buy-back.

Question 33

Companies are NOT allowed to combine the income statement and the statement of comprehensive income,but must show them as two separate reports.

Question 34

A company closes a facility and moves to a new location.How would a loss on the disposal of the equipment at the closed facility be reported on an income statement?

A)As a component of discontinued operations
B)As an extraordinary loss
C)As a contra revenue from continuing operations
D)As an operating expense in net profit from continuing operations

Question 35

A share buy-back requires a credit to the Ordinary share capital account.

Question 36

An appropriation guarantees that cash will be available either for a specific or general purpose in the future.

Question 37

Which of the following BEST describes the appropriation of retained earnings?

A)Restricting cash dividends or share buy-backs so that the company maintains adequate levels of equity
B)Limiting company transactions in order to boost earnings and profits
C)Designating certain amounts of retained earnings for cash dividends to be paid out to shareholders
D)Earmarking certain amounts for specific business purposes,such as for growth or expansion projects

Question 38

Which of the following items is NOT included in comprehensive income?

A)Contingent liabilities
B)Changes in Asset revaluation reserve
C)Profit
D)Gains or losses on some types of superannuation plan