Deck 11: Shareholders Equity: Capital

Question 1

The number of shares a corporation may issue is specified in the articles of incorporation and approved by the Securities and Exchange Commission.

Answer 1

False

Question 2

When a shareholder sends in a proxy statement to a corporation he or she owns shares in, they relinquish their voting rights to the officers of the corporation.

Answer 2

False

Question 3

Treasury share is share that is issued and outstanding but not authorized

Answer 3

False

Question 4

A corporation is a legal entity separate from its owners; it may sue and be sued, but it may not own property in its own name.

Question 5

A corporation continues in existence even if a shareholder dies or withdraws from the organization.

Question 6

When a corporation fails to pay a dividend one year on its ordinary shares it is said to be "in arrears".

Question 7

The par value of a share is the minimum amount of capital of the corporation existing for the protection of creditors.

Question 8

Preference share means the share is entitled to its regular dividend plus an additional share of the total amount of declared dividends.

Question 9

Contributed capital is equivalent to issued and fully paid capital.

Question 10

Ordinary share is considered the legal capital of the corporation.

Question 11

When a state authorizes the sale of shares to shareholders, the corporation will credit Retained Earnings for the par value of the share.

Question 12

A share split will decrease the total par value of the share.

Question 13

The purchase of treasury share creates an asset for the corporation and is recorded at the cost of the shares purchased not par value.

Question 14

The declaration of a cash dividend by the board of directors causes a decrease in a corporation's retained earnings and a decrease in its assets.

Question 15

It is illegal for the government to double tax corporate earnings.

Question 16

A shareholders' subsidiary ledger will have entries made for each shareholder showing the number of shares held.

Question 17

Treasury share is share of a corporation that has been issued and then reacquired and then cancelled.

Question 18

Only preference share of a corporation must have a par value.

Question 19

Shareholders of a corporation are personally liable for the debts of the corporation if all shares are owned by the officers of the corporation.

Question 20

A share split will normally increase the market price of the share and decrease the number of shares on the market.

Question 21

In a "pump-and-dump" scheme the owners of the company:

A) Falsely claim the business has high growth potential.
B) Artificially raise the price of the share.
C) Sell the share at a high price.
D) All of the above.

Question 22

To be consistent with international standards the FASB has changed reporting requirements for redeemable preference share to require it to be reported in the equity section.

Question 23

By going public a corporation can raise equity capital from many investors.

Question 24

The advantages of corporations going public include all of the following except:

A) Professional management.
B) Transferability of ownership.
C) Limited shareholder liability.
D) Ability to remove assets.

Question 25

The purchase of treasury share for cash causes no change in total assets.

Question 26

Preference shareholders generally do not have the same voting rights as do ordinary shareholders in a corporation.

Question 27

In order to limit the use of a shell company, the SEC has proposed:

A) Greater financial disclosures.
B) Eliminating this type of company.
C) Arresting promoters of shell companies for fraud.
D) That its share only be sold in foreign countries.

Question 28

Inside directors of a corporation may be officers of the corporation and therefore are not considered independent.

Question 29

The sale of treasury share at a price in excess of its cost results in a realized gain which should be presented as a non-operating item in the income statement.

Question 30

Dividends declared and paid to both ordinary and preference shareholders increase retained earnings.

Question 31

When assets are donated to a corporation, a revenue account should be credited for the fair market value of the assets received.

Question 32

Preference shareholders are owners of the corporation and have rights upon liquidation and to receive dividends.

Question 33

In the event of the liquidation of a corporation, treasury share ordinarily has preference as to liabilities and preference share has preference as to assets.

Question 34

When par value share is issued, share capital is credited with the par value of the shares issued, regardless of whether the issuance price is equal to par, more than par, or less than par.

Question 35

If share is issued by a corporation at a price lower than par value, the difference represents a loss in the period in which the shares are issued.

Question 36

A corporation must always have more than one class of share.

Question 37

International accounting standards require mandatory redeemable preference share to be classified as a liability on the balance sheet and not as equity.

Question 38

Issued and fully paid capital includes donated capital.

Question 39

The declaration of a cash dividend causes shareholders' equity to decrease but has no immediate effect upon corporate assets.

Question 40

The ownership of ordinary share in a corporation usually carries the following rights:

A) To vote for directors.
B) To declare dividends.
C) To share in a distribution of assets if the corporation is to be liquidated.
D) Both a and c.

Question 41

Which of the following is not a right of shareholders?

A) To vote for directors and on key issues.
B) To participate in dividends declared.
C) To share in the distribution of assets if the corporation is liquidated.
D) All three of the above are rights of the shareholders.

Question 42

A primary disadvantage of the corporate form of organization is:

A) Unlimited personal liability for business debts.
B) Ownership is difficult to transfer.
C) Corporate earnings are subject to double taxation.
D) Management is separated from ownership.

Question 43

The directors of a corporation:

A) Are hired by the officers to run the business on a day-to-day basis.
B) May not own share in the same corporation or be officers of the same corporation.
C) Are responsible for formulating corporate policy and for hiring corporate officers.
D) Are elected by the shareholders to run day-to-day operations.

Question 44

Shares that have been sold and are in the hands of shareholders are called

A) Outstanding.
B) Issued.
C) Treasury.
D) Underwritten.

Question 45

The board of directors' primary functions include all of the following except:

A) Hiring corporate officers.
B) Setting officers' salaries.
C) Declaring dividends.
D) Protecting the interests of the officers.

Question 46

Public corporations are required by law or regulation to perform all of the following except:

A) Submit much of their financial information to the SEC for review.
B) Make regularly scheduled dividend payments to all shareholders.
C) Have their annual financial statements audited by an independent CPA.
D) Disclose their financial information to the public.

Question 47

Topper Corporation has 60,000 $1 par value ordinary share and 16,000 cumulative 7%, $100 par preference share outstanding. Topper has not paid a dividend for the prior year. If Topper declares a $1.95 per share dividend this year, what will be the total amount they must pay their shareholders?

A) $117,000
B) $341,000
C) $327,000
D) $177,000

Question 48

The term share capital means:

A) All assets other than retained earnings.
B) Legal capital plus retained earnings.
C) Total shareholders' equity minus retained earnings.
D) Legal capital minus retained earnings.

Question 49

The market price of a preference share will be affected by:

A) The dividend rate.
B) The chance that the company will not operate profitably.
C) The level of interest rates.
D) All of the above.

Question 50

Which of the following is not an addition to issued and fully paid capital?

A) Retained earnings.
B) Treasury share.
C) Neither retained earnings nor treasury share.
D) Both retained earnings and treasury share.

Question 51

Which of the following best describes retained earnings?

A) Cash available for dividends.
B) The amount initially invested in the business by shareholders.
C) Cash available for expansion and growth.
D) Income that has been reinvested in the business rather than distributed as dividends to shareholders.

Question 52

Which of the following is not a characteristic of the corporate form of organization?

A) The owners of a corporation cannot lose more than the amount of their investment.
B) Shares in a corporation are more readily transferable than is an interest in a partnership.
C) Shareholders have authority to decide by majority vote the amount of dividends to be paid.
D) The corporation is a very efficient vehicle for obtaining large amounts of capital required for large-scale production.

Question 53

Most preference shares have the following characteristics, except:

A) To receive dividends on a preference basis.
B) Cumulative dividends.
C) Voting rights.
D) Callable at the option of the corporation.

Question 54

When shares are sold from one investor to another they will trade at:

A) Par value.
B) Book value.
C) Market value.
D) Stated Value.

Question 55

Which of the following individuals has the most power to influence corporate policy on a long-term basis?

A) A shareholder owning 60% of the outstanding ordinary share.
B) A shareholder owning 80% of the outstanding preference share.
C) The treasurer of the corporation.
D) The controller of the corporation.

Question 56

The net assets of a corporation are equal to:

A) Total assets - total liabilities.
B) Total assets - retained earnings.
C) Total assets + total liabilities.
D) Total assets + retained earnings.

Question 57

Cash dividends paid to shareholders will appear in which section of the statement of cash flows:

A) Operating.
B) Investing.
C) Financing.
D) Discontinued.

Question 58

If a corporation has issued a single class of share, it must be:

A) Ordinary Share.
B) Preference Share.
C) Share issued at Par-value.
D) Cumulative Preference Share.

Question 59

Book value per share of ordinary share is derived by which of the following

A) Shareholders equity divided by the number of shares authorized.
B) Shareholders equity divided by the number of shares outstanding.
C) Profit divided by the number of shares outstanding
D) Profit divided by the number of shares authorized.

Question 60

The rights of a ordinary shareholder do not include the right:

A) To vote for directors.
B) To withdraw a share of corporate net assets proportionate to the person's shareholdings.
C) To receive a proportionate share of corporate assets upon liquidation, after creditors have been paid.
D) To share in profits when the board of directors declares a dividend.

Question 61

Which of the following best describes the relationship between revenue and retained earnings?

A) Revenue increases profit, which in turn increases retained earnings.
B) Revenue represents a cash receipt; retained earnings is an element of shareholders' equity.
C) Revenue represents the price of goods sold or services rendered; retained earnings represents cash available for paying dividends.
D) Retained earnings is equal to assets minus expenses.

Question 62

If preference share is convertible, it is so at the option of the:

A) Board of directors.
B) CEO.
C) CFO.
D) Shareholders.

Question 63

Which of the following best describes the book value of a share share?

A) Net assets divided by the number of shares outstanding.
B) The amount at which the share would sell on the market if sold by a willing and informed seller to a willing and informed buyer.
C) Total assets of the company, as reported in the accounting records, divided by the number of shares outstanding.
D) Total shareholders' equity divided by the number of shares authorized.

Question 64

Which of the following would usually be the greatest amount?

A) The number of shares authorized.
B) The number of shares issued.
C) The number of shares outstanding.
D) They must all be the same amount.

Question 65

When a corporation issues share at a price higher than the par value:

A) The amount received over par value increases retained earnings.
B) The entire issue price is credited to the Share Capital account.
C) The amount received in excess of par value constitutes profit to the issuing corporation.
D) The amount received in excess of par value becomes part of issued and fully paid capital.

Question 66

The financial statements of a corporation that failed during the current year to pay any dividends on its cumulative preference share should:

A) Include the amount of the omitted dividends among its current liabilities.
B) Include a footnote disclosing the amount of the dividends in arrears.
C) Show the amount of the omitted dividends as a deduction from retained earnings.
D) List the omitted dividends as a long-term liability.

Question 67

The par value of the ordinary share of a large listed corporation:

A) Tends to establish a ceiling for the market price of the share.
B) Tends to establish a floor for the market price of the share.
C) Represents legal capital and is not related to the market price of the share.
D) Is increased by profit and decreased by dividends.

Question 68

In a corporation's organization chart, which is the highest position?

A) Shareholders.
B) Board of directors.
C) CEO.
D) President.

Question 69

The purchase of treasury share for cash will:

A) Increase shareholders' equity.
B) Not increase nor decrease shareholders' equity.
C) Decrease shareholders' equity.
D) Not change total assets.

Question 70

The overall effect of declaring and distributing a cash dividend includes each of the following except:

A) Reducing total assets.
B) Reducing shareholders' equity.
C) Reducing the balance of the Retained Earnings account.
D) Reducing profit for the period.

Question 71

A 2-for-1 share split will:

A) Increase the total par value of the share and increase the number of shares outstanding.
B) Decrease the total par value of the share and increase the number of shares outstanding.
C) Not change the total par value of the share and increase the number of shares outstanding.
D) Increase total shareholders' equity.

Question 72

A deficit appears in a corporation's financial statements:

A) Among the operating expenses.
B) Among the liabilities.
C) As a deduction from assets.
D) As a deduction from issued and fully paid capital.

Question 73

The entry to record the issuance of ordinary share at a price above its par value includes:

A) A credit to Cash.
B) A credit to a liability account for the difference between the price paid by the shareholders and the par value of the share.
C) A credit to Share Premium: Ordinary Share.
D) A debit to Ordinary Share.

Question 74

Which of the following is not a characteristic of most preference share?

A) Dividends that vary as income changes
B) Preference as to dividends.
C) Preference as to assets in the event of liquidation of the company.
D) No voting power.

Question 75

Treasury share:

A) Is an asset.
B) Increases total shareholders' equity.
C) Decreases total shareholders' equity.
D) Does not change total shareholders' equity.

Question 76

Treasury share should most often be recorded:

A) At cost.
B) Par value.
C) Fair market value at year end.
D) Face value.

Question 77

If a corporation has only ordinary share outstanding, which of the following constitutes legal capital at a particular date?

A) The amount in the Ordinary Share account.
B) The sum of the Ordinary Share account and any share premium.
C) The total amount of shareholders' equity.
D) The sum of the Ordinary Share account and retained earnings.

Question 78

Which statement is true about a share split?

A) Total shareholders' equity increases.
B) Total shareholders' equity decreases.
C) Total shareholders' equity remains the same.
D) A change in total shareholders' equity depends upon whether it is a 2-for-1 split or a 1-for-2 split.

Question 79

If the preference share of a corporation is cumulative:

A) Dividends on preference share are guaranteed.
B) Dividends cannot be declared in an amount less than that stated on the share certificate.
C) Preference shareholders participate in dividends paid in excess of a stated amount on the ordinary shares.
D) Dividends in arrears must be paid on preference share before any dividend can be paid on ordinary share.

Question 80

When no-par share is issued:

A) The entire amount received is credited to the Share Premium account.
B) The issue price is credited to the Share Capital account.
C) There is no legal capital created because there is no par or stated value.
D) The transaction usually involves only an exchange for non-cash assets or services, since the share has no value on the share exchanges.