Question 1

A company issued 100,000, fully paid, 5% preference shares priced at $2 each. The dividend to be paid on the shares for a financial year is:

Accepted Answer

The answer of A company issued 100,000, fully paid, 5%...

Question 2

An investor invests in Canta Ltd by purchasing 1,000 shares for $2.50 each. In the following year the company distributes a 1 for 1 share dividend (bonus issue). After the issue the number of shares held by the investor:

Accepted Answer

A 1 for 1 share dividend means the investor receives an additional share for each share they own, doubling their shares to 2000. Typically, the market price adjusts to reflect the increased share count, often resulting in a lower price per share.

Question 3

The business most likely to operate as a sole trader is:

Accepted Answer

A medical specialist would most likely operate as a sole trader because they typically work independently and do not require large amounts of capital or complex organizational structures. An airline, bank, or private hospital would require significant capital, multiple employees, and more complex structures, making it less likely for them to operate as a sole trader.

Question 4

Advantages of operating as a sole trader are:

Accepted Answer

Operating as a sole trader allows the owner to have total control over the business, making all the decisions themselves. Additionally, the start-up costs can be low since there are no partners to consider. However, being a sole trader does not offer limited liability, meaning the owner is personally liable for any debts or legal issues the business may face.

Question 5

The main government regulator of companies in New Zealand is:

Accepted Answer

The Financial Markets Authority is the main government regulator of companies in New Zealand. It is responsible for regulating financial markets and ensuring that companies comply with financial reporting requirements. The other answer choices, such as the External Reporting Board and the Accounting Standards Review Board, play important roles in setting accounting standards and ensuring financial transparency, but they do not have the same broad regulatory authority as the Financial Markets Authority. The New Zealand Exchange, while an important institution for trading securities, is not a government regulator of companies.

Question 6

A company needs $1,500,000 for expansion. The directors decide to raise the capital by issuing new shares. How many shares does the company need to sell to raise the amount if the last share issue was at a price of $1 each, and the current market price for the company's shares is $1.50 per share?

Accepted Answer

The company needs to raise $1,500,000 and the current market price per share is $1.50. Therefore, $1,500,000 / $1.50 = 1,000,000 shares need to be sold to raise the required amount.

Question 7

Which statement in relation to a company is not correct?

Accepted Answer

The auditors of a company are typically appointed by the shareholders, not the directors, to ensure independence in the audit process. This is a key aspect of corporate governance, aiming to provide an unbiased examination of the company's financial statements.

Question 8

The feature that is not a characteristic of a company is:

Accepted Answer

The level of government regulation that a company faces depends on its industry and size, and may vary from country to country. It is not a defining characteristic of a company. The other choices are all characteristics of a company - perpetual life refers to its ability to continue existing even after its owners or managers die or leave, limited liability means the owners' personal assets are protected from business debts, and being a legal entity means it is recognized as a separate entity from its owners.

Question 9

Bonus shares are:

Accepted Answer

Bonus shares are shares issued at no cost to shareholders. Bonus shares are also known as scrip dividends. Companies issue bonus shares to reward their shareholders without the shareholders having to create additional capital. It increases the number of shares that shareholders hold but does not change the underlying value of their holdings.

Question 10

The largest source of new finance for New Zealand companies is:

Accepted Answer

According to data from the Reserve Bank of New Zealand, retained earnings are the largest source of new finance for New Zealand companies, followed by bank loans and share issues. Revaluations are not a significant source of finance.

Question 11

The principle whereby each partner is responsible for the business actions of all other partners when the actions are carried out in the normal course of business is known as:

Accepted Answer

Mutual agency is the principle whereby each partner is responsible for the business actions of all other partners when the actions are carried out in the normal course of business. Unlimited liability refers to the legal obligation of a general partner to pay off all debts and liabilities of the partnership. Perpetual life refers to the ongoing existence of the partnership beyond the death or departure of an individual partner. The rule in Garner versus Murray refers to a legal precedent regarding the fiduciary duty of partners in a partnership.

Question 12

The statement concerning a rights issue that is true is:

Accepted Answer

Rights issues are typically offered at a discount to the current market price to encourage existing shareholders to buy more shares, and they are generally cheaper than public offerings due to lower marketing and underwriting costs.

Question 13

Which of these is a reason why companies are more heavily regulated than sole traders or partnerships?

Accepted Answer

A) The owners (shareholders) of a company often have limited involvement in the day-to-day running of the business. This creates a need for regulatory bodies to oversee activities and ensure compliance with legal requirements.

B) Companies have limited liability, which means that the personal assets of shareholders are protected from financial loss. This protection can lead to increased risk-taking and potential losses for creditors. Therefore, there is a need for greater regulation to protect the interests of creditors.

C) The mutual agency principle applies to partnerships, where each partner is seen as an agent of the partnership and can enter into legally binding contracts on behalf of the partnership. This principle is not applicable to companies.

Therefore, both reasons mentioned in options A and B contribute to the need for greater regulation of companies, making option D the correct choice.

Question 14

The accounting convention that means that accountants ignore inflation when preparing accounting reports is the:

Accepted Answer

The stable monetary unit convention is the accounting convention that assumes that the value of money is stable and that accountants ignore inflation when preparing accounting reports. This convention allows for easy comparison of financial information over time, but can result in misleading information when there are significant changes in the value of money.

Question 15

Application of the (prudence) conservatism assumption can produce:

Accepted Answer

The prudence conservatism assumption suggests that financial statements should err on the side of caution and provide for all possible losses and contingencies. This can result in higher amounts for liabilities and lower values for assets, as the assumption requires that companies account for potential losses, even if they are not certain to occur. It may also result in lower profits, as expenses and losses are recognized immediately, while gains are only recognized when they are certain.

Question 16

A shareholder in Company C owns 1,000 shares bought for $1 each. The company decides to make a bonus issue of one new share for every two existing shares held. How many shares does the shareholder now have in Company C?

Accepted Answer

The shareholder originally owns 1,000 shares. With a bonus issue of one new share for every two existing shares held, they receive 1,000 / 2 = 500 additional shares, making their total 1,000 + 500 = 1,500 shares.

Question 17

The report that is specifically designed to provide an assessment of the credibility and reliability of the financial statements a company issues for external use, is the:

Accepted Answer

An audit report is specifically designed to provide an assessment of the credibility and reliability of the financial statements a company issues for external use. Trustees may make a statement about the company's financial status or activities, and directors may issue reports on the company's performance or goals, but these do not provide the same level of assessment as an audit report.

Question 18

In 2007 New Zealand adopted which set of accounting standards?

Accepted Answer

In 2007, New Zealand adopted International Financial Reporting Standards (IFRS).

Question 19

The statement relating to preference shares that is not correct is:

Accepted Answer

Preference shares are usually less risky than ordinary shares because they have a fixed rate of dividend and holders receive their dividend before ordinary shareholders.

Question 20

The assumption that means accountants ignore inflation is:

Accepted Answer

The assumption that means accountants ignore inflation is the stable monetary unit assumption. This assumption assumes that the monetary unit used in financial statements is stable and does not change in value due to inflation or deflation. Therefore, accountants do not adjust the financial statements for changes in purchasing power caused by inflation.

Quiz 2: Different Accounting Entities