Deck 11: Reporting and Analyzing Shareholders Equity

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

A company can control the market value of its shares.

Question 16

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

Question 17

Identify and discuss the major characteristics of a corporation.

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

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 24

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

Question 25

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

Question 26

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

Question 27

Retained earnings that are restricted are unavailable for dividends.

Question 28

Those most responsible for the major policy decisions of a corporation are the

A) shareholders.
B) board of directors.
C) management.
D) employees.

Question 29

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

Question 30

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

Question 31

Retained earnings represents the amount of cash available for dividends.

Question 32

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

Question 33

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 34

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 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

Shareholders directly elect the corporation's

A) president.
B) board of directors.
C) controller.
D) auditor.

Question 41

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 42

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 43

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 44

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 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

Authorized shares of a corporation

A) are the minimum amount 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 47

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 48

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 49

$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 50

A corporate board of directors does not generally

A) select officers.
B) formulate operating policies.
C) declare dividends.
D) execute policy.

Question 51

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 52

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 53

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 54

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 55

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 56

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 57

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 58

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 59

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 60

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 61

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 62

The effect of the declaration of a cash dividend is to

Question 63

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 64

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

Question 65

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 66

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 67

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 68

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 69

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 70

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 71

Baria Inc. is reacquiring 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 72

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 73

If Tools Corporation issues 5,000 common shares for $200,000, which account will be credited?

A) Common Shares
B) Retained Earnings
C) Contributed Capital
D) Cash

Question 74

Use the following information for questions.
On July 15, 2018, 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, 2018, to shareholders of record on July 31, 2018.
The journal entry to be recorded on July 15, 2018, will include a

A) debit to Dividends Payable.
B) debit to Dividends Declared.
C) credit to Cash.
D) credit to Retained Earnings.

Question 75

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 76

Retractable preferred shares are

A) included in contributed capital on the statement of financial position.
B) callable at the corporation's option.
C) never issued.
D) presented under liabilities on the statement of financial position.

Question 77

Use the following information for questions.
On July 15, 2018, 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, 2018, to shareholders of record on July 31, 2018.
The effects of the journal entry to record the declaration of the dividend on July 15, 2018, are to

A) decrease shareholders' equity and increase liabilities.
B) decrease shareholders' equity and decrease assets.
C) increase shareholders' equity and increase liabilities.
D) increase shareholders' equity and decrease assets.

Question 78

Apricot Inc. is reacquiring 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

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 basic earnings per share.
D) have additional shares available for use.

Question 80

The board of directors of Wessex Inc. declared a cash dividend on November 15, 2018, to be paid on December 15, 2018, to shareholders owning shares on November 30, 2018. Given these facts, the date of November 30, 2018, is referred to as the

A) declaration date.
B) record date.
C) payment date.
D) authorization date.