Question 1

Shares are most commonly issued for cash.

Accepted Answer

Shares are most commonly issued for cash, but they can also be issued in exchange for assets or services.

Question 2

One of the preference rights for preferred shares is the right to vote.

Accepted Answer

Preferred shares generally do not have voting rights, while common shares typically do.

Question 3

The declaration of cash dividends reduces retained earnings.

Accepted Answer

The declaration of cash dividends involves paying out a portion of retained earnings to shareholders, which in turn reduces the amount of retained earnings on the company's balance sheet.

Question 4

When preferred shares are issued,this will always cause an increase in the future return to common shareholders.

Accepted Answer

The issuance of preferred shares does not always guarantee an increase in future returns to common shareholders, as the priority of payments and dividends will be given to preferred shareholders before common shareholders. It depends on the terms and conditions of the preferred shares and the financial performance of the company.

Question 5

Dividends represent the distribution of profits to the shareholders of a corporation.

Accepted Answer

Dividends are indeed the distribution of profits to shareholders of a corporation.

Question 6

The liability for preferred dividends declared is recorded on the date of record.

Accepted Answer

The liability for preferred dividends declared is recorded on the date of declaration, not the date of record. The date of record is used to determine which shareholders are entitled to receive the dividend.

Question 7

Special rights for preferred shares may include a preference in receiving dividends and in the distribution of assets if the corporation is liquidated.

Accepted Answer

Preferred shares often have special rights that include a preference in receiving dividends and assets in the event of liquidation.

Question 8

If shares are issued for non-cash assets,the assets are always recorded at the current market value of the shares.

Accepted Answer

The assets are recorded at the fair market value of the non-cash assets or the fair market value of the shares issued, whichever is more clearly determinable.

Question 9

Preferred shares are seen by some investors as being less risky and having a greater dividend rate than common shares.

Accepted Answer

Preferred shares typically have a fixed dividend rate, which can be more attractive to investors seeking reliable income. They also have priority in receiving dividends and in the event of liquidation, making them perceived as less risky than common shares.

Question 10

When issuing common shares,the initial investment is credited to Common Shares.

Accepted Answer

When issuing common shares, the initial investment made by shareholders is credited to the Common Shares account on the balance sheet.

Question 11

When issuing shares,the initial investment is credited to Retained Earnings.

Accepted Answer

When issuing shares, the initial investment is credited to either Common Stock or Preferred Stock accounts, not Retained Earnings. Retained Earnings is the accumulated profits or losses of the company after dividends are paid and is typically not affected by the issuance of new shares.

Question 12

The shareholders can vote to pay themselves a dividend.

Accepted Answer

The answer of The shareholders can vote to pay themselves...

Question 13

Whenever the dividend rate on preferred shares is higher than the rate the corporation earns on its assets,the effect of issuing preferred shares is to increase the dividend rate earned by common shareholders.

Accepted Answer

Issuing preferred shares with a dividend rate higher than the corporation's earnings rate on its assets dilutes the earnings available for common shareholders, as preferred dividends are paid out before any dividends are distributed to common shareholders. This typically reduces the amount available for common shareholders, not increases it.

Question 14

Dividends represent the distribution of profits to the managers of a corporation.

Accepted Answer

Dividends represent the distribution of profits to the shareholders/owners of a corporation, not the managers.

Question 15

The use of preferred shares to increase return to common shareholders is an example of financial leverage.

Accepted Answer

Preferred shares can be used to increase return to common shareholders through financial leverage, as preferred dividends are fixed and do not fluctuate with company performance. This allows the company to use more of its profits to pay dividends to common shareholders, potentially increasing their return on investment.

Question 16

Corporations issue preferred shares in order to raise capital without sacrificing control of the corporation and to increase the return earned by common shareholders.

Accepted Answer

Preferred shares offer certain advantages to corporations, such as the ability to raise capital without diluting the voting rights of existing shareholders. Additionally, preferred shareholders typically receive a fixed dividend payment that must be paid before any dividends can be paid to common shareholders, which can help attract investors and increase the return earned by common shareholders.

Question 17

If a corporation is authorized to issue 1,000 preferred shares,which have a current market value of $80 per share,it has $80,000 worth of shares outstanding.

Accepted Answer

The corporation only has $80,000 worth of shares outstanding if it has actually issued all 1,000 preferred shares. Being authorized to issue shares is not the same as having issued them.

Question 18

The date of record is the date the directors vote to pay a dividend to shareholders.

Accepted Answer

The date of record is the date set by a company's board of directors once they have declared a dividend, on which you must be on the company's books as a shareholder to receive the dividend. It is not the date the directors vote to pay a dividend.

Question 19

Common shares usually carry a preference for dividends.

Accepted Answer

Common shares do not carry a preference for dividends. Dividends are distributed on a pro-rata basis to all shareholders based on the number of shares they hold. Preference shares, on the other hand, have a priority claim on dividends and receive their dividend payment before common shareholders.

Question 20

A corporation can issue two general types of shares: common and preferred.

Accepted Answer

This statement is true. A corporation can choose to issue both common and preferred shares. Common shares usually come with voting rights and ownership in the company, while preferred shares usually come with fixed dividends and priority in receiving dividends over common shareholders.

Quiz 4: Organization and Operation of Corporations