Question 1

Which item(s)can be a component of shareholders' equity?

Accepted Answer

All of the above (retained profits, share capital, and reserves) can be components of shareholders' equity. Shareholders' equity represents the residual interest of the company's shareholders in its assets after deducting liabilities, and it is comprised of both contributed and earned capital. Share capital is the amount of money that shareholders have invested in the company, while retained profits are the accumulated earnings that have not been distributed as dividends. Reserves are also part of shareholders' equity and they are typically created from profits that have been set aside for a specific purpose, such as contingencies or future investments.

Question 2

The largest source of new finance for Australian companies is:

Accepted Answer

According to research conducted by the Reserve Bank of Australia, retained profits are the largest source of new finance for Australian companies. This means that companies are reinvesting their earnings back into the business rather than seeking external sources of funding. While share issues and bank loans may be common sources of finance, it appears that retained profits are the most significant for Australian companies. Revaluations, which involve an increase in the value of assets on a company's balance sheet, are not typically a source of new finance.

Question 3

A public issue of shares where the investor must state in advance the amount they are willing to pay for the shares is called a:

Accepted Answer

A tender issue is a public offering of shares where investors must state in advance the amount they are willing to pay for the shares. The company will then sell the shares to the investors who offered the highest amount. This is also known as a tender offer or Dutch auction. Private issues are not public offerings and are offered to a select group of investors. A share purchase plan is a plan that allows existing shareholders to purchase additional shares at a predetermined price. A venture share issue is not a commonly used term.

Question 4

A share issue where the company gives existing shareholders the first right of refusal of the issue is:

Accepted Answer

A rights issue is a share issue that gives existing shareholders the first right of refusal of the issue. This means that they have the option to purchase new shares before they are offered to the general public. This is often done in order to raise additional capital without diluting the ownership of the company.

Question 5

If a company issues 20,000 ordinary shares which are sold at $4 per share,the effect on the accounting equation is:

Accepted Answer

When a company issues ordinary shares, it increases its cash balance by the amount of cash received from the sale of shares. At the same time, the company's shareholders' equity increases by the same amount since the company now has more equity investors. The correct entry, therefore, is to increase both cash and shareholders' equity by $80,000. Option A is incorrect because the entry on both sides of the accounting equation would be decreasing, which would not balance the equation. Option B is incorrect because issuing shares does not increase liabilities. Option D is incorrect because an accounting entry is required to reflect the transaction.

Question 6

Bonus shares are:

Accepted Answer

Bonus shares are shares issued by the company to the existing shareholders at no cost or a nominal cost, as a way of rewarding them, without increasing the company's share capital or shareholder's stake.

Question 7

A bonus issue of shares by a company will:

Accepted Answer

A bonus issue of shares (also known as a stock dividend) redistributes a company's retained earnings to its share capital account but does not change the total shareholders' equity. It simply reallocates amounts within shareholders' equity, without increasing or decreasing the total amount.

Question 8

If the retained profit figure in a company statement of financial position increases from the beginning of the year to the end of the year,it is most probable that:

Accepted Answer

If the retained profit figure in a company statement of financial position increases from the beginning of the year to the end of the year, it means that the profit for the year is more than dividends declared. Retained profits are the portion of a company's profits that are kept after dividends are paid out to shareholders. Therefore, if the amount of retained earnings increases, it suggests that the company has retained more of its profits instead of paying them out as dividends, indicating a strong financial position. Choices A, B, and C are incorrect because these events are not directly related to an increase in retained profits.

Question 9

Which statement relating to preference shares is not correct?

Accepted Answer

Preference shares are generally less risky for shareholders to own than ordinary shares as they have priority over ordinary shareholders in receiving dividends and in the event of liquidation.

Question 10

A company needs $1,500,000 for expansion.They 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 answer of A company needs $1,500,000 for expansion.They decide...

Question 11

A bonus issue of shares will result in:

Accepted Answer

A bonus issue of shares increases the number of issued shares without changing the shareholders' equity or the company's cash position. It redistributes reserves to issued share capital.

Question 12

If a company has a share capital of $100,000,revenue reserves of $15,000 and retained profits of $30,000,what is the maximum amount it can legally distribute as cash dividends?

Accepted Answer

The maximum amount a company can legally distribute as cash dividends is calculated by adding the retained profits and revenue reserves, which would be $45,000 ($15,000 + $30,000). The share capital does not factor into this calculation as it is the amount the company originally raised through the issuance of shares and not available for distribution as dividends. Therefore, the correct answer is B.

Question 13

Shareholders who exercise their entitlement to a bonus issue of shares,in theory,will:

Accepted Answer

A bonus issue of shares is essentially a method of redistributing a company's retained earnings to its shareholders in the form of additional shares, rather than cash. This action does not involve the shareholders paying for the new shares; instead, they receive them free of charge based on their existing ownership. Therefore, while the number of shares a shareholder owns increases, the overall value of the company remains the same, as does the shareholder's proportionate ownership. This means their wealth, in terms of the value of their holdings in the company, remains unchanged immediately following the bonus issue. The market may adjust the share price to reflect the increased share count, but the total value of an individual's holdings should theoretically remain the same, hence not altering their wealth.

Question 14

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

After the bonus issue, the shareholder will receive one new share for every two existing shares held. As the shareholder initially had 1,000 shares, they will receive 1,000/2 = 500 new shares. Therefore, the shareholder will have a total of 1,000 + 500 = 1,500 shares in Company C.

Question 15

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

The investor will receive a 1 for 1 share dividend, doubling their shares to 2,000. Typically, the market price per share falls after such an issue to reflect the increased share count.

Question 16

The offer of new shares to existing shareholders at no cost,in proportion to the amount of their current holding,is known as:

Accepted Answer

A bonus issue is a distribution of additional shares to existing shareholders at no cost, in proportion to the amount of their current holding. This is different from a rights issue, where existing shareholders are offered the opportunity to purchase new shares at a discounted price.

Question 17

In a company statement of financial position,the balance of retained profit at the end of the period is equal to:

Accepted Answer

The balance of retained profit at the end of the period is the amount of profit that remains within the company after the payment of any dividends. This can be calculated as the retained profit at the beginning of the period plus the profit earned during the period minus any dividends declared during the period. Therefore, choice B is the correct answer.

Question 18

Which statement concerning a rights issue is true?

Accepted Answer

Rights issues are typically offered to existing shareholders at a discount to the current market price, not above it, and are aimed at raising capital more efficiently and at a lower cost than public offerings. They are not primarily designed to bring new shareholders into the company.

Question 19

Which of the following is not a reason for a company making a bonus issue of shares?

Accepted Answer

A bonus issue of shares is typically made to capitalize a part of the company's reserves into share capital. It does not involve the use of cash but rather the conversion of profits or reserves into share capital, thereby adjusting the share structure without affecting the company's cash position. It is often done to signal confidence, manage share prices, or adjust the capital structure, but not to use cash.

Question 20

The main government regulator of companies in Australia is:

Accepted Answer

The Australian Securities and Investments Commission (ASIC) is the main government regulator of companies in Australia. ASIC is responsible for regulating and enforcing company and financial services laws to protect consumers and maintain confidence in the financial system. The other options listed may have some regulatory responsibilities, but they are not the primary regulator of companies in Australia.

Quiz 4: Introduction to Limited Companies

Which item(s) can be a component of shareholders' equity?