Deck 11: Shareholders Equity

Question 1

The denominator in the return on equity calculation is the average number of common shares outstanding.

Answer 1

False

Question 2

The simplest form of business organization is a partnership.

Answer 2

False

Question 3

The price\earnings ratio provides a measure of the return to common shareholders.

Answer 3

False

Question 4

Stock options may be granted to employees as a form of compensation.

Question 5

Earnings per share provides a measure of the earnings relative to the number of common shares outstanding.

Question 6

A company whose shares trade on a stock exchange is a:

A)private corporation.
B)limited partnership.
C)partnership.
D)public corporation.

Question 7

Once a company is a public company it is not possible to become a private corporation again.

Question 8

Which form of organization is a taxable entity?

A)Corporation
B)Limited partnership
C)Partnership
D)Sole proprietorship

Question 9

Most large businesses in Canada take what form?

A)Corporation
B)Limited partnership
C)Partnership
D)Sole proprietorship

Question 10

Small stock dividends are accounted for using the fair market value of the shares on the date of declaration.

Question 11

Sole Proprietorships are taxable entities.

Question 12

Stock splits apply to treasury shares.

Question 13

Dividends are only paid in cash.

Question 14

A change in accounting policy requires an adjustment to opening retained earnings.

Question 15

The balance sheet shows all the dividends declared during the year.

Question 16

Three significant differences between corporations versus sole proprietorships and partnerships include all of the following, except for:

A)double taxation
B)unlimited liability
C)ease of start up
D)it is a separate entity

Question 17

Convertible preferred shares are convertible to common shares at the option of the shareholder.

Question 18

Sole proprietorships are more likely to select accounting methods used for taxes than GAAP.

Question 19

Which of the following ownership structures must adhere to IFRS for its financial reporting?

A)Partnerships
B)Private Corporations
C)Public Corporations
D)All of the above

Question 20

Which form of organization is a separate legal entity?

A)Corporation
B)Limited partnership
C)Partnership
D)Sole proprietorship

Question 21

Which form of organization is subject to double taxation?

A)Sole proprietorship
B)Corporation
C)Partnership
D)Limited partnership

Question 22

In the case of liquidation, where do preferred shareholders rank?

A)Before creditors and common shareholders
B)After creditors and common shareholders
C)After creditors and equally with common shareholders.
D)Before common shareholders and after creditors.

Question 23

Which form of organization has a document specifying the division of profits and losses among the owners \ shareholders?

A)Partnership
B)Corporation
C)Sole proprietorship
D)None of these

Question 24

An individual who invests in a partnership but is not involved in the day-to-day management of the partnership is referred to as an):

A)general partner.
B)limited partner.
C)capital partner.
D)investor.

Question 25

Which of the following is the most likely reason a single owner would establish a business as a corporation rather than as a sole proprietorship?

A)Ease of setting up the business
B)Limited liability
C)Having to follow GAAP when preparing financial statements.
D)Double taxation

Question 26

The articles of incorporation include all of the following except:

A)what kinds of shares are to be issued.
B)the costs of issuing the shares.
C)the type of business to be conducted.
D)how the board of directors is organized.

Question 27

Which of the following is not true for a sole proprietorship?

A)Limited liability
B)Limited life
C)Single taxation
D)Ease of formation

Question 28

The maximum number of shares that a firm can issue is the number of:

A)issued shares.
B)authorized shares.
C)outstanding shares.
D)permissible shares.

Question 29

If the division of profits and losses is not spelled out in a formal agreement between the owners, they will be split evenly amongst the owners.In which form of organization is this true?

A)Corporation
B)Partnership
C)Sole proprietorship
D)All of these

Question 30

Which of the following is not true for corporations?

A)Limited liability
B)Ease of formation
C)Ease of raising capital
D)Unlimited life

Question 31

Partnership agreements:

A)result in equal distribution of profits and assets for all partners
B)specify how assets will be distributed if the partnership is dissolved.
C)can be costly and have limited value
D)limit liability for all partners.

Question 32

Liability is limited in all of the following organizational structures, except for:

A)Private Corporations
B)Public Corporations
C)Limited Partnerships
D)All of above

Question 33

Which of the following groups are the ultimate decision makers in a public corporation?

A)Shareholders
B)Audit committee
C)Management
D)Board of directors

Question 34

When money is paid to an owner of a sole proprietorship for personal use it is referred to as a:

A)salary.
B)dividend.
C)withdrawal.
D)return of capital.

Question 35

Which form of organization has both limited and unlimited liability?

A)Corporation
B)Limited partnership
C)Partnership
D)Sole proprietorship

Question 36

An additional paid in capital account under shareholder's \ owner's equity is the result of:

A)legal capital
B)the sale of par value shares
C)the sale of no par value shares
D)sale of preferred shares.

Question 37

For accounting purposes, the most important section of the articles of incorporation is the description of:

A)the shares to be issued.
B)the type of business to be conducted.
C)how the board of directors will be organized.
D)who will make up the management.

Question 38

The account that tracks the ownership interest of the partners is referred to as the:

A)drawings account.
B)partner's capital account.
C)retained earnings account.
D)wage expense account.

Question 39

Which of the following statements about issuing common shares is true?

A)The total amount received is referred to as legal capital and it cannot be paid out as dividends.
B)The total amount received is referred to as legal capital and it may be paid out as dividends once the company is profitable.
C)All classes of common shares pay identical dividends.
D)All classes of common shares have the same voting rights.

Question 40

Profits in a sole proprietorship are:

A)tax preferred
B)subject to double taxation
C)fully taxable
D)tax exempt - only owner draws are taxed

Question 41

Which of the following happens at the date of declaration?

A)Dr.Dividends expense, Cr.Dividends declared
B)Dr.Dividends declared, Cr.Cash
C)Dr.Dividends declared, Cr.Dividends payable
D)The board of directors approves the dividend but no entry is made in the accounts.

Question 42

Which of the following statements is true?

A)Dividends are guaranteed to preferred shareholders.
B)Dividends accumulate on common shares.
C)Dividends are only issued if the board of directors declares them.
D)Dividends are paid to all classes of shares on the same basis.

Question 43

The one class of shares that represent a company's basic voting rights are:

A)preferred shares.
B)capital shares.
C)cumulative shares.
D)common shares.

Question 44

Stock splits:

A)decrease the retained earnings account
B)increase the number of outstanding shares
C)increase the contributed capital account
D)all of the above

Question 45

Which of the following statements concerning a change in accounting policy is true?

A)If a change in accounting policy is adopted retroactively, the company needs to restate closing retained earnings.
B)If a change in accounting policy is adopted retroactively, the company needs to restate opening retained earnings.
C)If a change in accounting policy is adopted prospectively, the company needs to restate closing retained earnings.
D)If a change in accounting policy is adopted prospectively, the company needs to restate opening retained earnings.

Question 46

Property dividends are valued using:

A)the most recent cash dividend paid by the corporation.
B)the fair market value of the asset given up.
C)the book value of the asset given up.
D)the balance in the corporation's retained earnings account.

Question 47

Shares that have been issued and subsequently repurchased but not cancelled are called:

A)Issued shares
B)Re-issued shares
C)Treasury shares
D)Outstanding shares

Question 48

Which of the following happens at the date of record?

A)Dr.Dividends declared, Cr.Dividends payable
B)Dr.Dividends declared, Cr.Cash
C)No entry is made in the accounts, but a list of shareholders entitled to receive the dividend is prepared.
D)The board of directors approves the dividend but no entry is made in the accounts.

Question 49

A corporation currently has two classes of common shares; Class A with 1 vote per share and Class B with 10 votes per share.The owners of the Class B shares have recently announced that all of their outstanding shares will be exchanged for Class A shares.Which of the following statements is true?

A)The change will improve the corporate governance of the company.
B)This is an example of convertible preferred shares.
C)The company will pay a lower amount in dividends in the future.
D)The change will decrease the legal capital of the company.

Question 50

The type of preferred share that can be bought back by the company at a specified time and price is a:

A)cumulative preferred share.
B)convertible preferred share.
C)redeemable preferred share.
D)nonparticipating preferred share.

Question 51

What type of preferred share is entitled to dividends above its specified dividend if the common shares receive excess dividends and must receive dividends in arrears before the common dividends can be declared?

A)Cumulative and participating
B)Cumulative and nonparticipating
C)Redeemable and participating
D)Redeemable and cumulative

Question 52

Which of the basic rights of shareholders does the preferred shareholder usually give up in order to acquire preferences over the common shareholder?

A)Right to share in profits and losses
B)Right to share in subsequent issues of shares
C)Right to share in assets upon liquidation
D)Right to vote

Question 53

Which of the following is not a basic right of common shares?

A)Right to share in profits and losses
B)Right to participate in the management of the company
C)Right to vote in the selection of the board of directors for the corporation
D)Right to share in the assets upon liquidation

Question 54

Dividends in arrears relate to which of the following?

A)Cumulative preferred shares
B)Participating preferred shares
C)Cumulative common shares
D)Participating common shares

Question 55

Generally the major difference between preferred shares and common shares is:

A)preferred shares are restricted by the amount of dividends that can be paid out.
B)common shares have a priority claim over corporate assets.
C)preferred shares have voting rights.
D)there are no significant differences between preferred and common shares.

Question 56

The pre-emptive right is the right to:

A)share in the management of the company.
B)share proportionately in any new sale of shares.
C)share in the profits and losses of the company.
D)share in any dividends paid by the company.

Question 57

Which of the following increases the number of shares outstanding resulting in the capitalization of a portion of the existing retained earnings?

A)Cash dividends
B)Property dividends
C)Stock dividends
D)Stock splits

Question 58

Issued shares will exceed outstanding shares because of:

A)Un-issued shares
B)Treasury shares
C)Declared stock dividend
D)Declared stock split

Question 59

Which of the following is the first date in the sequence required to pay dividends?

A)Payment date
B)Announcement date
C)Date of record
D)Declaration date

Question 60

Which of the following is the largest number of shares?

A)Outstanding shares
B)Authorized shares
C)Issued shares
D)Approved shares

Question 61

Use the following information for questions
Harbour Co. has $200,000 of no par value 4% cumulative preferred shares, and 12,000 shares of no par value common shares outstanding. In its first three years of operation, the company paid cash dividends as follows: Year 1: $8,000; Year 2: $18,000; and Year 3: $24,000.

-The amount of dividends received by the preferred shareholders in year 2 was:

A)$8,000
B)$9,000
C)$12,000
D)$18,000

Question 62

Use the following information to complete questions
Jalisco Ltd.is a public company trading on the Toronto Stock Exchange.The company's shares are currently trading for $16.00 per share.Jalisco just released the following information related to its 2011 year-end: $$\begin{array} { l r r } &2011&2010\\\text { Total assets } & \$ 14,500,000 & 13,250,000 \\\text { Total liabilities } & 7,500,000 & 6,750,000 \\\text { Net income } & 762,500 & 555,000 \\\text { Preferred share dividends } & 65,000 & 65,000 \\\text { Average number of common shares outstanding } & 100,000 & 100,000\end{array}$$

-For 2011, the company's earnings per share were closest to:

A)$7.63
B)$6.98
C)$6.50
D)Cannot be calculated with the information provided

Question 63

Use the following information for questions
On January 1, Canary Co. had total shareholders' equity as shown below when their shares were selling at $25 per share. $\begin{array}{ll}\text { Common shares (125,000 shares) } & \$ 2,500,000 \\\text { Retained earnings } & 4,000,000 \\\quad \text { Total shareholders' equity } & \$ 6,500,000\end{array}$

-If the company declared a 15% stock dividend, the number of issued and outstanding shares would:

A)remain unchanged
B)increase by 18,750 shares
C)decrease by 18,750 shares
D)total 143,700 shares

Question 64

In 2011, Oceanview Co.reported net income of $75,000 and declared a dividend of $40,000.The dividend is to be paid on February 1, 2012 to shareholders of record on January 15, 2012.The balance in the retained earnings account on January 1, 2011 was $140,000.At Ocean's year end on December 31, 2011 the company reported the following ending balance on the statement of shareholders' equity:

A)$ 35,000
B)$ 115,000
C)$ 175,000
D)$ 215,000

Question 65

Dividends are not paid on:

A)Common shares
B)Preferred shares
C)Treasury shares
D)Outstanding shares

Question 66

Information to determine the amount of dividends declared and the amount of dividends paid during the year is found on which financial statement?

Question 67

Which of the following is a reason companies issue stock options to their employees?

A)It is a form of compensation
B)If employees are owners they may work harder for the company
C)If the company grows, their shares will increase in value
D)All of the above

Question 68

Use the following information for questions
Harbour Co. has $200,000 of no par value 4% cumulative preferred shares, and 12,000 shares of no par value common shares outstanding. In its first three years of operation, the company paid cash dividends as follows: Year 1: $8,000; Year 2: $18,000; and Year 3: $24,000.

-The amount of dividends received by the common shareholders in year 1 was:

A)$4,000
B)$ -0-
C)$8,000
D)$12,000

Question 69

Which date is used to determine which shareholders will receive the declared dividend?

A)Date of record
B)Date of declaration
C)Ex-dividend date
D)Date of payment

Question 70

On December 1, Gilligan Ltd.declared a 2 for 1 stock split when the market value was $40 per share.Prior to the split, there were 200,000 shares issued and outstanding.After the stock split, the number of shares outstanding and the share capital balance were:

Question 71

Stock splits are usually declared in order to:

A)increase the number of shares outstanding.
B)improve the earnings per share.
C)reduce the shareholders' equity.
D)reduce the shares' market price.

Question 72

A contract between two parties to either purchase or sell shares at a fixed price is referred to as a:

A)stock dividend.
B)stock option.
C)contract option.
D)employment option.

Question 73

All of the following are reasons for issuing small stock dividends except:

A)it does not reduce the assets of the company.
B)it provides an opportunity for the company to capitalize its retained earnings.
C)it allows the company to issue a dividend without recording it in their records.
D)it allows the shareholders the option of keeping the shares or selling them for cash.

Question 74

The declaration and issuance of a stock dividend:

A)increases total shareholders' equity.
B)does not change total shareholders' equity.
C)increases current liabilities.
D)does not change total retained earnings.

Question 75

Which of the following is a reason a company would declare a stock split?

A)To increase the marketability of its shares.
B)To increase the share price in the market.
C)To increase the value of the company.
D)To increase the legal paid-in capital of the company.

Question 76

A legal liability for cash dividends occurs on which of the following dates?

A)Date of record
B)Ex-dividend date
C)Date of payment
D)Date of declaration

Question 77

Use the following information for questions
Harbour Co. has $200,000 of no par value 4% cumulative preferred shares, and 12,000 shares of no par value common shares outstanding. In its first three years of operation, the company paid cash dividends as follows: Year 1: $8,000; Year 2: $18,000; and Year 3: $24,000.

-The amount of dividends received by the common shareholders in year 3 was:

A)$8,000
B)$12,000
C)$16,000
D)$20,000

Question 78

Use the following information for questions
On January 1, Canary Co. had total shareholders' equity as shown below when their shares were selling at $25 per share. $\begin{array}{ll}\text { Common shares (125,000 shares) } & \$ 2,500,000 \\\text { Retained earnings } & 4,000,000 \\\quad \text { Total shareholders' equity } & \$ 6,500,000\end{array}$

-Assume the company declared and issued a 10% stock dividend and that the market price remained constant.The effect of this dividend would:

A)Increase common shares by $312,500
B)Increase common shares by $250,000
C)Decrease retained earnings by $250,000
D)Increase common shares by $400,000

Question 79

Use the following information for questions
On January 1, Canary Co. had total shareholders' equity as shown below when their shares were selling at $25 per share. $\begin{array}{ll}\text { Common shares (125,000 shares) } & \$ 2,500,000 \\\text { Retained earnings } & 4,000,000 \\\quad \text { Total shareholders' equity } & \$ 6,500,000\end{array}$

-Assume the company declared and issued a 50% stock dividend.The effect of this dividend would:

A)Increase common shares by $1,250,000 and shares issued and outstanding by 62,500
B)Increase common shares by $1,250,000 with no change in the number of issued and outstanding shares
C)Leave total shareholders' equity unchanged but increase the number of shares issued and outstanding to 187,500
D)Reduce retained earnings by $2,000,000 and double the number of shares issued and outstanding

Question 80

In a stock option, the price at which the employee may buy the shares is the:

A)market price.
B)exercise price.
C)price at the grant date.
D)there is no price; they are given the shares as compensation.