Deck 4: Introduction to Limited Companies

Question 1

Under the Corporations Act 2001, a proprietary (Pty Ltd)company is restricted to a maximum of:

A)100 shareholders.
B)2 shareholders.
C)50 shareholders.
D)10 shareholders.

Answer 1

C

Question 2

Which type of company has the right to raise money from the general public?

A)proprietary company.
B)public company.
C)private company.
D)all of the above.

Answer 2

B

Question 3

Which of these is not a consequence of the status of a company as a separate legal entity?

A)The right to retain profits.
B)The obligation to pay taxation.
C)The right to enter into contracts in its own name.
D)None of the above, i.e., all are consequences of the status of a company as a separate legal entity.

Answer 3

D

Question 4

What is the main stock exchange in Australia?

A)NASDAQ.
B)ASX.
C)DAX.
D)ASIC.

Question 5

Which of these is not an advantage of a private company compared to a partnership?

A)Perpetual life
B)Easier transfer of ownership
C)Limited liability
D)Mutual agency

Question 6

The company 'Raider Limited' must be:

A)a proprietary company.
B)a public company.
C)a private company.
D)none of the above.

Question 7

Small proprietary companies are relieved of many of the reporting requirements to which public companies are subject. A company is deemed to be 'small' if it satisfies two of three specified criteria. Which of the following is not one of the criteria?

A)It has consolidated gross profits of less than $30 million.
B)Its consolidated gross assets at the end of the financial year are less than $12.5 million.
C)It employs fewer than 50 employees at the end of the financial year.
D)It has consolidated gross operating revenue of less than $25 million

Question 8

Which of the following is not a rule in the framework used for monitoring and controlling the behaviour of company directors?

A)Subjectivity.
B)Disclosure.
C)Fairness.
D)Accountability.

Question 9

A company issued 120,000 fully paid, 5% preference shares priced at $2 each. The dividend to be paid on the shares for a financial year is:

A)$5,000.
B)$10,000.
C)$20,000.
D)$12,000.

Question 10

A company issued 500,000 ordinary shares to the public, priced at $1. The shares were payable 50 cents on 1 July 2018 and 50 cents was uncalled. How much cash was due to the company on 1 July from the issue?

A)$150,000.
B)$300,000.
C)$100,000.
D)$250,000.

Question 11

Which is the highest level of control in a company?

A)board of directors.
B)chief financial officer.
C)executive officer.
D)chief accountant.

Question 12

Additional regulations that may apply to limited companies (depending on their classification)do not include requirements relating to:

A)the audit of annual reports by a registered auditor.
B)a limited number of employees.
C)the submission of annual reports to ASIC.
D)preparation of annual reports in accordance with accounting standards.

Question 13

Which of the following is a legal entity?

A)company.
B)partnership.
C)sole proprietorship.
D)all of the above.

Question 14

Which feature is not a characteristic of a company?

A)limited liability.
B)less government regulation than other types of entities.
C)legal entity.
D)perpetual life.

Question 15

Which type of company operating under the Corporations Act 2001 must have the words Proprietary Limited (Pty Ltd)after its name?

A)Proprietary company.
B)No liability company.
C)Company listed on the stock exchange.
D)Public company.

Question 16

The shareholders that are eligible to vote for the board of directors of a company are:

A)all shareholders holding more than 1,000 shares.
B)all shareholders who attend the annual general meeting.
C)all shareholders holding voting shares.
D)all preference shareholders.

Question 17

Which statement is untrue for private (Pty Ltd)companies?

A)They tend to be associated with smaller businesses.
B)There are fewer private companies in Australia than public companies.
C)They are less regulated than public companies.
D)The shareholders are often family members.

Question 18

Limited liability means:

A)the liability of shareholders for company debts is normally limited to the amount they have paid for their shares.
B)the liability of directors for company debts is limited.
C)if the company fails, the creditors may have to bear greater losses than if they were dealing with a non-company.
D)Both A and C.

Question 19

Jane and Jarrod have been employed by two different firms of photographers. They decide they should get together and establish their own business, called JJ Photographers. Each has decided to contribute $20,000 in cash to buy equipment, and they will rent premises in the local shopping centre. Both will work full time in the business and share profits and losses equally. They are not sure whether they should set up as a partnership or as a private company and have come to you for advice.
REQUIRED:
Explain to Jane and Jarrod the advantages and disadvantages of a partnership versus a private company structure for their new venture.

Question 20

The disadvantages of a company business structure include all of the following except:

A)extensive regulatory requirements.
B)more expensive to establish.
C)less management flexibility.
D)mutual agency.

Question 21

If a company has a share capital of $150,000, revenue reserves of $25,000 and retained profits of $50,000, what is the maximum amount it can legally distribute as cash dividends?

A)$130,000.
B)$75,000.
C)$145,000.
D)$30,000.

Question 22

What are bonus shares?

A)shares issued to employees.
B)shares issued at no cost to shareholders.
C)shares issued to the board of directors.
D)shares issued to valued customers.

Question 23

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

A)an ordinary issue.
B)a bonus issue.
C)a rights issue.
D)a preference issue.

Question 24

The largest source of new finance for Australian companies is:

A)retained profits.
B)share issues.
C)bank loans.
D)revaluations.

Question 25

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

A)a preference issue.
B)a bonus issue.
C)an option.
D)a rights issue.

Question 26

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

A)profit for the period.
B)retained profit at the beginning of the period plus profit minus dividends declared.
C)profit less losses.
D)retained profit at the beginning of the period plus profit.

Question 27

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:

A)tender issue.
B)private issue.
C)share purchase plan.
D)venture share issue.

Question 28

A company needs $3,000,000 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?

A)500,000 shares
B)100,000 shares.
C)1 million shares.
D)2 million shares.

Question 29

A bonus issue of shares by a company will:

A)increase total shareholders' equity.
B)sometimes increase shareholders' equity and sometimes leave it unchanged.
C)leave total shareholders' equity unchanged.
D)reduce total shareholders' equity.

Question 30

An investor invests in Canta Ltd by purchasing 2,000 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:

A)will increase by 200 and the market price of the shares will fall.
B)will increase by 2,000 and the market price of the shares will remain the same.
C)will increase by 2,000 and the market price of the shares will rise.
D)will increase by 2,000 and the market price of the shares will fall.

Question 31

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:

A)profit for the year is less than dividends declared.
B)bonus shares have been issued.
C)additional capital has been raised during the year.
D)profit for the year is more than dividends declared.

Question 32

Which statement relating to preference shares is not correct?

A)They are often non-voting shares.
B)They are generally more risky for shareholders to own than ordinary shares.
C)They are entitled to receive a dividend before the ordinary shareholders.
D)They normally have a fixed rate of dividend attached.

Question 33

Which is the main government regulator of companies in Australia?

A)The Australian Securities and Investments Commission.
B)The Auditors Board.
C)The Australian Securities Exchange.
D)The Australian Accounting Standards Board.

Question 34

A bonus issue of shares will result in:

A)an increase in cash at bank.
B)an increase in the number of issued shares.
C)an increase in shareholders' equity.
D)all of the above.

Question 35

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

A)To use cash.
B)As a signal to the market of the company's confidence in its future.
C)To reduce its share price when it has become too high.
D)None of the above, i.e., all are reasons for making a bonus issue.

Question 36

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

A)Retained profits.
B)Share capital.
C)Reserves.
D)All of the above.

Question 37

A shareholder in Company C owns 2,000 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?

A)3,000 shares.
B)1,500 shares.
C)500 shares.
D)1,000 shares.

Question 38

Which statement concerning a rights issue is true?

A)The issue is often made to ensure that new shareholders are brought into the company.
B)The shares are generally offered at above the current market price of the existing shares.
C)The cost of the issue tends to be less than making a share issue to the general public.
D)Both A and C.

Question 39

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

A)leave their wealth unchanged.
B)reduce their proportional ownership in the company.
C)increase their wealth.
D)reduce their wealth.

Question 40

If a company issues 25,000 ordinary shares which are sold at $4 per share, the effect on the accounting equation is:

A)increase cash $100,000; decrease in shareholders' equity $80,000.
B)increase cash $100,000; increase in liabilities $80,000.
C)increase cash $100,000; increase in shareholders' equity $100,000.
D)none of the above.

Question 41

If the tax rate is 30%, interest expense is $15,000 and operating profit is $82,000, what is the profit for the year?

A)$63,000.
B)$44,100.
C)$46,900
D)None of the above.

Question 42

The shareholders' equity section in a statement of financial position may include which of the following accounts?

A)Retained profits.
B)Share capital.
C)Reserves.
D)All of the above.

Question 43

Which of the following statements is correct?

A)Most companies see retained profits as the least likely source of finance.
B)The law quite clearly specifies the size of the non-distributable portion of capital a firm must hold back.
C)Preference capital redeemed by a company is always held in retained profits.
D)A company is not allowed to acquire and hold its own shares.

Question 44

Sovereign Ltd has an issued capital of 300,000,000 shares sold at $2 each. Aman holds 9,000 shares. If Sovereign Ltd makes a 1 for 3 bonus issue, how many bonus shares will Aman acquire?

A)3,000 shares.
B)1,800 shares.
C)2,000 shares.
D)9,000 shares.

Question 45

If operating profit is $131,000, tax expense is $39,000 and profit for the year is $82,000, what is the interest expense?

A)$43,000.
B)$49,000.
C)$10,000.
D)Unable to be calculated.

Question 46

In what order do the following items appear in a company's statement of financial performance?
1. Tax expense
2. Revenue
3. Gross profit
4. Operating profit
5. Cost of sales

A)1, 2, 3, 5 & 4.
B)2, 3, 5, 1 & 4.
C)2, 5, 3, 1, & 4.
D)2, 5, 3, 4 & 1.

Question 47

Which of the following equations relating to a company's statements of financial performance is incorrect?

A)Operating profit - Interest = Profit before tax.
B)Revenues - Cost of sales = Gross profit.
C)Profit before tax - Tax expense = Profit for the period.
D)Gross profit - Tax expense - Interest expense = Operating profit.

Question 48

What is the main difference between the financial statements prepared for a sole proprietorship and those prepared for a company?

A)the number of statements that must be prepared.
B)the detail in the reports.
C)sole proprietorship's reports are always prepared at the end of December.
D)companies do not have to prepare a cash flow statement.

Question 49

The part of shareholders' equity that may not be used to pay cash dividends is:

A)Retained profits.
B)Share capital.
C)Revenue reserves.
D)Both A and B.

Question 50

Which report is specifically designed to provide an assessment of the credibility and reliability of the financial statements a company issues for external use?

A)audit report.
B)director's statement.
C)director's report.
D)trustee statement.

Question 51

Which general standard of reporting must financial accounts prepared by companies under the Corporations Act 2001 meet?

A)Accurate.
B)Satisfactory.
C)True and fair.
D)Beyond a reasonable doubt.

Question 52

Which of these is a disadvantage of a country adopting international accounting standards compared to the country developing its own standards?

A)Standards by their nature must be general and involve compromises.
B)It will increase accounting and reporting costs for multinational companies.
C)It will reduce the comparability of different countries' financial reports.
D)All are disadvantages.

Question 53

Which of the following statements in relation to dividends is true?

A)Dividends represent drawings by the owners (shareholders)of the company.
B)Dividends can be paid out of any equity account.
C)Shareholders must be paid an annual dividend regardless of the type of share they hold.
D)A company cannot declare both an interim and a final dividend.

Question 54

Which of the following factors does not influence a firm's dividend decision?

A)A desire to have good investor relations.
B)Cash available to pay a dividend.
C)Wanting to reduce paid-up capital.
D)The need for finance for an investment.

Question 55

Redeemable preference shares:

A)are the same as bonus shares.
B)can be repurchased by the company.
C)allow the holders full voting rights.
D)can be exchanged for ordinary shares.

Question 56

Which of the following is unlikely to be a reserve found in a company's statement of financial position?

A)Asset replacement.
B)Foreign currency.
C)Acquisition.
D)All of the above are likely to be found.

Question 57

How are dividends that have been declared and authorized but remain unpaid at the end of the year, recorded in the statement of financial position?

A)as a current asset.
B)as a current liability.
C)as a non-current liability.
D)as a non-current asset.

Question 58

Assume the balance in the retained profit account 03/06/2017 is $55,000. The profit for 2017/18 is $35,000 and dividends declared are $40,000. What is the balance in retained profits 03/06/2018?

A)$49,000.
B)$89,000.
C)$50,000.
D)None of the above.

Question 59

Why is a company required to retain a specific part of its capital?

A)protect the company's creditors.
B)enable the payment of future dividends.
C)facilitate a non-current asset replacement plan.
D)use as security for future loans.

Question 60

An audit fee expense will most likely be found in the statement of financial performance for a:

A)sole proprietorship.
B)partnership.
C)company.
D)Both B and C.

Question 61

The shareholders are the owners of a company. The shareholders' equity of Adventure Travel Agency Pty Ltd is set out below. (Note that all shares were issued when the company was originally set up and there have been no subsequent issues.)

REQUIRED:
a)Briefly explain the meaning of each of the four components of shareholders' equity, giving an example of how each might have arisen.
b)Indicate which of the four components are legally available for the payments of cash dividends.