Deck 13: Accounting for Corporations

Question 1

Stated value share is par share that is assigned a value per share by the corporation's board of directors.

Answer 1

False

Question 2

An ordinary share always carries a preference for receiving dividends over a preference share.

Answer 2

False

Question 3

Owning shares is attractive to investors because shareholders are not liable for the corporation's actions and debts and because shares are easily transferred.

Answer 3

True

Question 4

A cumulative preference share carries the right to be paid both current and all prior periods' unpaid dividends before any dividends are paid to ordinary shareholders.

Question 5

The term "authorized shares" is the total number of shares outstanding.

Question 6

If a corporation is authorized to issue 1,000 $50 ordinary shares, it is said to have $50,000 of shares outstanding.

Question 7

A corporation is a legal entity separate from its owners.

Question 8

Corporations are subject to substantially fewer regulations and laws than are proprietorships and partnerships.

Question 9

A corporation can issue two kinds of shares - ordinary and preference.

Question 10

Organization expenses of a corporation often include legal fees and promoter fees.

Question 11

Shareholders' equity consists of paid-in capital and retained earnings.

Question 12

Par value per share is the price at which a share is bought or sold.

Question 13

Special rights often granted to preference shares include a preference for receiving dividends and for the distribution of assets if the corporation is liquidated.

Question 14

Paid-in capital is the total amount of cash and other assets the corporation receives from its shareholders in exchange for its shares.

Question 15

Retained earnings are not part of the shareholders' claims on the company's net assets.

Question 16

A proxy is a document that gives a designated agent the right to vote on behalf of a shareholder.

Question 17

The only way that a shareholder can affect the management of a corporation is to get elected to the corporation's board of directors.

Question 18

Ordinary shareholders always share equally with all other shareholders in all dividends.

Question 19

A preemptive right means shareholders can purchase their proportional share of ordinary shares issued later by the corporation.

Question 20

Retained earnings generally consist of a company's cumulative net income less any net losses and dividends declared since its inception.

Question 21

Sparrow Company had net income of $63,000. The company had 9,000 weighted average ordinary shares outstanding. The basic earnings per share equal $7.00 per share.

Question 22

The term revenue reverse is sometimes used for retained earnings.

Question 23

A statement of comprehensive income is intended to show all owner changes in equity and other comprehensive income.

Question 24

A company paid $2.10 in dividends. Its earnings per share is $5.40, and its share price is $120 per share. The dividend yield equals 38.9%.

Question 25

Changes in accounting estimates are accounted for in current and future periods.

Question 26

Dividend yield shows the annual amount of cash dividends distributed to ordinary shares relative to the share's market price.

Question 27

The Perk's earnings per share is $3.11. Its ordinary dividend is $0.36 per share and its share price is $40 per share. Its dividend yield equals 0.9%.

Question 28

The price-earnings ratio reveals information about the stock market's expectations for a company's future growth in earnings.

Question 29

Book value per ordinary share is calculated by dividing shareholders' equity applicable to ordinary shares by the number of ordinary shares outstanding.

Question 30

Book value per share reflects the value per share if a company is liquidated at balance sheet amounts.

Question 31

If the dividends account is not recorded as a reduction to Retained Earnings on the date of declaration, the dividends account is closed to Retained Earnings at the end of the accounting period.

Question 32

A company made an error in recording the 2009 purchase of computer equipment as an expense. This was discovered in 2011. The item should be reported as a prior period adjustment on the 2009 income statement.

Question 33

Earnings per share is the amount of income earned per share of a company's outstanding (weighted-average) ordinary shares.

Question 34

Shares with a price-earnings ratio greater than 20 to 25 are likely to be underpriced.

Question 35

The main limitation in using book value per share for share valuation models is the potential difference between recorded value and market value for both assets and liabilities.

Question 36

Dividend yield is computed by dividing annual cash dividends per share by the market value per share.

Question 37

Dividend yield is defined as the market price per share of a company's shares divided by its earnings per share.

Question 38

A company has earnings per share of $6.45. Its dividend per share is $0.20, and its market price per share is $80. Its price-earnings ratio equals 12.4.

Question 39

Shares that pay large dividends on a regular basis are growth shares.

Question 40

The price-earnings ratio is computed by dividing earnings per share by the market price per share.

Question 41

Recording of a bonus issue or share dividend does not result in a liability being recorded.

Question 42

Corporations issue preference shares to raise capital without sacrificing control of the corporation and/or to boost the return earned by ordinary shareholders.

Question 43

When no-par share is not assigned a stated value, the total amount received is recorded as Share Capital-Ordinary.

Question 44

If a corporation receives assets other than cash in exchange for shares, it records the assets received at their market value as of the date of the transaction.

Question 45

A company has $424,000 in total shareholders' equity. The company has no preference shares and has 40,000 ordinary shares outstanding. Its book value per share is $10.60.

Question 46

Callable preference shares give its holders the option of exchanging their preference shares into ordinary shares at a specified rate.

Question 47

A corporation sometimes gives its shares to promoters in exchange for their services in organizing the corporation.

Question 48

A bonus issue or share dividend decreases the market price of the company's share.

Question 49

The declaration of cash dividends reduces retained earnings.

Question 50

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

Question 51

Unpaid and undeclared preference dividends are called dividends in arrears.

Question 52

A share split is the distribution of additional shares to shareholders according to their percent of ownership.

Question 53

The journal entry to record the declaration of dividends on ordinary shares includes a debit to Retained Earnings and a credit to Ordinary Dividend Payable.

Question 54

Treasury share is share that has been authorized, issued, and is outstanding.

Question 55

A bonus issue or share dividend is a distribution of corporate assets that returns part of the original investment to shareholders.

Question 56

A bonus issue or share dividend reduces a corporation's assets and its shareholders' equity.

Question 57

A share split increases total shareholders' equity.

Question 58

A cumulative preference share has a right to be paid both current and prior periods' unpaid dividends before any dividend is paid to ordinary shareholders.

Question 59

A company has $595,000 in total shareholders' equity. Preference shares outstanding are valued at $150,000, and 75,000 ordinary shares are outstanding. Its book value per ordinary share is $7.93.

Question 60

A participating preference share has a feature that allows it to share with ordinary shareholders in any dividends paid in excess of the percent or dollar amount stated on the preference share.

Question 61

Par value of a share refers to the:

A) Issue price of the share.
B) Value assigned per share.
C) Market value of the share on the date of the financial statements.
D) Maximum selling price of the share.
E) Dividend value of the share.

Question 62

The right of ordinary shareholders to protect their proportionate interest in a corporation by having the first opportunity to buy additional proportionate shares of ordinary shares issued by the corporation is called a:

A) Preemptive right.
B) Proxy right.
C) Right to call.
D) Financial leverage.
E) Voting right.

Question 63

If a company resells treasury shares below the acquisition cost, a loss from the sale of treasury shares is recorded.

Question 64

Purchasing treasury share reduces the corporation's assets and shareholders' equity by equal amounts.

Question 65

A company had a beginning balance in retained earnings of $43,000. It had net income of $6,000 and paid out cash dividends of $5,625 in the current period. The ending balance in retained earnings equals:

A) $54,625.
B) $42,625.
C) $11,625.
D) $43,375.
E) $49,000.

Question 66

Buying shares in a corporation is attractive to investors because:

A) Shareholders are not liable for the corporate acts or debts.
B) Shares are easily transferred.
C) A corporation has unlimited life.
D) Shareholders are not mutual agents of the corporation.
E) All of these.

Question 67

The statement of comprehensive income shows:

A) all owner changes in equity and other comprehensive income.
B) only changes in net income.
C) all nonowner changes in equity and other comprehensive income.
D) the changes in assets over the period.
E) the changes in equity over the period.

Question 68

Changes in accounting estimates are:

A) Considered accounting errors.
B) Reported as prior period adjustments.
C) Accounted for with a cumulative "catch-up" adjustment.
D) Immaterial items.
E) Accounted for in current and future periods.

Question 69

Retained earnings:

A) Generally consists of a company's cumulative net income less any net losses and dividends declared since its inception.
B) Can only be appropriated by setting aside a cash fund.
C) Represent an amount of cash available to pay shareholders.
D) Are never adjusted for anything other than net income or dividends.
E) All of these.

Question 70

The total amount of cash and other assets received by a corporation from its shareholders in exchange for its shares is:

A) Always equal to its par value.
B) Always equal to its stated value.
C) Referred to as paid-in capital.
D) Referred to as retained earnings.
E) Always below its stated value.

Question 71

A proxy is:

A) A document that gives a designated agent of a shareholder the right to vote on the shareholder's behalf.
B) A contractual commitment by an investor to purchase unissued shares.
C) An amount of assets defined by law that shareholders must invest and leave invested in a corporation.
D) The right of ordinary shareholders to protect their proportionate interests in a corporation by having the first opportunity to purchase additional ordinary shares issued by the corporation.
E) An arbitrary amount assigned to no-par shares by the corporation's board of directors.

Question 72

The number of shares that a corporation's registration allows it to sell is referred to as:

A) Issued shares.
B) Outstanding shares.
C) Ordinary shares.
D) Preference shares.
E) Authorized shares.

Question 73

Stated value of no-par share is:

A) Another name for redemption value.
B) An amount assigned to par value share by the state of incorporation.
C) The market value of the share on the date of issuance.
D) The difference between the par value of share and the amount below or above par value paid-in by the shareholder.
E) An amount assigned to no-par share by the corporation's board of directors.

Question 74

Prior period adjustments to financial statements can result from:

A) Changes in accounting estimates.
B) Unacceptable accounting practices.
C) Discontinued operations.
D) Changes in tax law.
E) Immaterial items.

Question 75

The board of directors of a corporation:

A) Are elected by the corporate registrar.
B) Are responsible for day-to-day operations of the business.
C) Do not have the power to bind the corporation to contracts, due to lack of mutual agency.
D) May not also be executive officers of the corporation, due to the separate entity principle.
E) Are responsible for and have final authority for managing corporate activities.

Question 76

Shareholders' equity consists of:

A) Long-term assets.
B) Paid-in capital and retained earnings.
C) Paid-in capital and par value.
D) Retained earnings and cash.
E) Premiums and discounts.

Question 77

Owners of preference shares often do not have:

A) Ownership rights to assets of the corporation.
B) Voting rights.
C) Preference to dividends.
D) The right to sell their shares on the open market.
E) Preference to assets at liquidation.

Question 78

When all of the authorized shares have the same rights and characteristics, the share is called

A) Preference share.
B) Ordinary share.
C) Par value share.
D) Stated value share.
E) No-par value share.

Question 79

Prior period adjustments are reported in the:

A) Income statement.
B) Balance sheet.
C) Statement of changes in equity.
D) Statement of cash flows.
E) Statement of comprehensive income.

Question 80

A company made an error in calculating and reporting depreciation expense in 2011. The error was discovered in 2012. The item should be reported as a prior period adjustment:

A) on the 2011 statement of changes in equity.
B) on the 2011 income statement.
C) on the 2012 statement of changes in equity.
D) on the 2012 income statement.
E) accounted for with a cumulative "catch-up" adjustment.