Deck 11: Corporations: Organization, Share Transactions, Dividends, and Retained Earnings

Question 1

A shareholder of ordinary shares has the right to vote in the election of the board of directors.

Answer 1

True

Question 2

Corporations can pay dividends out of share capital in most countries.

Answer 2

False

Question 3

The par value of ordinary shares must always be equal to its fair value on the date the shares are issued.

Answer 3

False

Question 4

When no-par value shares do not have a stated value, the entire proceeds from the issuance of the shares becomes legal capital.

Question 5

If a corporation pays taxes on its income, then shareholders will not have to pay taxes on the dividends received from that corporation.

Question 6

In most countries, a corporation's creditors' claim can only be paid out of that corporation's assets.

Question 7

A corporation acts under its own name rather than in the name of its shareholders.

Question 8

As soon as a corporation is authorized to issue shares, an accounting journal entry should be made recording the total value of the shares authorized.

Question 9

A privately traded corporation would be traded on a national securities exchange such as the London Stock Exchange.

Question 10

The acquisition of treasury shares by a corporation increases total assets and total equity.

Question 11

A proxy is a legal document that instructs a shareholder's agent how to vote shares for the shareholder.

Question 12

When no-par ordinary shares that have a stated value are issued, the stated value is credited to Share Capital-Ordinary.

Question 13

In the United States, a corporation must be incorporated in each state in which it does business.

Question 14

A corporation is not an entity which is separate and distinct from its owners.

Question 15

Ownership rights of a shareholder include the right to be involved in the daily operations of the corporation.

Question 16

The par value of shares issued for noncash assets is never a factor in determining the cost of the assets received.

Question 17

Treasury shares purchased for $25 per share that are reissued at $20 per share, result in a Loss on Sale of Treasury Shares being recognized on the income statement.

Question 18

The fair value of a corporation's shares is determined by the number of shares that the corporation has been authorized to issue.

Question 19

Ownership rights in a corporation are evidenced by ordinary shares.

Question 20

A corporation can be organized for the purpose of making a profit or it may be not-for-profit.

Question 21

The priorities associated with preference shares include the right to vote before the ordinary shareholders.

Question 22

Dividends in arrears on cumulative preference shares are considered a liability.

Question 23

The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.

Question 24

Cash dividends are not a liability of the corporation until they are declared by the board of directors.

Question 25

Prior period adjustments to income are reported in the current year's income statement.

Question 26

Preference shareholders have the right to receive assets in the event of liquidation before the ordinary shareholders.

Question 27

Unpaid dividends on non-cumulative preference shares are called dividends in arrears.

Question 28

The number of ordinary shares outstanding can never be greater than the number of shares issued.

Question 29

Retained earnings that are restricted are unavailable for dividends.

Question 30

A debit balance in the Retained Earnings account is identified as a deficit.

Question 31

Net income of a corporation should be closed to retained earnings and net losses should be closed to the share premium account.

Question 32

A correction in income of a prior period involves either a debit or credit to the Retained Earnings account.

Question 33

Net losses reduce the balance of Share Capital-Ordinary.

Question 34

A 3-for-1 ordinary share split will increase total equity but reduce the par or stated value per share.

Question 35

Treasury Shares is a contra equity account.

Question 36

Preference shares have contractual preference over ordinary shares in certain areas.

Question 37

Dividends may be declared and paid in cash or shares.

Question 38

Preference shareholders generally do not have the right to vote for the board of directors.

Question 39

Retained earnings represents the amount of cash available for dividends.

Question 40

When treasury shares are purchased, the cost is debited to Share Capital - Ordinary.

Question 41

The term "reserves" is used for forms of equity other than that contributed by shareholders.

Question 42

The cash proceeds from issuing par value shares may be equal to or greater than, but not less than par value.

Question 43

Restricted retained earnings are available for preference share dividends but unavailable for ordinary share dividends.

Question 44

Return on ordinary shareholders' equity is computed by dividing net income by ending ordinary shareholders' equity.

Question 45

The cost of a noncash asset acquired in exchange for ordinary shares should be either the fair value of the consideration given up, or the fair value of the consideration received, whichever is more clearly determinable.

Question 46

A book value per ordinary share is the same amount as the market value per share.

Question 47

Which one of the following is a privately held corporation?

A) Intel
B) General Electric
C) Caterpillar Inc.
D) Cargill Inc.

Question 48

Ordinary Share Dividends Distributable is shown in the equity section of the statement of financial position.

Question 49

The share capital category on the statement of financial position includes both preference and ordinary shares.

Question 50

Ordinary Share Dividends Distributable is reported as share premium in the equity section.

Question 51

A dividend declared out of share capital or share premium is termed a liquidating dividend.

Question 52

The dominant form of business organization in the United States in terms of dollar sales volume, earnings, and employees is

A) the sole proprietorship.
B) the partnership.
C) the corporation.
D) not known.

Question 53

A detailed equity section in the statement of financial position will list the names of individuals who are eligible to receive dividends on the date of record.

Question 54

Shareholders of a corporation directly elect

A) the president of the corporation.
B) the board of directors.
C) the treasurer of the corporation.
D) all of the employees of the corporation.

Question 55

A statement of changes in equity shows the changes in each equity account and in total that have occurred during the year.

Question 56

Under the corporate form of business organization

A) a shareholder is personally liable for the debts of the corporation.
B) shareholders' acts can bind the corporation even though the shareholders have not been appointed as agents of the corporation.
C) the corporation's life is stipulated in its charter.
D) shareholders wishing to sell their corporation shares must get the approval of other shareholders.

Question 57

The chief accounting officer in a company is known as the

A) controller.
B) treasurer.
C) vice-president.
D) president.

Question 58

Organization costs are capitalized by debiting an intangible asset entitled Organization Costs.

Question 59

Under the cost method, Treasury Shares is debited at the price paid to reacquire the shares, and the same amount is credited to Treasury Shares when the shares are sold.

Question 60

A prior period adjustment is reported as an adjustment of the beginning balance of Retained Earnings.

Question 61

Which of the following is not true of a corporation?

A) It may buy, own, and sell property.
B) It may sue and be sued.
C) The acts of its owners bind the corporation.
D) It may enter into binding legal contracts in its own name.

Question 62

What is ordinarily the first step in the formation of a corporation in the United States?

A) Development of by-laws for the corporation
B) Issuance of the corporate charter
C) Application for incorporation to the appropriate Secretary of State
D) Registration with a government agency

Question 63

A factor which distinguishes the corporate form of organization from a sole proprietorship or partnership is that a

A) corporation is organized for the purpose of making a profit.
B) corporation is subject to government taxes.
C) corporation is an accounting economic entity.
D) corporation's temporary accounts are closed at the end of the accounting period.

Question 64

If a corporation has only one class of shares, it is referred to as

A) classless shares.
B) preference shares.
C) solitary shares.
D) ordinary shares.

Question 65

Which one of the following would not be considered an advantage of the corporate form of organization?

A) Limited liability of owners
B) Separate legal existence
C) Continuous life
D) Government regulations

Question 66

A corporate board of directors does not generally

A) select officers.
B) formulate operating policies.
C) declare dividends.
D) execute policy.

Question 67

A typical organization chart showing delegation of authority would show

A) shareholders delegating to the board of directors.
B) the board of directors delegating to shareholders.
C) the chief executive officer delegating to the board of directors.
D) the controller delegating to the chief executive officer.

Question 68

Which of the following statements reflects the transferability of ownership rights in a corporation?

A) If a shareholder decides to transfer ownership, he must transfer all of his shares.
B) A shareholder may dispose of part or all of his shares.
C) A shareholder must obtain permission from the board of directors before selling shares.
D) A shareholder must obtain permission from at least three other shareholders before selling shares.

Question 69

The officer who is generally responsible for maintaining the cash position of the corporation is the

A) controller.
B) treasurer.
C) cashier.
D) internal auditor.

Question 70

The term residual claim refers to a shareholders' right to

A) receive dividends.
B) share in assets upon liquidation.
C) acquire additional shares when offered.
D) exercise a proxy vote.

Question 71

The concept of an "artificial being" refers to which form of business organization?

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

Question 72

The two ways that a corporation can be classified by ownership are

A) publicly held and privately held.
B) share and non-share.
C) inside and outside.
D) majority and minority.

Question 73

The two ways that a corporation can be classified by purpose are

A) general and limited.
B) profit and not-for-profit.
C) local and national
D) publicly held and privately held.

Question 74

If an investment banking firm underwrites a share issue, the

A) risk of being unable to sell the shares stays with the issuing corporation.
B) corporation obtains cash immediately from the investment firm.
C) investment firm has guaranteed profits on the sale of the shares.
D) issuance of shares is likely to be directly to creditors.

Question 75

The ability of a corporation to obtain capital is

A) enhanced because of limited liability and ease of share transferability.
B) less than a partnership.
C) restricted because of the limited life of the corporation.
D) about the same as a partnership.

Question 76

Which one of the following is not an ownership right of a shareholder in a corporation?

A) To vote in the election of directors
B) To declare dividends on the ordinary shares
C) To share in assets upon liquidation
D) To share in corporate earnings

Question 77

Which of the following factors does not affect the initial market price of shares?

A) The company's anticipated future earnings
B) The par value of the shares
C) The current state of the economy
D) The expected dividend rate per share

Question 78

Which of the following would not be true of a privately held corporation?

A) It is sometimes called a closely held corporation.
B) Its shares are regularly traded on a National securities exchange.
C) It does not offer its shares for sale to the general public.
D) It is usually smaller than a publicly held company.

Question 79

Which of the following statements is not considered a disadvantage of the corporate form of organization?

A) Additional taxes
B) Government regulations
C) Limited liability of shareholders
D) Separation of ownership and management

Question 80

Ed Tresh has invested $400,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Tresh stand to lose?

A) Up to his total investment of $400,000.
B) Zero.
C) The $400,000 plus any personal assets the creditors demand.
D) $200,000.