chapter 11

Question 1

what is a corporation

Answer 1

is a separate legal entity, it is distinct from its owners (shareholders) and has rights and privileges of a legal person

Question 2

what is a public corporation

Answer 2

: A public corporation is one where anyone can buy shares on the open market.
A public corporation will normally have many shareholders (could be thousands)
A public corporation will have to use IFRS

Question 3

what is a private corporation

Answer 3

A private corporation is one where the shares will not be traded on the open market.
Normally only has a few close shareholders
A private corporation has the option to use either IFRS or ASPE

Question 4

what are the advantages of a corporation

Answer 4

• limited liability of shareholders: shareholders cannot lose more money than they have invested in the corporation.
• continuous life: the corporation will continue to exist even upon shareholders death.
• Income tax: a corporation will pay corporate income tax as a separate entity. There is typically a lower tax rate compared to individual tax rate.
  can transfer rights of ownership
  ability to acquire capital (cash) by issuing shares
  separation of management and onwership

Question 5

transferable ownership rights

Answer 5

it is generally easy to transfer the ownership rights (shares).
Transactions between two independent investors do not affect the corporation’s accounting records.
Shares (stocks) are actively traded in the market so are easy to acquire

Question 6

corporation management

Answer 6

The owners (shareholders) do not have to manage the firm directly. They will appoint a Board of Directors who then hires CEO and Executives.

Question 7

what are disadvantages of a corporation

Answer 7

corporations, especially public ones, must follow certain government regulations.
More monitoring by security commissions
Financial reporting and disclosure requirements
Generally, this will result in increased costs

Question 8

what are the rights of shareholders

Answer 8

vote to elect the board of directors
share the corporate earnings through dividends
share in assets upon liquidation in proprtion to their holdings (residual claim)

Question 9

what is share capital

Answer 9

After a corporation is incorporated, the ownership will be sold in the form of shares, which can have different characteristics and will be referred to as the share capital

Question 10

what are authorized shares

Answer 10

are the maximum number of shares of capital stock that can be sold to the public. could be unlimited or specified

Question 11

does the authorization of share capital result in a journal entry

Answer 11

no, only if you sell a share

Question 12

what is initial public offering (IPO)

Answer 12

the initial offering of a corporations shares to the public

Question 13

what are issued shares

Answer 13

are authorized shares of stock that have been sold. These include both outstanding shares (owned by investors) and treasury shares (repurchased by the company).

Question 14

what are unissued shares

Answer 14

are authorized shares of stock that never have been sold

Question 15

The number of authorized shares

Answer 15

limited or unlimited (mostly unlimited) and authorized shares are not recorded, disclosed only.

Question 16

how are shares issued

Answer 16

The first stock issuance normally through initial public offering (IPO)
Share price is set by the company
Second time and on – referred to as a Seasoned equity offering (SEO)

Question 17

what is FMV

Answer 17

Once issued, shares of publicly held companies trade on organized exchanges at the fair value (FMV) – share price is determined by market forces.

Question 18

what is market capitalization

Answer 18

: a measure of the FMV of the corporation’s total equity. Calculated by multiplying the total shares outstanding to the FMV on a given date.

Question 19

what are common shares

Answer 19

all corporations have common shares. These are the shares that will normally control the corporation as they have voting rights. When you own common shares of a company, you become a shareholder and have a claim on its assets and earnings

Question 20

how do you issue for common shares

Answer 20

debit cash
credit common shares

Question 21

When a public company’s shares are issued for a noncash consideration

Answer 21

they should be recorded at the fair value of the consideration received (record at the value of the object you are getting)

Question 22

what are preferred shares

Answer 22

: these are optional and will have some special (optional) features

Question 23

what are the features of preferred shares

Answer 23

Dividend preference and liquidation preference
Other preference: convertible to common shares, retractable (shareholder option), redeemable (company option)
Normally do not have voting rights
Price will normally be less volatile

Question 24

how are preferred shares normally issued

Answer 24

will normally be issued with a specified dividend rate

Question 25

what is a dividend preference

Answer 25

preferred shareholders must be paid dividends before any are paid to the common shareholders

Question 26

what are the two types of dividends preference

Answer 26

Cumulative: when dividends are declared, preferred shareholders must be paid both current year dividends and any unpaid prior year dividends. Noncumulative: if dividends are not declared in a year, these are lost forever.

Question 27

what are dividends in arrears

Answer 27

Dividends that were not declared on cumulative preferred shares during a period. NOT A LIABILITY

Question 28

what are redeemable preferred shares

Answer 28

where the issuing corporation has the option to buy back the shares from shareholders at specific future dates and prices. This feature gives the corporation flexibility because it allows them to eliminate these shares when it's financially beneficial. In Canada, most preferred shares come with this redeemable feature, providing companies with a tool to manage their capital structure effectively.

Question 29

what are retractable preferred shares

Answer 29

The shareholder has the right to require the company to repurchase shares at specified future dates and prices

Question 30

similarities between common shares and preferred shares

Answer 30

Both are equity instruments on which dividends may be declared and paid.There is no legal requirement for a company’s board of directors to declare dividends on either type of share.

Question 31

differences between common shares and preferred shares

Answer 31

Preferred shareholders do not have the right to vote at annual general meetings. Preferred shares have preferences over common shareholders with regard to dividend payments. Preferred shareholders have a priority claim over the company’s assets upon liquidation. While both types of shares have the potential for price appreciation, the prices for preferred shares tend to be less volatile than for common shares because any income not distributed through dividends accrues to the common shareholders, as do any losses

Question 32

how are the shares issued

Answer 32

, for cash or noncash consideration

Question 33

why does a company repurchase shares

Answer 33

Increase trading price on securities markets Reduce number of shares issued (increases earnings per share and return on common shareholders’ equity) Buyout hostile shareholders Have shares available for CEO compensation or other uses

Question 34

When you are recording the entry for the repurchase of shares or the retirement, what are the steps

Answer 34

Removing the cost of the shares from the share capital account Based on the average share price (calculated right before the repurchase by dividing the share capital account by the total number of related shares) Recording cash paid – credit to cash account Recording a gain or loss on the reacquisition Will not be reported on the income statement Will impact the contributed surplus or retained earnings account, depending on if it is a gain or loss

Question 35

If the shares are repurchased for an amount below their average cost

Answer 35

they have essentially been repurchased for a “gain” . debit to common shares, credit cash, credit contributed surplus

Question 36

what is contributed surplus

Answer 36

A source of contributed capital that can result from certain types of equity transactions, including the reacquisition of shares

Question 37

contributed surplus formula

Answer 37

average cost- cash paid

Question 38

If the shares are repurchased for an amount above their average cost,

Answer 38

they have essentially been repurchased for a “loss” . debit common shares, de bit contributed surplus, debit retained earnings, credit cash

Question 39

what is a dividend

Answer 39

is a pro-rata distribution of a portion of the corporation’s retained earnings to shareholders

Question 40

does a company have ti pay dividends

Answer 40

no

Question 41

For a corporation to declare and pay a cash dividend, it must meet a two-part solvency test under the Canada Business Corporations Act

Answer 41

The company must have sufficient cash or resources to be able to pay their liabilities as they become due after the dividend is declared and paid. The net realizable value of the assets must exceed total of liabilities and share capital. have to argue that the company will be in a good financial position after they pay dividends

Question 42

what is a cash dividend

Answer 42

most common form of dividends. a cash dividend decreases assets (through the Cash account) and shareholders’ equity (through the Retained Earnings account)

Question 43

who can a cash dividend be paid to

Answer 43

preferred or common shareholders

Question 44

formula for retained earnings at thee nd of the period

Answer 44

re at beginning+ net income- dividends declared

Question 45

what is a stock dividend

Answer 45

when a corporation distributes some of their own shares to shareholders instead of cash.

Question 46

what is a stock split

Answer 46

technically not a dividend but is like a stock dividend in the sense that additional shares are issued to existing shareholders.

Question 47

what Is a stock splits main purpose

Answer 47

to increase the marketability of the shares by lowering the share price.

Question 48

what is the declaration date

Answer 48

the date the company directors decide to issue a dividend. This is the date a legal obligation is created.

Question 49

what is the record date

Answer 49

the date the ownership of shares is determined. That means that whoever owns the shares on that date will be entitled to receive the dividend paymen

Question 50

what is the payment date aka distribution date

Answer 50

the date the payment is made to shareholders.

Question 51

what is a stock dividend

Answer 51

a distribution of the corporation’s own shares instead of cash to the shareholders. a percentage and the company gets the percentage more. a stock dividend does not change assets, liabilities, or total shareholders’ equity.

Question 52

A company may distribute a stock dividend for the following reasons:

Answer 52

Satisfy shareholders’ dividend expectations without paying cash. Increase marketability of shares (a higher number of shares will decrease the share price on the market, which makes the shares more affordable). To show that a portion of shareholders’ equity has been reinvested in the legal capital of the business (so is unavailable for future cash dividends).

Question 53

what are the main components of equity

Answer 53

contributed capital and retained earnings

Question 54

what does contributed capital include

Answer 54

Share capital: preferred and common shares Contributed Surplus: amounts contributed from acquiring and retiring shares

Question 55

Accumulated other comprehensive income (AOCI

Answer 55

This type of equity only exists under IFRS.

Question 56

The year end balance formula

Answer 56

beginning AOCI +/- other comprehensive income (loss) = ending AOCI.

Question 57

what is the payout ratio

Answer 57

The payout ratio measures the percentage of profit distributed in the form of cash dividends to common shareholders

Question 58

what is the formula for payout ratio

Answer 58

cash dividends declared ➗ net income.

Question 59

To determine if a higher than average ratio is good or bad

Answer 59

, it depends on a combination of investors strategy/company policy:

Question 60

what is higher than average

Answer 60

investors that value dividend income over growth in share price will prefer this company.

Question 61

what is lower than average

Answer 61

investors that value growth in share price over dividend income will prefer this company.

Question 62

what is the dividend yield

Answer 62

yield is a measure of the shareholders return on their investment

Question 63

what is the dividend yield formula

Answer 63

Dividends declared per share ➗ Market price per share

Question 64

how do you know if a higher or lower ratio is better for dividend yield

Answer 64

depends on investors

Question 65

what is the basic earnings per share

Answer 65

income earned on a per share basis.

Question 66

how to calucate basic earnings per share

Answer 66

Net income available to common shareholders ➗ Weighted average number of common shares

Question 67

is it better to have a higher basic earnings per share

Answer 67

yes

Question 68

when is basic earnings per share not useful

Answer 68

is not a useful comparison between companies as all companies will have a different number of shares outstanding. (comparing different companies )

Question 69

what is return on equity

Answer 69

Measures the company’s profitability from the shareholders’ viewpoint

Question 70

what is the formula for return on equity

Answer 70

Net income available to common shareholders ➗ Average common shareholder’s equity. can compare with other companies

Question 71

is it better to have a higher return on equity?

Answer 71

yes

Question 72

advantages of debt financing

Answer 72

The ownership of current shareholders remains the same and are not decreased or diluted by new equity from new shareholders. Interest is a deductible expense for tax purposes and dividends are not.

Question 73

advantages of equity financing

Answer 73

Dividends are discretionary and not legally binding if not declared vs interest payments that are legally binding. Funds received from shareholders do not have to be returned to shareholders unless company is liquidated. Loan must be repaid to creditors.