chapter 11

Question 1

is a corporation a separate legal entity?

Answer 1

yes it is distinct and separate from its owners and has most of the rights and privileges of a person

Question 2

can a corporation be public or private?

Answer 2

yes it can be public or private

Question 3

what is a public corporation?

Answer 3

a corporation that has many shareholders and shares are publicly traded

Question 4

what is a private corporation?

Answer 4

a corporations that has few shareholders and shares are closely held and not traded

Question 5

what are the 8 characteristics?

Answer 5

separate legal existence
limited liability of shareholders
transferable ownership rights
ability to acquire capital easily
continuous life
corporation management
government regulations
income tax

Question 6

what are the 7 advantages of a corporation?

Answer 6

separate legal entity
limited liability of shareholders
ease of transferring ownership rights (shares)
ability to acquire capital by issuing shares
continuous life
separation of management and ownership
potential for reduced income tax

Question 7

what are the 2 disadvantages of a corporation?

Answer 7

increased cost and complexity to follow government regulations

increased reporting and discourse requirements

Question 8

why do corporations issue shares?

Answer 8

to raise capital they sell ownership rights in the form of shares

Question 9

what are the 2 kinds of shares?

Answer 9

common (ordinary) shares
preferred shares

Question 10

what are the 3 benefits of owning shares?

Answer 10

rights in voting (varies depending on the share)

dividends (preferred shares have priority)

liquidation (preferred shares have priority over common)

Question 11

what is authorized shares?

Answer 11

maximum amount of shares corporations are allowed to sell, this could be limited to a number or could have unlimited authorized shares

Question 12

are authorized shares recorded?

Answer 12

no, they are only disclosed

Question 13

what are issued shares?

Answer 13

number of shares sold

Question 14

how are issued shares disclosed on financial statements?

Answer 14

on the statement of financial position as SHE, they are recorded as the dollar amount the company received when they sell at IPO

Question 15

are issued shares recorded at market value?

Answer 15

no they are recorded at amount they sold for at IPO

Question 16

what is share capital?

Answer 16

money that has been acquired through issuing shares

Question 17

can share capital be distributed to share holders through dividends?

Answer 17

no, only retained earnings can be used to distribute dividends

Question 18

what is the initial issue of shares called?

Answer 18

an initial public offering (IPO)

Question 19

what price are shares sold at when a company IPOs?

Answer 19

at the share price set by there company

Question 20

once shares are issued, where are shares traded?

Answer 20

on organized exchanges at prices established between buyers and sellers for the fair value of shares (market price)

Question 21

what is share capital?

Answer 21

the amount that shareholders have paid to the corporation for their shares

Question 22

what does the journal entry look like for shares issued for cash?

Answer 22

dn cash
cr common shares

Question 23

can shares be used as a form of payment?

Answer 23

yes they can be used in exchange for services or non cash assets

Question 24

how does IFRS record using shares as a form of payment?

Answer 24

they are recorded at cash equivalent of price ideally the fair value of consideration

Question 25

how does ASPE record using shares as a form of payment?

Answer 25

fair value of shares given up or fair value of consideration received (whatever is most reliable)

Question 26

what are the 5 reasons to repurchase common shares?

Answer 26

distribute cash to shareholders increasing trading on securities market reduce number of shares issued (increase earnings per share and return on common shareholders equity) buyout hostile shareholders have shares available for compensation or other users

Question 27

what are repurchased shares?

Answer 27

shares that a corporation owns that had been previously issued and later reacquired by the corporation

Question 28

once repurchased shares are retired or cancelled by the corporation, how does that impact their share capital account?

Answer 28

it will be removed from the share capital account

Question 29

what are the 3 steps in the repurchase of common shares?

Answer 29

remove cost of shares from share capital account record the cash paid record the gain or loss on repurchase

Question 30

what are the 4 preferential features of preferred shares?

Answer 30

specified dividend rate dividend preference over common share holders liquidation preference other preferences

Question 31

what are 3 other preferences of preferred shares?

Answer 31

conversion privilege redeemable/ callable retractable

Question 32

what are dividends?

Answer 32

an equal distribution of a portion of a corporations retained earnings to its shareholders

Question 33

what are the 2 kinds of dividends?

Answer 33

cash dividends stock dividends

Question 34

what is the most common dividend type?

Answer 34

cash dividends

Question 35

what are the 2 things that must happen for a cash dividend to occur?

Answer 35

a corporation must meet a two-part solvency test a corporation must effect a formal declaration of dividends by board directors

Question 36

once dividends are declared, what kind of account are they?

Answer 36

a liability

Question 37

what are the 3 important dates in connection with dividends?

Answer 37

declaration date record date payment date

Question 38

what is the declaration date?

Answer 38

date obligation of cash dividend is recognized and the board of directors formally authorizes the cash divided and commits the corporation to a binding legal obligation

Question 39

would would the journal entry look like on declaration date?

Answer 39

dn dividends declared cr dividends payable

Question 40

how is the record date journalized?

Answer 40

it is not

Question 41

what is the journal entry like on the payment date of dividends?

Answer 41

dn dividends payable cr cash

Question 42

what is a stock dividend?

Answer 42

when the dividends are paid in shares

Question 43

how would the share price be determined for stock dividends?

Answer 43

the stocks are are valued at then fair value at the declaration date

Question 44

how do stock dividends impact assets liabilities or SHE?

Answer 44

it does not change change assets, liabilities or SHE

Question 45

what is the purpose of stock dividends?

Answer 45

to satisfy shareholders dividend expectation without spending cash increase marketability of the shares by decreasing the market price per share reinvest and restrict a portion of shareholders equity

Question 46

what is a stock split?

Answer 46

when the issue of additional shares to shareholders according to their percentage ownership, the shareholders get their shares doubled but the price falls in half

Question 47

what is the primary purpose of a stock split?

Answer 47

to increase marketability of shares by lowering the share price

Question 48

how does a stock split impact total share capital, retained earnings and total shareholders equity?

Answer 48

it does not impact any of those

Question 49

how is a stock split journalized?

Answer 49

no they are not

Question 50

what are the 2 dividend record performance ratios?

Answer 50

payout ratio dividend ratio

Question 51

what are the 2 earnings performance ratios for measuring corporate performance?

Answer 51

basic earnings per share return on common shareholders equity

Question 52

what does the payout ratio measure?

Answer 52

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

Question 53

what is the payout ratio formula?

Answer 53

payout ratio= cash dividends declared/ net income

Question 54

what is good for the payout ratio?

Answer 54

higher is better if an investor is looking for short term income lower is better if investors are looking for long term share price increases

Question 55

what does dividend yield measure?

Answer 55

measures the profit generated by each share based on the market price of the shares

Question 56

what is the dividend yield formula?

Answer 56

dividend yield= dividend declared per share/ market price per share

Question 57

what is good for dividend yield ratio?

Answer 57

higher is better if investor is looking for short term income lower is better if investor is looking for the price of the shares to increase

Question 58

what does basic earnings per share measure?

Answer 58

the income earned by each common share

Question 59

what is the basic earnings per share ratio formula?

Answer 59

basic EPS= income available to common share holders/ weighted average of # of common shares

Question 60

how do you find the net income available to common shareholders?

Answer 60

net income- less preferred dividends

Question 61

can the basic EPS be used to compare 2 companies?

Answer 61

no it can only be used to compare year after year for the same company

Question 62

what is weighted average of number of common shares?

Answer 62

shares issued during the year X the faction of the year they are outstanding (example on slide 43 ppt11)

Question 63

what does return on common shareholders equity measure?

Answer 63

the companies profitability form the shareholders viewpoint (how many dollars were earned for each dollar invested by common shareholders)

Question 64

what is the formula for return on common shareholders equity?

Answer 64

return on common SHE= income available to common SHE/ common shareholder equity

Question 65

how do you fund common share holder equity?

Answer 65

total shareholder equity - legal capital of preferred shares