Chapter 10: Shareholders’ Equity

Question 1

Explain the edge corporations have over other businesses

Answer 1

They can raise large amounts of capital as investors large and small can participate in ownership

Question 2

Explain the factors related to the edge corporations have on other businesses

Answer 2

• Shares can be purchased in small amounts.
• Ownership interest can easily be transferred through the sale of shares on markets, such as the TSX
• Stock ownership provides investors with limited liability.

Question 3

What are the two primary sources of equity capital?

Answer 3

• Contributed capital
• Retained earnings

Question 4

What is Contributed capital and its two distinct componants

Answer 4

Contributed capital = the amount invested by shareholders

1. Amounts initially received from the sale of shares
2. Contributed surplus that reflects contributions made by shareholders in excess of the amounts credited to share capital accounts.

Question 5

What is retained earnings?

Answer 5

Generations made by the profit-making
activities of the company.

Retained Earnings is the accumulated net earnings since the corporation’s inception, less the accumulated dividends from the corporation since its incorporation

Question 6

What are some benefits of Share ownership

Answer 6

• A voice in management
• Dividends
• Residual claims

Question 7

What is the share benefit of residual claims?

Answer 7

Share holders may receive a proportionate share of the company upon liquidation

Question 8

What are authorized shares?

Answer 8

The maximum number of shares that can be issued, as specified in the charter of the corporation

Question 9

What are issued shares?

Answer 9

The total # of shares the corporation has issue to date

Question 10

What are un-issued shares

Answer 10

of authorized shares that have never been issued to date

Question 11

What are treasury shares

Answer 11

Shares that have been issued to investors then reacquired by the issuing corporation

Question 12

What are outstanding # of shares

Answer 12

of shares currently owned by shareholders
or
# of shares authorized, less un-issued shares, less # of treasury shares

Question 13

What is the Earnings per share ratio?

Answer 13

Answers how profitable a company is

Earnings per share (EPS) = Net earnings available to common shareholders / Average # of common shares outstanding

Question 14

What are the two types of shares companies issue?

Answer 14

Common Shares
Preferred Shares

Question 15

What are Common shares

Answer 15

Basic voting shares issued by a corporation

Question 16

What is Par value?

Answer 16

The nominal value per share established in the charter of a corporation

Question 17

What are no par value shares?

Answer 17

Share that do not have an amount per share specified in the corporation charter

Question 18

What is an Initial public offering (IPO)

Answer 18

Initial sale of a company’s shares to the public

Question 19

What are stock options?

Answer 19

Stock options allow employees to purchase shares from the corporation at a predetermined, fixed price.

Generally lower than price in secondary market

Question 20

What happens when purchase price of shares is less than average issuance price of shares?

Answer 20

the difference is credited to contributed surplus

Common shares (SE) 2,700,000
Cash (A) 2,500,000
Contributed surplus (SE) 200,000

Question 21

What are the key dates of declaration and payment of dividends

Answer 21

The declaration date
The date of record
The payment Date

Question 22

What is the declaration date?

Answer 22

The date when the board of directors approves the divided. When declared it creates dividend liability

Question 23

What is the date of record?

Answer 23

The date in which the corporation prepares a list of current shareholders. Dividend is paid to names on the record date.

Question 24

What is the payment date?

Answer 24

date on which cash is dispersed to pay dividends

Question 25

What is the journal entry on declaration date

Answer 25

Dividends declared (-SE)
Dividends payable (+L)

Question 26

What is the journal entry on date of payment

Answer 26

Dividends payable (-L)
Cash (-A)

Question 27

What are the two fundamental requirements for the payment of a cash dividend

Answer 27

Sufficient retained earnings
Sufficient Cash

Question 28

When does legal obligation to pay dividend happen?

Answer 28

When board of directors declares a dividend.

Question 29

What is the dividend yield ratio?

Answer 29

a measure of percentage return that shareholders earn from dividends

Dividend Yield Ratio = Dividends per share/Market price per share

Question 30

What is a stock dividend?

Answer 30

a distribution of additional shares of a corporations own share capital to its shareholders.

Question 31

How is value of stock dividend calculated?

Answer 31

outstanding shares x percent stock dividend x price per share

Question 32

What are stock splits?

Answer 32

Similar to dividends, the total number of authorized, issued, and outstanding shares are increased by a specified number

EX. 2-for-1 stock split
- Doubles outstanding shares
- Halves issue price per share

Question 33

What are the journal entries for stock dividends?

Answer 33

Dividends declared-Common (SE)
Stock dividend distributable (SE)

Stock dividend distributable (SE)
Common shares (SE)

Question 34

How are Preferred shares different from common shares?

Answer 34

Preferred shares:
- typically do not grant voting rights
- typically have a fixed dividend rate
- are less risky than common shares

Question 35

What are convertible preferred shares?

Answer 35

Shares that may be exchanged for a different series of preferred or common shares of the corporation

Question 36

What are redeemable or callable perferred shares?

Answer 36

Shares that may be repurchased by the corporation at a predetermined price.

Question 37

What are retractable preferred shares?

Answer 37

Shares that may be redeemed at the option of the shareholder for the redemption price

Question 38

What are the two preferred shares dividend preference?

Answer 38

Current Dividend preference
Cumulative Dividend preference

Question 39

What is Cumulative dividend preference?

Answer 39

Any unpaid dividends from previous years must be paid before common dividends are paid

Question 40

What is current dividend preference?

Answer 40

The current preferred dividends must be paid before paying any dividends to common shares

Question 41

When can an adjustment to the beginning balance of retained earnings be made?

Answer 41

When there was a correction of a material accounting error that occurred in a prior period

OR

A change in accounting policy occurred

Question 42

What is Accumulated Other Comprehensive Income (AOCI) (Loss)

Answer 42

An equity item that reflects the financial effect of events that cause changes in SE, other than investments or distributions by shareholders

Question 43

What are the two equity accounts needed in a sole proprietorship?

Answer 43

a capital account
a drawings account

Question 44

What is the purpose of a capital account in a sole proprietorship?

Answer 44

-to record investments by owner
-to accumulate period net earnings or losses

Question 45

What is the purpose of a drawings account in a sole proprietorship?

Answer 45

• to record withdrawals of cash or assets from the business

Question 46

What is a capital account (sole proprietorship)

Answer 46

cumulative total of all investments + earnings - withdrawals of resources

Question 47

What is the difference in accounting between sole proprietorship & partnership?

Answer 47

• Separate capital and drawings accounts must be created for each partner
• After closing process, each partners capital account = cumulative total of investments + partners share of earnings - partners withdrawls