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Accounting 111 > Chapter 13: Intro to Corporations > Flashcards

Chapter 13: Intro to Corporations Flashcards

1
Q

What is a corporation?

A

A legal entity that is separate from its owners, who are known as shareholders

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2
Q

Corporations are classified by…

A

1) Purpose: Profit or non-profit organization
2) Ownership: Public or private corporation

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3
Q

What is a public corporation?

A

A corporation whose shares are available for purchase on an organized securities market

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4
Q

What is a private corporation?

A

A corporation whose shares are held by a few individuals and are not traded

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5
Q

What are characteristics of a corporation?

A

1) Separate legal existence:
- Acts under its own name
- May buy, own, and sell property
- Owners do not bind the corporation
- Pays income tax as a separate legal entity

2) Limited liability of shareholders
- Liability of each shareholder is limited to the amount of their investment

3) Transferrable ownership rights
- Shares may be bought or sold
- Has no effect on operating activities of corporation

4) Ability to acquire capital
- Can raise capital by issuing shares
- Only small amounts of money need to be invested
- May be difficult to reacquire capital for private corporations

5) Continuous and unlimited life
- Unaffected be change in ownership

6) Government regulations
- Specific laws that govern the operations of corporations (e.g. issuing shares, distributing income, etc. )

7) Income tax
- Taxed as a separate entity
- Lower income tax rates
- Profit is reported on the partner’s personal income tax return

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6
Q

What is the disadvantage of corporations?

A

Increased cost and complexity to follow government regulations

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7
Q

How do you form a corporation?

A
  • Can incorporate federally or provincially
  • Done by filing articles of incorporation
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8
Q

What are bylaws?

A

Internal rules and policies for operations

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9
Q

What are organization costs?

A

Costs incurred in the formation of a corporation
(e.g. legal fees, accounting fees, registration costs)

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10
Q

Ownership rights are in the form of…

A

Shares, that can be divided into different classes.

  • Stated in the articles of incorporation
  • Each class has rights and privileges
  • Usually referred to as common and preferred shares
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11
Q

Shareholders have rights…

A

1) To vote on certain matters (e.g. election of board of directors, appointment of external auditors)

2) To dividends: the distribution of profit

3) To remaining assets in a liquidation

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12
Q

How do shareholders manage the corporation?

A

Indirectly through the board of directors that they elect

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13
Q

What do the board of directors do?

A
  • Decides on the corporation’s operating policies
  • Selects officers (e.g. Chief Executive Officer (CEO) ) to execute policy and perform daily management functions
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14
Q

How is profit distributed in corporations?

A

Profit can either be reinvested in the company or distributed to shareholders as dividends

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15
Q

What is a dividend?

A

A distribution of profit by a corporation to its shareholders on a pro rata basis

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16
Q

What is pro-rata?

A

Based on the proportion of shares owned

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17
Q

What is share capital?

A

Amounts paid or contributed to the corporation in exchange for shares of ownership

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18
Q

What is authorized share capital?

A

Total number of each class of shares a corporation is allowed to sell

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19
Q

What is issued shares?

A

The authorized shares that have been sold to investors

20
Q

How can a corporation issue common shares?

A
  • Directly to investors
  • Indirectly through an investment dealer
21
Q

What is the initial public offering?

A

The first public sale of a corporation’s shares

22
Q

What happens when the taker value of shares are issued?

A
  • Once issued, shares trade on a secondary market
  • Prices are determined by buyers and sellers and other external factors
23
Q

What is legal capital?

A

The share capital that must be retained in the business for the protection of corporate creditors

24
Q

What is the difference between share capital and retained earnings?

A

1) Share capital is legal capital and cannot be distributed to shareholders

2) Retained earnings are earned capital and can be distributed to shareholders as dividends

25
Q

What is no par value shares?

A

Share capital that has not been given a specific value. All proceeds from the sale are treated as legal capital

26
Q

What are common shares?

A

Shares whose owners have the right to:

  • Vote on the election of the board of directors
  • Share in the distribution of profit through dividends
  • Share any assets that remain after liquidation
  • Corporation has only one class of shares
27
Q

Under IFRS, what do you do if the fair value of goods/services is not measurable?

A

Use fair value of shares given in exchange

28
Q

Under ASPE, what do you do fair value of goods/services is not measurable?

A

Value the transaction at the amount that can be more reliably measured

29
Q

What are preferred shares?

A

Shares that have a priority over common shares for dividends be assets in the event of liquidation of the company

30
Q

What are the characteristics of preferred shares?

A
  • Generally have no vote
  • Entries to record issue and reacquisition of preferred shares is similar to common shares
  • Annual dividend rate is specified in the articles of incorporation
  • Transactions for each class of share is recorded in a separate account
31
Q

What do cumulative preferred shares have a right to?

A

The current year’s dividends and any prior year’s dividends owing before dividends are paid on common shares

32
Q

What are dividends in arrears?

A

Dividends on cumulative preferred shares that were not declared

33
Q

What are non cumulative shares?

A

Preferred shares that are entitled to the current dividend, but not to any unpaid amounts from previous years. Shares are gone if not paid

34
Q

What are convertible preferred shares?

A

Preferred shares that the shareholder can convert into common shares at a specific ratio

35
Q

What are retained earnings?

A

The cumulative total of profit less losses and less declared dividends since incorporation.

It represents part of a shareholder’s claim on total assets of a corporation, not a claim on any specific asset (including cash)

Two major components on the statement: Profit and dividends

36
Q

What’s one major difference for a corporation’s income statement?

A

Income tax. Because a corporation is a separate legal entity. It affects the income statement and balance sheet

37
Q

What are cash dividends?

A

Distribution of cash on a pro rata basis to shareholders

38
Q

What are stock dividends?

A

Distribution of the corporation’s own shares to shareholders (normally common shares)

39
Q

To pay dividends, a corporation must…

A

1) Have enough retained earnings and cash

2) Maintain legal capital

3) Declare a dividend payable

40
Q

What are the three important dates for dividends?

A

1) Declaration date
- Board of directors formally declares dividend
- Commits corporation to a legal obligation

2) Record date
- Ownership of shares is determined
- Shareholders of record on this date will record dividends
- No journal entry required

3) Payment date
- Dividend is paid to shareholders and recorded

41
Q

Are dividends in arrears considered a liability?

A

Dividends in arrears are not considered a liability. No obligation to pay dividend until board of directors declared. It is disclosed in the notes to financial statements

42
Q

What does the statement of retained earnings show?

A

The statement of retained earnings show the changes in retained earnings during the year. It is required under ASPE.

43
Q

What are transactions that affect retained earnings?

A
  • Earning a profit
  • Declaring cash and stock dividends
  • Other transactions
44
Q

What is contributed capital?

A

The total amount contributed by shareholders

45
Q

What is share capital?

A

Consists of preferred and common shares

46
Q

What is contributed surplus?

A

Amounts contributed from acquiring and retiring shares

47
Q

What is return on equity and how is it calculated?

A

Return on equity evaluates how many dollars are earned for each dollar invested by shareholders.
It is considered to be the most important measure of a firm’s profitability

Profit / Average Shareholder’s Equity = Return on Equity

Accounting 111 (10 decks)

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