Volume 1- Chapter 11 Flashcards
Define the three types of business structures.
- Sole Proprietorship 2. Partnership 3. Corporation
Each structure has distinct legal, tax, and operational implications.
What is a corporation?
A distinct legal entity separate from its shareholders that can sue or be sued
Property acquired by the corporation belongs to the corporation, not the shareholders.
What is the liability of shareholders in a corporation?
Limited to the amount they invested in the corporation’s common shares
Shareholders are not personally liable for the corporation’s debts.
What happens to a corporation if a shareholder dies?
The corporation’s existence is not affected
Unlike sole proprietorships and partnerships, a corporation continues regardless of shareholder changes.
What are the advantages of incorporation?
- Limited shareholder liability * Continuity of existence * Transfer of ownership * Ability to finance * Growth * Professional management
These advantages make corporations suitable for larger business ventures.
What are the disadvantages of incorporation?
- Inflexibility * Double taxation * Expense * Capital withdrawal procedures
Disadvantages can complicate corporate operations and profitability.
Define private corporations.
Corporations with restricted share transfer rights and a maximum of 50 shareholders
Private corporations cannot invite the public to subscribe for their securities.
Define public corporations.
Companies whose shares are listed on a stock exchange or traded over the counter
Public corporations have more regulatory requirements than private ones.
What are corporate by-laws?
Rules that govern the conduct of the corporation, prepared at incorporation
By-laws address issues such as meetings, director qualifications, and dividend payments.
What voting rights do common shareholders have?
Vote on company matters, including board elections and major corporate changes
Shareholders can influence decisions such as mergers and executive compensation.
What is a proxy in the context of shareholder meetings?
A member of management authorized to vote on behalf of a shareholder
Shareholders often use proxies to vote if they cannot attend meetings.
What is a voting trust?
An agreement where shareholders deposit their shares with a trustee for voting control
Used during corporate restructuring to protect financial investments.
Describe the responsibilities of corporate directors.
- Set company policies * Appoint and supervise officers * Declare dividends and issue shares * Act in the best interests of the corporation
Directors can be personally liable for illegal acts done with their knowledge.
What are the key components of financial statements?
- Statement of Financial Position 2. Income Statement 3. Statement of Cash Flows
These components provide a comprehensive overview of a corporation’s financial health.
What does the statement of financial position show?
A company’s financial position on a specific date
Also known as the balance sheet, it lists assets, liabilities, and equity.
What accounting standards has Canada adopted for public companies?
International Financial Reporting Standards (IFRS)
IFRS promotes transparency and comparability across international financial statements.
Fill in the blank: The possibility of ______ arises when after-tax profits are distributed as dividends.
double taxation
True or False: In a sole proprietorship, the owner is personally liable for all business debts.
True
In a limited partnership, who is liable for business debts?
General partners are personally liable; limited partners are only liable to the extent of their investment
Limited partners cannot participate in daily business operations.
What is the role of the chairman of the board?
Presides over board meetings and influences management
The chairman may also have duties of the president or other officers.
What does the statement of financial position represent?
It shows a company’s financial position on a specific date.
What are the three main components of the statement of financial position?
- Assets
- Equity
- Liabilities
What does equity represent in a company’s financial statements?
It represents the shareholders’ interest in the company.
What is the equation that expresses the relationship between total assets, equity, and liabilities?
Total Assets = Total Equity + Total Liabilities
What is the fiscal year end for banks and trust companies?
October 31
True or False: Total assets are equal to total equity and total liabilities.
True
How are assets classified on a statement of financial position?
- Current
- Non-current
What does non-current assets include?
- Property, plant, and equipment (PP&E)
- Goodwill and other intangible assets
- Investments in associates
What is the definition of property, plant, and equipment (PP&E)?
It consists of land, buildings, machinery, tools, and equipment used in daily operations.
What is depreciation?
It is the loss of value of an asset over time due to wear and tear.
What is the difference between depreciation and depletion?
Depreciation applies to PP&E, while depletion applies to wasting assets in resource extraction.
What is amortization?
It refers to the gradual writing off of intangible assets such as patents or trademarks.
What are the two commonly used methods of calculating depreciation?
- Straight-line method
- Declining-balance method
Fill in the blank: The straight-line method applies an __________ amount to each period.
equal
In the straight-line method, how is the annual depreciation expense calculated?
Annual Depreciation Expense = (Original Value - Residual Value) / Expected Life
What is capitalization in accounting?
It records an expenditure as an asset rather than an expense.
What is goodwill?
It is the probability that a regular customer will continue to do business with a company due to its reputation.
What are intangible assets?
Non-monetary assets that do not have physical substance, such as patents and trademarks.
What does ‘investment in associates’ refer to?
It refers to the degree of ownership a company has in another company, typically at least 20%.
What are current assets?
Assets that will be realized, consumed, or sold within one year.
List examples of current assets.
- Inventory
- Prepaid expenses
- Trade receivables
- Cash and cash equivalents
What is inventory?
Goods and supplies that a company keeps in stock for sale.
How are inventories valued?
At original cost or net realizable value, whichever is lower.
What are the two methods commonly used to determine the value of inventories at original cost?
- Weighted-average method
- First-in-first-out (FIFO) method
In the FIFO method, which costs are assumed to be used or sold first?
Items acquired earliest.
True or False: The weighted-average method uses the average cost of goods purchased over the period.
True
What is the inventory value of the remaining hard drives valued at $150 each?
$150,000
Calculated as 1,000 hard drives × $150
What is the total cost of the hard drives under the weighted-average method?
$275,000
Calculated as (1,000 × $125) + (1,000 × $150)
What is the average cost of the inventory calculated using the weighted-average method?
$137.50
Calculated as $275,000 ÷ 2,000 units
What is the cost of goods sold per hard drive using the weighted-average method?
$137.50
What inventory value is reported on the statement of financial position using the weighted-average method?
$137,500
Calculated as $137.50 × 1,000
What are prepaid expenses?
Payments made for services to be received in the near future
What are examples of prepaid expenses?
- Rents
- Insurance premiums
- Taxes
What do trade receivables represent?
Money owing to a company for goods or services sold
What is the allowance for doubtful accounts?
An estimate of the amount that will not be collected from receivables
How is the net amount of trade receivables shown on the statement of financial position?
Trade receivables minus the allowance for doubtful accounts
What does cash and cash equivalents include?
- Cash on hand
- Funds in bank accounts
- Funds in short-term investments
What does shareholders’ equity represent?
The amount that shareholders have at risk in the business
What is share capital?
The money paid in by shareholders for shares issued by the company
How does retained earnings get affected by company losses?
Losses are deducted from retained earnings, reducing shareholders’ ownership interest
What is non-controlling interest?
The ownership interest outsiders have in a subsidiary company
What are non-current liabilities?
Liabilities that are not due within the current operating cycle
What are examples of long-term debt?
- Mortgages
- Bonds
- Debentures
What do deferred tax liabilities represent?
Income tax payable in future periods due to temporary differences
What are examples of current liabilities?
- Current portion of long-term debt due in one year
- Taxes payable
- Trade payables
- Short-term borrowings
What does the statement of comprehensive income show?
How much money a company earned compared to how much it spent
What does gross profit represent?
The amount remaining after cost of sales is subtracted from revenue
What are the two main sources of income for a company?
- Revenue
- Other income
What is the significance of gross profit percentage?
It indicates the success of merchandising operations compared to competitors
What are examples of general expenses deducted from gross profit?
- Distribution costs
- Administrative expenses
- Other expenses
- Finance costs
What is share of profit of associates?
Income from investments in companies where significant influence exists
What is the equity accounting method?
A method used to capture income from investments with significant influence
What is income tax expense composed of?
- Current tax
- Deferred tax
What is the treatment of share of loss of associates in financial statements?
It is a non-cash item and must be added back to the company’s profit when calculating ratios to show a true picture of the company’s cash profit.
What does income tax expense include?
Both current tax and deferred tax for the time period.
What is the definition of profit in the context of the statement of comprehensive income?
The amount of profit from the year’s operations that may be available for distribution to shareholders.
What items might be included in the other comprehensive income section?
- Actuarial gains and losses on defined benefit plans
- Gains and losses from currency translations relating to the financial statements of a foreign operation.
What does total comprehensive income consist of?
Profit (or loss) plus other comprehensive income.
What is the purpose of the statement of changes in equity?
To record changes to each component of equity, including share capital and retained earnings.
What are retained earnings?
Profits earned over the years that have not been paid out to shareholders as dividends.
What happens to retained earnings when dividends are declared?
Dividends declared during the year are subtracted from retained earnings.
How is total comprehensive income attributed to non-controlling interests calculated?
Total comprehensive income of the company minus total comprehensive income attributable to non-controlling interests.
What does the statement of cash flows show?
How the company generated and spent its cash during the year.
What are the three main headings of the statement of cash flows?
- Operating Activities
- Financing Activities
- Investing Activities.
What accounts are included in net working capital?
- Trade receivables
- Inventories
- Trade payables
- Interest payable
- Taxes payable.
What do cash flows from financing activities include?
Transactions used to finance the company, such as issuing new share capital and repaying debt.
What do investing activities encompass?
Investments made in the company, such as the purchase and disposal of capital assets.
What is the significance of a positive net cash flow?
It indicates that the company is generating more cash than it is spending.
What are the two key components of a company’s annual report?
- Notes to financial statements
- Auditor’s report.
What information is typically found in the notes to financial statements?
- Statement of compliance with IFRS
- Accounting policies used
- Detailed descriptions of fixed assets, share capital, and long-term debt.
What is the role of the auditor’s report?
To express an opinion on the fairness of the company’s financial statements.
What is required for continuous disclosure by public companies?
Periodic financial statements, insider trading reports, and material change reports.
What is a material change?
A change in the business, operations, or capital of an issuer that would reasonably be expected to have a significant effect on the market price or value of its securities.
What rights do investors have regarding the purchase of securities?
- Right of withdrawal
- Right of rescission.
What is the time frame for the right of withdrawal after receiving a prospectus?
Two business days.
What is the right of withdrawal in securities legislation?
Purchasers can withdraw from an agreement to purchase securities within two business days after receipt of a prospectus
Applies to most provinces, notice must be given to the vendor or agent
What can a purchaser do if a distribution is completed without a prospectus?
They may revoke the transaction, subject to time limits
In Quebec, the purchaser can apply for an adjustment of the purchase price
What is the right of rescission?
The right to cancel a completed contract if the prospectus contains a misrepresentation
Action must be brought within applicable time limits
What must a purchaser alleging misrepresentation choose between?
Rescission and damages
Most provinces require this choice
Who may be liable for damages if a prospectus contains a misrepresentation?
Issuers, directors, and anyone who signs a prospectus
Experts like auditors or lawyers are also liable for misrepresentations in their reports
What defences exist against actions for rescission or damages?
Thorough investigation by underwriters or directors and purchaser’s knowledge of the misrepresentation
Legislation imposes limitations on maximum liability and time limits for actions
What is a takeover bid?
An offer to purchase more than 20% of a company’s outstanding voting securities
Must comply with provincial legislation unless exempted
What is required from persons accumulating 10% or more of voting securities?
They must issue a press release immediately
Must include purpose of acquisition and future intentions
What must persons acquiring 5% or more of securities after a formal bid do?
Issue a press release reporting this information
This applies to anyone other than the offeror
Who is considered an insider for disclosure purposes?
Directors, senior officers, and those owning more than 10% of voting rights
Includes subsidiaries and individuals performing similar functions
What must insiders do regarding their trading activities?
Inform relevant securities commissions of their transactions
Reports must detail ownership and control over securities
What are the consequences of failing to file an insider report?
Offences under the acts, usually punishable by a fine
Includes providing false or misleading information
Fill in the blank: A _______ is an offer to purchase from a company’s shareholders more than 20% of the outstanding voting securities.
takeover bid
