Accounting Chapter 13: Corporations Overview
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Questions and Answers

Which of the following is a characteristic of a corporation?

  • Unlimited lifespan of individual owners
  • Limited liability for shareholders (correct)
  • Only one owner is allowed
  • Direct influence of shareholders on daily operations

What distinguishes a public corporation from a private corporation?

  • Private corporations are required to issue shares to the public.
  • Public corporations have shares traded on a stock exchange. (correct)
  • Public corporations cannot generate profit.
  • Private corporations are managed by a board.

When recording transactions for the issuance of preferred shares, which account is typically credited?

  • Retained Earnings
  • Preferred Shares (correct)
  • Dividends Payable
  • Common Shares

Which of the following best describes retained earnings?

<p>Accumulated profits not distributed to shareholders. (C)</p> Signup and view all the answers

In preparing financial statements for a corporation, which section would primarily include information on shareholders?

<p>Balance Sheet (B)</p> Signup and view all the answers

What is the main purpose of declaring cash dividends?

<p>To share profits with shareholders. (D)</p> Signup and view all the answers

Which of the following accounting entries is correct when a cash dividend is declared?

<p>Debit Retained Earnings, Credit Dividends Payable (B)</p> Signup and view all the answers

Which financial statement is prepared to summarize changes in retained earnings over a specific period?

<p>Statement of Retained Earnings (C)</p> Signup and view all the answers

What is the primary right of preferred shareholders regarding dividends?

<p>They have the right to dividends before common shareholders. (B)</p> Signup and view all the answers

What do cumulative preferred shares guarantee to their shareholders?

<p>Right to dividends for the current and any prior years’ dividends. (B)</p> Signup and view all the answers

What is required for a corporation to pay dividends?

<p>Retained earnings and cash must be sufficient. (C)</p> Signup and view all the answers

What occurs on the declaration date of a dividend?

<p>The board of directors formally declares the dividend. (B)</p> Signup and view all the answers

Which of the following statements is true regarding unpaid dividends in arrears?

<p>They do not have to be paid unless a dividend is declared. (B)</p> Signup and view all the answers

What is the purpose of a record date in dividend distribution?

<p>To determine which shareholders are eligible for dividends. (D)</p> Signup and view all the answers

Which type of dividends is usually paid in common shares?

<p>Stock dividends. (A)</p> Signup and view all the answers

What transactions affect retained earnings?

<p>Earning a profit, declaring cash dividends, and incurring a loss (A)</p> Signup and view all the answers

Which component is included in the shareholders' equity section of the balance sheet?

<p>Contributed capital (D)</p> Signup and view all the answers

How is the payment date characterized in the dividend process?

<p>Dividends are recorded and paid to shareholders. (A)</p> Signup and view all the answers

What is NOT a characteristic of a corporation?

<p>Direct ownership by management (B)</p> Signup and view all the answers

What does the statement of retained earnings show?

<p>Changes in retained earnings during the year (B)</p> Signup and view all the answers

Which one of the following is part of the calculation for return on equity?

<p>Net income divided by shareholders' equity (D)</p> Signup and view all the answers

Which type of shares typically does not carry voting rights?

<p>Preferred shares (D)</p> Signup and view all the answers

What is required under ASPE regarding retained earnings?

<p>The statement must reflect total changes during the year (B)</p> Signup and view all the answers

Which of the following is true regarding accumulated other comprehensive income?

<p>It is part of shareholders' equity for companies using IFRS. (A)</p> Signup and view all the answers

What does retained earnings represent in a corporation?

<p>Accumulated profits minus losses and declared dividends (A)</p> Signup and view all the answers

What differentiates legal capital from retained earnings?

<p>Legal capital cannot be distributed to shareholders, while retained earnings can. (A)</p> Signup and view all the answers

What entry is made when shares are issued for cash?

<p>Dr.Cash, Cr.Common shares (C)</p> Signup and view all the answers

What is one key characteristic of preferred shares?

<p>They have priority over common shares in dividends and assets in liquidation. (D)</p> Signup and view all the answers

Which of the following accounts is attributed to the issuance of shares for services?

<p>Dr.Service or asset, Cr.Common shares (D)</p> Signup and view all the answers

Which component is NOT part of retained earnings?

<p>Legal capital (D)</p> Signup and view all the answers

What is the main purpose of the shareholders' section of the balance sheet?

<p>To provide details on the shareholders' equity and return on equity (A)</p> Signup and view all the answers

Which statement is TRUE regarding the market value of shares?

<p>It is influenced by buyers, sellers, and external factors. (B)</p> Signup and view all the answers

What is a characteristic of a corporation that distinguishes it from other business entities?

<p>Independent legal existence (C)</p> Signup and view all the answers

What limits a shareholder's liability in a corporation?

<p>The amount of their investment (B)</p> Signup and view all the answers

Which of the following statements about shares in a corporation is true?

<p>Shares can represent different classes with varying rights (D)</p> Signup and view all the answers

How can a corporation acquire capital?

<p>By issuing shares (D)</p> Signup and view all the answers

What role does the Board of Directors play in a corporation?

<p>They elect the corporation's officers (C)</p> Signup and view all the answers

What does authorized share capital refer to in a corporation?

<p>The maximum number of shares a corporation can sell (C)</p> Signup and view all the answers

What is typically the first public sale of shares called?

<p>Initial public offering (IPO) (B)</p> Signup and view all the answers

What is the tax status of a corporation?

<p>Taxed as a separate legal entity (B)</p> Signup and view all the answers

Flashcards

Corporation

A legal entity that is separate from its owners (shareholders).

Public Corporation shares

Shares that are available for purchase on an organized stock market.

Private Corporation shares

Shares held by a small group of individuals and not traded publicly.

Share Capital

The capital raised by selling shares of the company.

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Preferred Shares

A category of shares that comes with certain rights and privileges.

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Retained Earnings

The accumulated profits of a company that are not distributed as dividends but retained for reinvestment.

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Cash Dividends

Distributions of a company's profits to its shareholders, usually paid out in cash.

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Statement of Retained Earnings

A financial statement that shows how much profit a company has retained over time.

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Market Value of Shares

The price at which shares are bought and sold on a stock market, influenced by supply and demand, market conditions, and company performance.

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Legal Capital

The total value of share capital, representing the portion of a company's assets that belongs to shareholders.

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Dividends

Distributed profits of a company to its shareholders, typically paid in cash.

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Issuing Shares

The process of issuing new shares to raise capital for a company.

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Reacquisition of Shares

The process of buying back previously issued shares from shareholders.

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Income Statement

A financial statement that summarizes a company's revenues, expenses, and net income over a period of time, providing insights into the company's profitability.

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Dividend Preference

Preferred shareholders have a right to receive dividends before common shareholders.

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Pro-rata Distribution

Dividends are distributed to shareholders in proportion to their ownership of shares.

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Cumulative Preferred Shares

Shares that allow holders to receive dividends owed from previous years before common shareholders.

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Dividends in Arrears

Unpaid dividends on cumulative preferred shares are not considered a liability until declared by the board of directors.

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Declaration Date

A corporate action formally declaring the payment of dividends to shareholders.

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Record Date

The date when shareholders owning shares on this date are entitled to receive the dividends.

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Payment Date

The date when the declared dividend is actually paid to shareholders.

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Separate legal existence

A corporation is a legal entity that exists separately from its owners, the shareholders. This means it can own assets, sue and be sued, and enter into contracts in its own name, without the shareholders being personally liable.

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Limited liability

Shareholders are only responsible for the amount of money they invested in the company. They are not personally liable for the company's debts or obligations.

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Transferable ownership

ownership shares can be easily transferred between individuals or entities. This means that shareholders can buy or sell their shares without affecting the operations of the corporation.

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Ability to raise capital

Corporations can raise capital by issuing shares to investors. This provides them with funds to finance operations and growth.

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Continuous life

A corporation can continue to exist even if its ownership changes. Changes in shareholders don't impact the corporation's lifespan.

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Government regulations

Corporations are subject to various rules and regulations established by the government. These rules govern aspects like how they operate, report, and pay taxes.

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Income tax

Corporations are taxed separately from their owners. They pay income tax on their profits, just like individuals pay tax on their personal income.

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Shareholder rights

Owners of a corporation have the right to vote on significant issues, receive dividends (share of profits), and get their share of assets if the company is liquidated.

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What is a Corporation?

A legal entity that is separate from its owners (shareholders).

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What are Public Corporation Shares?

Shares that are available for purchase on an organized stock market.

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What are Private Corporation Shares?

Shares held by a small group of individuals and not traded publicly.

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What is Share Capital?

The capital raised by selling shares of the company, like a pot of gold.

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What are Preferred Shares?

A category of shares that comes with certain rights and privileges, like VIP access.

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What are Retained Earnings?

The accumulated profits of a company that are not distributed as dividends but retained for reinvestment.

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What are Cash Dividends?

Distributions of a company's profits to its shareholders, usually paid out in cash.

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What is a Statement of Retained Earnings?

A financial statement that shows how much profit a company has retained over time.

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Study Notes

Chapter 13: Introductions to Corporations

  • This chapter covers corporations, including their characteristics, share capital, retained earnings, and financial statements.
  • Learning goals include describing corporations and classes of shares, recording transactions related to issuing shares and dividends, and preparing corporate financial statements.
  • Success criteria include identifying and discussing corporate characteristics, accounting for issuance of shares and dividends, preparing statements of retained earnings, and shareholders' sections of balance sheets.

Characteristics of a Corporation

  • Separate legal existence: Corporations act independently from their owners.
  • Limited liability of shareholders: Shareholders' financial liability is limited to the amount of their investment.
  • Transferable ownership rights: Shares can be bought and sold without affecting the corporation's operating activities.
  • Ability to acquire capital: Corporations can raise capital by issuing shares, but this can be more challenging for closely-held corporations.
  • Continuous and unlimited life: The business's existence isn't affected by changes in ownership.
  • Government regulations: Corporations must comply with specific regulations governing their operations.
  • Income tax: Corporations are taxed as separate entities.
  • Ownership rights of shareholders: These rights include voting on matters, receiving dividends, and claiming assets in a liquidation.

Corporation Management

  • Shareholders manage the corporation through the elected Board of Directors.
  • The board decides on operating policies and selects officers like the CEO.

Share Issue Considerations

  • Authorized share capital: The maximum number of shares a company is allowed to sell.
  • Issue of shares: Shares can be issued directly to investors or via an investment dealer (Initial Public Offering - IPO).
  • Market value of shares: Determined by buyers, sellers, and external factors on the secondary market.
  • Legal capital: The legal capital amount of a corporation is not distributed to shareholders.
  • Retained earnings: Earned capital can be distributed as dividends.

Retained Earnings

  • Cumulative total profits less losses & dividends since incorporation.
  • Represents part of shareholder's claim on total company assets.
  • Two main components: Profit and Dividends (cash distributions to owners).

Corporate Income Statements

  • Examples provided on page 16 of income statements. These statements show revenues, expenses, and resulting profit (or loss) for a period.

Textbook Questions

  • Students are assigned textbook exercises (BE13-1, BE13-8, BE13-9, E13-11, P13-2A).

Common Shares/Issuing Shares

  • Shares are typically issued for cash.
  • Shares can be issued for goods/services (at fair market value).

Preferred Shares

  • Preferred shareholders have priority over common shareholders for dividends and assets during liquidation.
  • Transactions involving preferred shares are recorded in separate accounts.

Dividend Preference

  • Preferred shareholders receive dividends before common shareholders.
  • Cumulative preferred shares receive any past unpaid dividends.

Dividends

  • Pro-rata distribution of a portion of retained earnings.
  • Types of dividends: Cash and Stock.

Cash Dividends

  • Corporations need enough retained earnings to pay dividends.
  • Key dates: Declaration date, Record date, and Payment date.
  • Examples provided on pages 30 and 31 illustrate transactions for cash dividends.

Statement of Retained Earnings

  • Shows changes in retained earnings during a fiscal year.
  • Transactions affecting retained earnings include profits/losses, cash declarations, and stock dividends.
  • Example of a statement is on page 35.

Shareholders' Equity

  • Shows contributed capital, retained earnings and accumulated other comprehensive income (for IFRS).
  • Example statement of shareholders' equity on page 39.

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Chapter 13 - Financial Accounting Textbook (Canadian Edition)

Description

Explore the essential aspects of corporations in this quiz, including their characteristics, share capital, retained earnings, and financial statements. Test your knowledge on the process of issuing shares, dividends, and preparing corporate financial statements to succeed in understanding corporate accounting.

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