Corporate Finance Basics

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Questions and Answers

What does the statement of comprehensive income primarily summarize?

The trends in a company’s equity over multiple years

The operating activities of the company for the year (correct)

The company's cash generation and expenditures

The company's financial position at year-end

What does the statement of cash flows help evaluate?

The non-controlling interests in the subsidiary

The company's operational efficiency and profit margins

The liquidity and solvency of the company (correct)

The market value of the company's shares

Which of the following is NOT a category listed in the statement of cash flows?

Budgeting Activities (correct)

Financing Activities

Investing Activities

Operating Activities

What does 'cash and cash equivalents' include in the context of cash flow statements?

Cash on hand, bank accounts, and short-term liquid investments Signup and view all the answers

How does the statement of cash flows differ from the statement of comprehensive income regarding financial insights?

It measures actual cash generated rather than just income. Signup and view all the answers

What key aspect does a review of the statement of cash flows over multiple years help to identify?

Trends that might go unnoticed in financial statements Signup and view all the answers

What is one advantage of corporations compared to sole proprietorships and partnerships?

Easier to raise capital through different classes of shares Signup and view all the answers

What does limited liability imply for investors in a corporation?

They can invest without risk beyond the amount invested Signup and view all the answers

What role do shareholders have in managing a corporation?

They elect a board of directors to manage the corporation Signup and view all the answers

What is a disadvantage of incorporation concerning flexibility?

Changes often require formal approval from various authorities Signup and view all the answers

What is a potential tax implication for shareholders of a corporation?

Shareholders can be double taxed on dividend income Signup and view all the answers

What is one ongoing cost associated with maintaining a corporation?

Annual costs that exceed those of partnerships or proprietorships Signup and view all the answers

In what way does a corporate structure benefit large and growing businesses?

By easily managing large amounts of needed capital Signup and view all the answers

What distinguishes the management of corporations from that of sole proprietorships?

Corporate management is typically handled by a board elected by shareholders Signup and view all the answers

Why might shareholders choose to replace their board of directors?

If they are dissatisfied with their management of the corporation Signup and view all the answers

What is one characteristic of the ownership structure of a corporation?

Ownership can change without affecting the corporation's assets Signup and view all the answers

What is the primary reason financiers may require control when injecting new capital into a corporation?

To protect their investment until recovery Signup and view all the answers

What document is issued by the trustee in a voting trust agreement?

Voting Trust Certificate Signup and view all the answers

Who maintains the voting privileges in a voting trust arrangement?

The trustee Signup and view all the answers

Which of the following responsibilities is NOT held by directors in a corporation?

Managing day-to-day operations Signup and view all the answers

Which committees may many boards of directors elect to assist in their responsibilities?

Finance, Audit, and Executive Committees Signup and view all the answers

What is a requirement for someone to be eligible as a director in a corporation?

Must not be an undischarged bankrupt Signup and view all the answers

In a typical corporate structure, who is responsible for appointing officers and signing authorities for financing?

Board of Directors Signup and view all the answers

Which of the following statements correctly describes the relationship between shareholders and the board of directors?

Directors are chosen by shareholders but focus on company policy and governance. Signup and view all the answers

What is the depreciation charge for year 3 using the Straight-Line Method?

$11,250 Signup and view all the answers

In which year using the Declining-Balance Method is the depreciation charge the lowest?

Year 8 Signup and view all the answers

What role does the trustee play in a voting trust agreement?

Holds and exercises voting privileges on behalf of shareholders Signup and view all the answers

How does depreciation, depletion, or amortization appear in the statement of comprehensive income?

As non-cash expenses Signup and view all the answers

What characteristic is NOT a requirement for a director?

Must be a resident of the country Signup and view all the answers

What is the carrying amount at the end of Year 4 using the Straight-Line Method?

$55,000 Signup and view all the answers

What is the total depreciation charged over the 8 years using the Straight-Line Method?

$90,000 Signup and view all the answers

Which method provides more variable depreciation charges year over year?

Declining-Balance Method Signup and view all the answers

What value is the carrying amount at the end of Year 6 using the Declining-Balance Method?

$17,798 Signup and view all the answers

What is the relationship between depreciation and net income in the context of cash resources?

High depreciation can lead to lower net income despite higher cash flow. Signup and view all the answers

What is the depreciation charge for Year 7 using the Declining-Balance Method?

$4,449 Signup and view all the answers

How should the depreciation method be treated according to the IFRS accounting system?

It should be reviewed annually. Signup and view all the answers

What is one of the primary purposes of the annual shareholders' meeting?

To elect directors and appoint auditors Signup and view all the answers

Under what condition can shareholders vote at the annual meeting?

They must have their shares registered in their name or a completed proxy form Signup and view all the answers

What does a proxy statement typically outline?

What is to be voted on at the shareholders' meeting Signup and view all the answers

Who is usually designated as the proxy in the voting process?

A member of the company's management team Signup and view all the answers

What must accompany a proxy statement when notifying shareholders of a meeting?

An information circular outlining issues for consideration Signup and view all the answers

What type of corporate decisions can shareholders vote on?

Sale, merger, or liquidation of the business Signup and view all the answers

What is one possible consequence if a shareholder does not attend the annual meeting?

They cannot vote unless they have a proxy Signup and view all the answers

What must be completed for a proxy to be valid?

It must be prepared in writing and signed by the shareholder Signup and view all the answers

What does the list of eligible shareholders prepared prior to a meeting indicate?

The shareholders eligible to vote on corporate matters Signup and view all the answers

What is an important topic that is often included in the issues to be voted on at the meeting?

Interest of directors and officers in material transactions Signup and view all the answers

Study Notes

Advantages of Incorporation

Ownership of shares may change, but corporation's assets are owned by the entity itself.
Corporations can raise capital more easily by issuing various shares and debt instruments compared to sole proprietorships or partnerships.
Limited liability protects investors, ensuring the risk is only the amount invested.
Corporations can efficiently manage large capital needs for growth and expansion.
Shareholders elect a board of directors to manage the corporation but have minimal involvement in daily operations.
Shareholders can vote on corporate matters, including director elections and significant business decisions.

Disadvantages of Incorporation

Corporations are subject to numerous statutory rules, making changes to charters and by-laws complex and often requiring formal approvals.
Double taxation can occur when corporate profits are taxed and dividends distributed to shareholders are taxed again.
Higher ongoing costs exist post-incorporation, which surpass those of sole proprietorships or partnerships.
Shareholders have voting rights for corporate decisions, such as mergers or liquidations.

Shareholders' Meetings

A list of eligible shareholders is prepared and effective for shareholder meetings.
Notification of meetings must be given within a specific timeframe.
At annual meetings, shareholders elect directors, appoint auditors, and review financial statements.
Voting requires shares registered in the shareholder's name or a completed proxy form.

Voting by Proxy

Proxy statements are sent to shareholders outlining voting matters before meetings.
Shareholders may vote in person or by proxy, typically through a management team member authorized to vote on their behalf.
Proxy forms must be written, signed, and accompany the notice of the meeting along with an information circular detailing matters for consideration.

Corporate Structure

The corporate structure includes shareholders at the top, followed by the board of directors, as well as various executive officers (e.g., President, Vice Presidents).
Directors set policies by passing resolutions and appointing/dividing responsibilities among officers.
Directors must meet criteria such as being of legal age and sound mind.

Depreciation

Depreciation allocates costs of assets over their useful lives, aligning earnings with expenses.
Various methods, such as straight-line and declining-balance, are used for calculating depreciation.
Non-cash expenses related to depreciation can affect a company's reported profits and cash flow balance.

Statement of Cash Flows

The statement of cash flows displays how cash is generated and spent within a fiscal year, impacting liquidity and solvency assessment.
It includes three primary categories: Operating Activities, Financing Activities, and Investing Activities.
Highlights changes in cash and cash equivalents, aiding in understanding a company's financial health and trends over time.

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Description

This quiz covers essential concepts related to corporate ownership, capital financing, and limited liability. Understand how corporations operate in terms of share issuance and asset ownership. Ideal for students studying business or corporate finance topics.