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ADM 1340 CH11 QUESTIONS WITH 100% ACCURATE ANSWERS, Exams of Business Systems

Yale UniversityBusiness Systems

ADM 1340 CH11 QUESTIONS WITH 100% ACCURATE ANSWERS

Typology: Exams

2024/2025

Available from 07/04/2025

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ADM 1340 CH11 QUESTIONS WITH 100%
ACCURATE ANSWERS
Corporation - Accurate answers A company organized as a separate legal entity, with most of the
rights and privileges of a person. Shares are evidence of ownership.
Public corporation - Accurate answers - a corporation whose stock anyone may buy, sell, or trade
- may have thousands of shareholders, and its shares are publicly traded or held.
Private Corporation - Accurate answers - a corporation owned by just one or a few people who are
closely involved in managing the business
- usually has only a few shareholders and does not offer its shares for sale to the general public
- A private corporation has the choice of following IFRS or Accounting Standards for Private Enterprises.
Characteristics of a corporation - Accurate answers - separate legal existence
- limited liability of stockholders
- transferable ownership rights
- ability to acquire capital
- continuous life
- corporation management
- government regulations
- additional taxes
Separate Legal Existence - Accurate answers - as an entity separate and distinct from its owners,
the corporation acts under its own name rather than in the name of its stockholders
- Leon's, for example, may buy, own, and sell property, borrow money, and enter into legally binding
contracts in its own name.
Limited Liability of Shareholders - Accurate answers -A general rule of corporate law that provides
that generally shareholders are liable only to the extent of their capital contributions for the debts and
obligations of their corporation and are not personally liable for the debts and obligations of the
corporation
- The liability of shareholders is limited to their investment in the shares of the corporation.
- This means that, in the event that a corporation is unable to pay its liabilities, its creditors can seize the
assets of only the corporation to settle these claims; creditors cannot require shareholders to pay for
the company's liabilities using their personal assets.
Transferable Ownership Rights - Accurate answers - A shareholder obtains an ownership interest in
a corporation by purchasing its shares.
- Shareholders can dispose of part or all of their interest in a corporation simply by selling their shares.
- With a public corporation, the transfer of shares is entirely up to the shareholder and is normally done
without the approval of either the corporation or other shareholders.
- In contrast, many private corporations impose limitations on the sale or transfer of shares by
shareholders.
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ADM 1340 CH11 QUESTIONS WITH 100%

ACCURATE ANSWERS

Corporation - Accurate answers A company organized as a separate legal entity, with most of the rights and privileges of a person. Shares are evidence of ownership. Public corporation - Accurate answers - a corporation whose stock anyone may buy, sell, or trade

  • may have thousands of shareholders, and its shares are publicly traded or held. Private Corporation - Accurate answers - a corporation owned by just one or a few people who are closely involved in managing the business
  • usually has only a few shareholders and does not offer its shares for sale to the general public
  • A private corporation has the choice of following IFRS or Accounting Standards for Private Enterprises. Characteristics of a corporation - Accurate answers - separate legal existence
  • limited liability of stockholders
  • transferable ownership rights
  • ability to acquire capital
  • continuous life
  • corporation management
  • government regulations
  • additional taxes Separate Legal Existence - Accurate answers - as an entity separate and distinct from its owners, the corporation acts under its own name rather than in the name of its stockholders
  • Leon's, for example, may buy, own, and sell property, borrow money, and enter into legally binding contracts in its own name. Limited Liability of Shareholders - Accurate answers -A general rule of corporate law that provides that generally shareholders are liable only to the extent of their capital contributions for the debts and obligations of their corporation and are not personally liable for the debts and obligations of the corporation
  • The liability of shareholders is limited to their investment in the shares of the corporation.
  • This means that, in the event that a corporation is unable to pay its liabilities, its creditors can seize the assets of only the corporation to settle these claims; creditors cannot require shareholders to pay for the company's liabilities using their personal assets. Transferable Ownership Rights - Accurate answers - A shareholder obtains an ownership interest in a corporation by purchasing its shares.
  • Shareholders can dispose of part or all of their interest in a corporation simply by selling their shares.
  • With a public corporation, the transfer of shares is entirely up to the shareholder and is normally done without the approval of either the corporation or other shareholders.
  • In contrast, many private corporations impose limitations on the sale or transfer of shares by shareholders.
  • The transfer of shares from one stockholder to another usually has no effect on the corporation or its operations except when this causes a change in the directors who control or manage the corporation. Ability to Acquire Capital - Accurate answers - it is relatively easy for a corporation to obtain capital through the issuance of stock
  • Most individuals will never have an opportunity to invest in a private corporation, but even with a limited amount of funds, many of us can purchase the shares of a public company and become shareholders. Continuous Life - Accurate answers - continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer
  • Corporations have an unlimited life.
  • Because a corporation is a separate legal entity, it's continuance as a going concern is not affected by the withdrawal, death, or incapacity of a shareholder, employee, or officer.
  • As a result, a successful corporation can have a very long, if not indefinite, life.
  • For example, there are about 5,500 companies throughout the world that have been in business for more than 200 years. Corporation Management - Accurate answers - separation of ownership and management prevents owners from having an active role in managing the company
  • Shareholders can invest in a corporation without having to manage it personally. Although shareholders legally own the corporation, they manage it indirectly through a board of directors they elect.
  • Shareholders elect directors, who set policy and appoint officers Government Regulations - Accurate answers - a law that controls the way that a business can operate, or all of these laws considered together
  • Canadian companies may be incorporated federally, under the terms of the Canada Business Corporations Act, or provincially, under the terms of a provincial business corporations act.
  • Federal and provincial laws state the requirements for issuing and reacquiring shares and distributing dividends. Income Tax - Accurate answers - A tax on people's earnings
  • Proprietorships and partnerships do not pay income tax as separate entities.
  • Instead, each owner's (or partner's) share of net income from these organizations is reported on his or her personal income tax return.
  • Income tax is then paid on this amount by the individual.
  • Corporations, on the other hand, must pay federal and provincial income taxes as separate legal entities. Advantages of Corporations - Accurate answers - Separate legal entity
  • Limited liability of shareholders
  • Ease of transferring ownership rights (shares)
  • Ability to acquire capital (cash) by issuing shares
  • Continuous life
  • Separation of management and ownership
  • Potential for reduced income tax
  • Some factors that are beyond a company's control (such as a drop in oil prices, an economic recession, changes in interest rates, the outcome of an election, and acts of violence) can also influence share prices.
  • Understanding share prices is complex and the subject of advanced finance courses Market Capitalization - Accurate answers - A firm performance metric that captures the total dollar market value of a company's total outstanding shares at any given point in time.
  • A measure of the fair value of a company's equity.
  • It is calculated by multiplying the number of shares by the share price at any given date.
  • Leon's market capitalization in December 2015 was $1.2 billion.
  • The largest market capitalization for any company in Canada was that of the Royal Bank of Canada, whose market capitalization at the time of writing was $110 billion. Legal Capital - Accurate answers - The amount per share that must be retained in the business for the protection of corporate creditors. Equal to the proceeds received from the issue of most shares. No par value shares - Accurate answers - shares that do not have a value assigned to them by the articles of incorporation
  • Rather, the amount received by the company when issuing shares is considered to be legal capital that must remain invested in the company for the protection of corporate creditors. Contributed Capital - Accurate answers - The total amount paid or contributed by shareholders in exchange for shares of ownership.
  • It consists of share capital and additional contributed capital, such as contributed surplus, if any.
  • All corporations must issue common shares because these shares have voting rights and major decisions affecting the corporation must be approved through shareholder voting. -For example, common shareholders typically have the right to vote for the board of directors and external auditors, in addition to certain other matters of significance to the corporation. Contributed Surplus (Additional Contributed Capital) - Accurate answers - A source of contributed capital that can result from certain types of equity transactions, including the reacquisition of shares. Reacquired/repurchased shares (Stock purchases) - Accurate answers - If shares were reacquired during the period, the weighted-average number of shares is reduced.
  • The number of reacquired shares is time-weighted for the fraction of the year they were not outstanding. Normal course issuer bid - Accurate answers - The reacquisition of a specified percentage of a company's own shares from the general public for a predetermined price and period, subject to regulatory approval.
  • In a normal course issuer bid, a company is allowed to repurchase up to a certain percentage of its shares subject to regulatory approval.
  • It can purchase the shares gradually over a period of time, such as one year.
  • This repurchasing strategy allows the company to buy when its shares are favourably priced. Steps to record a reacquisition and retirement of common shares - Accurate answers 1. Remove the cost of the shares from the share capital account
  1. Record the cash paid
  1. Record the "gain" or "loss" on reacquisition Preferential Features of Preferred Shares - Accurate answers Dividend Preference - Accurate answers - Preferred shares are usually issued with a specified dividend rate, which makes them attractive to investors who wish to earn dividend income.
  • In contrast, common shares do not have a specified dividend associated with them, although the company may choose to pay dividends to common shareholders.
  • For example, Leon's pays dividends on its common shares but this was not specified when these shares were issued. Cumulative - Accurate answers - A feature of preferred shares that entitles the shareholder to receive current-year and unpaid prior-year dividends before common shareholders receive any dividends. Noncumulative - Accurate answers - Preferred shares that are entitled to the current dividend, if declared, but not to any undeclared and unpaid amounts from prior years. Dividends in arrears - Accurate answers - preferred dividends that were supposed to be declared but were not declared during a given period Liquidation Preference - Accurate answers - determines the payout order in case of a corporate liquidation, frequently used in venture capital contracts to specify which investors get paid first and how much they get paid in the event of a liquidation event, such as the sale of the company rate (fixed) reset preferred shares - Accurate answers - A significant number of preferred shares that are issued with the right for a corporation to reset the dividend rate on their preferred shares.
  • Normally when preferred shares are issued, the dividend rate is specified because investors usually purchase these shares for the primary purpose of earning dividends.
  • Almost 60% of the issued preferred shares in Canada reset their dividends on predetermined dates. redeemable preferred shares - Accurate answers - stock that permits a corporation to buy back the preferred stock at some future date
  • has a mandatory redemption period or a redemption feature that the issuer cannot control
  • its gives the issuing corporation the right to purchase the shares from shareholders at specified future dates and prices.
  • The redemption feature offers some flexibility to a corporation by enabling it to eliminate this type of equity security when it is advantageous to do so. Retractable preferred shares - Accurate answers - Preferred shares that give the shareholder the right to sell the shares to the issuer at specified future dates and prices.
  • However, in the case of retractable preferred shares, it is at the shareholder's option, rather than the corporation's option, that the shares can be redeemed.
  • Less than 5% of preferred shares issued in Canada currently have this feature. Cash dividend - Accurate answers - a pro rata (proportional to ownership) distribution of cash to shareholders

Retained Earnings - Accurate answers An amount earned by a corporation and not yet distributed to stockholders. Retained Earnings Restrictions - Accurate answers - Circumstances that make a portion of retained earnings currently unavailable for dividends.

  • The most common reason for a restriction is the requirement under a loan agreement (known as a covenant) to limit the amount of retained earnings that can be distributed as dividends.
  • Restricting retained earnings does not mean that cash is set aside; rather, it is meant to inform users that a portion of retained earnings is not available for dividend payments. Other Comprehensive Income (OCI) - Accurate answers - Gains and losses that affect shareholders' equity but are not shown in net income or loss.
  • They relate to complex transactions such as certain types of gains and losses on investments
  • There are several examples of these unique gains and losses being recorded in other comprehensive income or loss.
  • One example is gains on revaluing property, plant, and equipment using the revaluation model. Comprehensive Income (loss) - Accurate answers - an income measure that includes gains and losses that are excluded from the determination of net income
  • Comprehensive income (loss) therefore includes (1) the revenues, expenses, gains, and losses included in net income, and (2) the gains and losses that are reported in OCI, Comprehensive Income formula - Accurate answers Comprehensive Income = Net Income (loss) + Other Comprehensive Income (loss) Accumulated Other Comprehensive Income - Accurate answers - the aggregate amount of the other comprehensive income items
  • The cumulative change in shareholders' equity that results from the gains and losses that bypass net income (recorded in OCI) but affect shareholders' equity.
  • AOCI starts with the balance at the beginning of the period and is increased by other comprehensive income and decreased by other comprehensive losses during the period, to arrive at the ending balance.
  • It is this ending balance that is reported in the shareholders' equity section of the statement of financial position.
  • If AOCI becomes negative because of accumulated other comprehensive losses, it is shown as accumulated other comprehensive loss. Statement of changes in equity - Accurate answers also known as the "Statement of Shareholders' equity"/"Statement of Equity" Statement of Retained Earnings - Accurate answers - A statement that summarizes the changes in the Retained Earnings account during the period.
  • This statement is issued only by private companies reporting using ASPE.
  • Similar to the statement of changes in equity, a statement of retained earnings must be prepared after the income statement is prepared, because net income is a key component of retained earnings Payout Ratio - Accurate answers - cash dividends declared on common stock/net income
  • A measure of the percentage of the net income distributed in the form of cash dividends to common shareholders.
  • It is calculated by dividing cash dividends by net income. Dividend Yield - Accurate answers - A measure of the percentage of the share price that is paid in dividends.
  • It is calculated by dividing dividends per share by the share price.
  • Dividends declared per share/Market Price per share Income Available to Common Shareholders - Accurate answers - Net income less the annual preferred dividend for cumulative preferred shares.
  • The dividend is deducted for noncumulative preferred shares only if declared. Weighted Average Number of Common Shares - Accurate answers - A weighted average of the number of common shares issued during the year.
  • Shares issued or repurchased during the year are weighted by the fraction of the year for which they have been issued.
  • This is done because changes in the number of issued shares affects the amount of assets on which net income can be generated.
  • If there is no change in the number of common shares during the year, the weighted average number of shares will be the same as the ending balance. Diluted Earnings per Share - Accurate answers - Earnings per share calculation that requires dilutive securities be added to the denominator of the basic EPS calculation. Return on Common Shareholder's Equity - Accurate answers - A measure of profitability from the shareholders' point of view.
  • This ratio shows how many dollars were earned for each dollar invested by common shareholders.
  • It is calculated by dividing net income minus preferred dividends by average common shareholders' equity (total shareholders' equity minus preferred shares). ROCSE= (Net income - preferred dividends)/Average common shareholder's equity Advantages of debt financing - Accurate answers 1. When debt is used, the ownership interests of current shareholders remain the same and are not decreased or diluted by new equity from new shareholders.
  1. When financing with debt, interest expense is tax deductible whereas dividends paid are not. Disadvantages of debt financing - Accurate answers - Interest payments are legally binding and if not paid, litigation by creditors can arise, whereas dividends to shareholders are discretionary and are not legally binding if they are not declared.
  • The principal portion of loans must be paid back to creditors whereas the amount received from the sale of shares does not have to be returned to shareholders until the company is liquidated.