FINANCIAL ACCOUNTING THEORY QUESTIONS

1. An ordinary share
A. is an equity instrument that is subordinate to all other classes of equity instruments.
B. is a financial instrument or other contract that may entitle its holder to ordinary shares.
C. is a financial instrument that gives the holder the right to purchase ordinary shares.
D. is any contract that gives rise to both a financial asset of one entity and a financial liability or equity
instrument of another entity.

2. On February 1, authorized ordinary shares were sold on a subscription basis at a price in excess of par
value, and 20% of the subscription price was collected. On May 1, the remaining 80% of the
subscription price was collected. Share Capital would increase on
February May 1
1
A. No Yes
B. No No
C. Yes No
D. Yes Yes

3. What effect does the issuance of a 2-for-l stock split have on each of the following?
Par Value per Retained
Share Earnings
A. No effect No effect
B. Increase No effect
C Decrease No effect
.
D Decrease Decrease
.

4. A company issued rights to its existing shareholders to purchase ordinary shares. When the rights are
exercised, share premium would be credited if the purchase price
A. exceeded the par value.
B. was the same as the par value.
C. was the same as the par value, but less than the market value at the date of exercise.
D. was less than the par value.

5. Select the statement that is incorrect concerning the appropriations of retained earnings.
A. Appropriations of retained earnings do not change the total amount of shareholders' equity.
B. Appropriations of retained earnings reflect funds set aside for a designated purpose, such as plant
expansion.
C. Appropriations of retained earnings can be made as a result of contractual requirements.
D. Appropriations of retained earnings can be made at the discretion of the board of directors.

6. In January 2021, Eladamri Corporation, a newly formed company, issued 10,000 shares of its ₱10 par
common stock for ₱15 per share. On July 1, 2021, Eladamri Corporation reacquired 1,000 shares of its
outstanding shares for ₱12 per share. The acquisition of these treasury shares
A. decreased total stockholders' equity.
B. increased total stockholders' equity.
C. did not change total stockholders' equity.
D. decreased the number of issued shares.

7. Assume common stock is the only class of stock outstanding in the Serra Corporation. Total
stockholders' equity divided by the number of common stock shares outstanding is called
 A. book value per share. C. stated value per share.
B. par value per share. D. fair value per share

8. Dividends are not paid on

A. noncumulative preferred stock. C. treasury common stock.
B. nonparticipating preferred stock. D. Dividends are paid on all of these
E. .
9. Noncumulative preferred dividends in arrears
A. are not paid or disclosed.
B. must be paid before any other cash dividends can be distributed.
C. are disclosed as a liability until paid.
D. are paid to preferred stockholders if sufficient funds remain after payment of the current preferred
dividend.

10. Gains and losses on purchase and resale of treasury shares is reflected in
A. paid in capital account only.
B. paid in capital and retained earnings accounts.
C. profit or loss, paid in capital and retained earnings accounts.
D. profit or loss and paid in capital accounts.

11. At the date of the financial statements, ordinary shares issued would exceed ordinary shares
outstanding as a result of the
A. declaration of a share split. C. purchase of treasury shares.
B. declaration of a share bonus. D. payment in full of subscribed shares
12. .Which of the following features of preferred stock makes the security more like debt than an equity
instrument?
A. Participating C. Redeemable
B. Voting D. Noncumulative

13. Cash dividends are paid on the basis of the number of shares
A. authorized.
B. issued.
C. outstanding.
D. outstanding less the number of treasury shares.

14. Which of the following statements about property dividends is not true?
A. A property dividend is usually in the form of securities of other companies.
B. A property dividend is also called a dividend in kind.
C. The accounting for a property dividend should be based on the carrying value (book value) of the
nonmonetary assets transferred.
D. All of these statements are true.

15. The issuer of a 5% common stock dividend to common shareholders preferably should transfer from
retained earnings to contributed capital an amount equal to the
A. fair value of the shares issued.
B. book value of the shares issued.
C. minimum legal requirements.
D. par or stated value of the shares issued.

16. These are preference shares that have no claim on any prior year dividends that may have passed.
A. Cumulative C. Non-cumulative
B. Participating D. Non-participating

17. A company declared a cash dividend on its ordinary shares in December 2020, payable in January
2021. Retained earnings would
A. increase on the date of declaration.
 B. not be affected on the date of C. not be affected on the date of payment.
declaration. D. decrease on the date of payment

18. A company issued rights to its existing shareholders to purchase for ₱30 per share, unissued ₱15 par
ordinary shares. When the rights lapse,
A. no entry will be made.
B. share premium will be debited.
C. share premium will be credited.
D. share rights outstanding will be debited.

19. Assuming that the issuing company has only one class of share capital, a transfer from retained
earnings to contributed capital equal to the market value of the shares issued is ordinarily a
characteristic of
A. either a bonus issue or a share split.
B. neither a bonus issue nor a share split.
C. a share split but not a bonus issue.
D. a bonus issue but not a share split.

20. Dividends in arrears are reported in the statement of financial position as

A. current liabilities. C. contra asset accounts.
B. contra-equity accounts. D. a note disclosure.

21. How would a share split affect the amount of each of the following?

Total share Total shareholders’ Retained

capital equity earnings
A. Increase Increase No effect
B. No effect No effect No effect
C No effect No effect Increase
.
D Decrease Decrease Decrease
.

22. When a share dividend or bonus issue results in some shareholders being entitled to a fraction of a
share, the corporation may take any of the following alternatives, except to
A. issue fractional share warrants.
B. pay the shareholder an amount equal to the market price of the fraction share.
C. require the shareholder to surrender the equivalent fraction of a share.
D. require the shareholder to pay sufficient amount to receive a full share.

23. Which of the following is not a legal restriction related to profit distributions by a corporation?
A. The amount distributed to owners must be in compliance with the Philippine laws governing
corporations.
B. The amount distributed in any one year can never exceed the net income reported for that year.
C. Profit distributions must be formally approved by the board of directors.
D. Dividends must be in full agreement with the capital stock contracts as to preferences and
participation.

24. "Gains" on sales of treasury stock (using the cost method) should be credited to
A. paid-in capital from treasury stock.
B. capital stock.
C. retained earnings.
D. other income.

25. Fully participating preference share means that

 A. the ordinary shareholders receive a dividend rate per share equal to the preference and all excess
dividends are given to the ordinary shareholders.
B. the ordinary shareholders receive a dividend rate per share equal to the preference and all excess
dividends go to the preference shareholders.
C. the ordinary shareholders receive a dividend rate per share equal to the preference and all excess
dividends are shared proportionately between the two classes.
D. the preference shareholders receive their full dividend and any excess dividends on the ordinary
shareholders.

26. Which of the following best describes a possible result of treasury stock transactions by a corporation?
A. May increase but not decrease retained earnings.
B. May increase net income if the cost method is used.
C. May decrease but not increase retained earnings.
D. May decrease but not increase net income.

27. How would the Share Dividends Distributable account balance be presented in the statement of
financial position?
A. As deduction from retained earnings
B. As part of current liabilities
C. As addition to share capital
D. As addition to retained earnings

28. Retained earnings balance is not affected by

A. understatement of profit of prior period.
B. unrealized gain on equity investments at fair value through profit or loss.
C. unrealized gain on equity investments at fair value through other comprehensive income.
D. realized revaluation surplus on building.

29. Other comprehensive income created during the current financial year
A. is a liability.
B. is reported in the statement of profit or loss and other comprehensive income.
C. includes net profit or loss.
D. is reported in the statement of financial position.

30. Other comprehensive income accumulated over the current and prior periods
A. is a liability.
B. is usually reported in the statement of profit or loss and other comprehensive income.
C. is an asset.
D. is usually reported in separate reserves accounts in the statement of financial position.

31. Ordinary shareholders usually have all of the following rights, except
A. to share in the profits.
B. to share in assets upon liquidation.
C. to elect a board of directors.
D. to participate in the day-to-day operations.

32. Each of the following is ownership right held by ordinary shareholders, unless specifically withheld by
agreement, except
A. the right to vote on policy issues
B. the right to share in profits when dividends are declared (in proportion to the percentage of shares
owned by the shareholders)
C. the right to dividends equal to a stated rate times par (if dividends are paid)
D. the right to share in the distribution of any assets remaining at liquidation after other claims are
satisfied
33. The retained earnings balance reported in the statement of financial position is typically not affected by
A. net profit.
B. a prior period adjustment.
C. dividends paid.
D. restrictions.

34. Share splits are issued primarily to

A. increase the number of outstanding shares
B. increase the number of authorized shares
C. increase legal capital
D. induce a decline in market value per share

35. When a company grants a bonus issue, which of the following would be affected?
A. Earnings per share
B. Total assets
C. Total liabilities
D. Total shareholders’ equity

36. In a corporate form of business organization, legal capital is best defined as

A. the amount of capital the corporation law allows the company to accumulate over its existence.
B. the par value of all capital stock issued.
C. the amount of capital the local government allows a corporation to generate.
D. the total capital raised by a corporation within the limits set by the Securities and Exchange
Commission.

37. Total shareholders’ equity represents

A. a claim to specific assets contributed by the owners.
B. the maximum amount that can be borrowed by the enterprise.
C. a claim against a portion of the total assets of an enterprise.
D. only the amount of earnings that have been retained in the business.

38. Which of the following represents the total number of shares that a corporation may issue under the
terms in its article of incorporation?
A. authorized shares
B. issued shares
C. unissued shares
D. outstanding shares

39. Stock that has a fixed per-share amount printed on each stock certificate is called
A. stated value stock.
B. fixed value stock.
C. uniform value stock.
D. par value stock.

40. A journal entry is not made on the

A. date of declaration.
B. date of record.
C. date of payment.
D. an entry is made on all of these dates.