Chapter 16
Corporate Reporting: Income, Earnings Per Share, and Retained Earning
True / False Questions

A cash dividend does not reduce a corporation's assets or equity, while a share
dividend reduces both.
FALSE

If a company's activities include operations that are being discontinued, the income or
loss effects of the discontinued operations are included on the income statement in
income from continuing operations.
FALSE

The statement of comprehensive income is a detailed statement of net income plus or
minus any other comprehensive income items.
TRUE

A share dividend is a corporation's distribution of its own shares to its shareholders
without receiving any payment in return.
TRUE

A share dividend reduces a corporation's assets and equity.
FALSE

A share dividend reduces the number of previously outstanding shares.
FALSE

A share dividend increases the number of previously outstanding shares.
TRUE

A share dividend capitalizes retained earnings because it decreases a company's
contributed capital.
FALSE

A share split decreases the market price of the company shares.
TRUE
16-1

A share dividend is a distribution of corporate assets as a dividend that returns part of
the original investment to shareholders.
FALSE

A share split is the distribution of additional shares to shareholders according to their
percent of ownership.
TRUE

A share split affects total equity as reported on the balance sheet.
FALSE

A reverse share split reduces the market value of shares and the par value per share.
FALSE

A share dividend is not a liability on the balance sheet because it does not require a
distribution of assets.
TRUE

Share dividends are recorded at market value.
TRUE

Earnings per share is the amount of income earned by each share of a company's
outstanding common shares.
TRUE

Earnings per share is calculated by dividing the number of common shares outstanding
by net income.
FALSE
16-2


Retained earnings are part of the shareholders' claim on the company's net assets.
TRUE
Restricted retained earnings must be disclosed on the balance sheet or the statement of
changes in equity, or in the notes to the financial statements.
TRUE

Treasury shares are shares that have been authorized, issued, and are outstanding.
FALSE

Purchasing treasury shares reduces retained earnings.
FALSE
Multiple Choice Questions

A corporation's distribution of its own shares to its shareholders without receiving any
payment in return is a:
A. Share dividend.
B. Share subscription.
C. Premium on shares.
D. Discount on shares.
E. Preferred share.

A share dividend:
A. Is a distribution of additional shares to its shareholders without receiving any
payment.
B. Does not reduce a corporation's assets and equity.
C. Transfers a portion of equity from retained earnings to contributed capital.
D. Often referred to as a stock dividend.
E. All of these answers are correct.

Companies use share dividends:
A. To increase the market value of shares.
B. To keep the market price of the shares affordable.
C. To increase contributed capital.
D. To raise capital for the company for future expansion.
E. All of these answers are correct.
16-3

A share dividend transfers:
A. Contributed capital to retained earnings.
B. Retained earnings to contributed capital.
C. Retained earnings to assets.
D. Contributed capital to assets.
E. Assets to contributed capital.

The act of a corporation to call in its shares and issue one new share in the place of
more than one share previously outstanding is a:
A. Reverse share split.
B. Share dividend.
C. Liquidating dividend.
D. Share split.
E. Stock dividend.
When a corporation calls in its outstanding shares and issues more than one new share
in exchange for each old share, this is a:
A. Reverse share split.
B. Share dividend.
C. Cash dividend.
D. Share split.
E. Stock dividend.


Failure to record the declaration and distribution of a share dividend would:
A. Cause the balance sheet to be out of balance.
B. Cause the outstanding shares to exceed the equity.
C. Cause an understatement of equity.
D. Cause an overstatement of equity.
E. Have no effect on total equity.
16-4

The amount of income earned by each outstanding common share of a company is
known as:
A. Restricted retained earnings.
B. Earnings per share.
C. Income from continuing operations.
D. Dividends payable.
E. A share dividend.

The financial statement impact for a company that desires to make a change in
accounting policy include(s):
A. Retrospective restatement of prior period financial statements.
B. Financial impact charged or credited net of tax to opening balance of retained
earnings.
C. The nature and justification for the change.
D. The effect of the change in current year net income.
E. All of these answers are correct.
Retained earnings:
A. Are the cumulative net profits or losses minus dividends paid since the date of
incorporation.
B. Are part of shareholders' equity.
C. Represent an amount of cash available to pay shareholders.
D. Are the cumulative net profits or losses minus dividends paid since the date of
incorporation, and are part of shareholders' equity.
E. All of these answers are correct.
Accounting changes will be presented on which statement:
A. Income Statement.
B. Balance Sheet
C. Cash Flow Statement.
D. Statement of Changes in Equity
E. All of these answers are correct.


16-5



Which of the following is true about treasury shares?
A. Treasury shares are held by shareholders.
B. Treasury shares increase retained earnings.
C. Treasury shares increase the number of common shares outstanding.
D. Treasury shares that are sold for more than cost, result in a gain for the company.
E. Treasure Shares are reported as a separated item in the contributed capital section
of equity.
Corporations buy back treasury shares:
A. To avoid a hostile take-over.
B. To have shares available for a merger or acquisition.
C. To have shares available for employee compensation.
D. To maintain market value for the company shares.
E. All of these answers are correct.
The following data were obtained from Bolan, Inc.:
The number of outstanding shares is:
A. 12,000.
B. 18,000.
C. 17,000.
D. 23,000.
E. 15,000.

Retirement of shares:
A. Reduces the number of issued shares.
B. Is permissible under law if the interest of the shareholders is not jeopardized.
C. Is accounted for like treasury shares.
D. Reduces the number of issued shares and is permissible under law if the interest of
the shareholders is not jeopardized.
E. All of these answers are correct.
16-6
Matching Questions

Match each of the following terms with the appropriate definition.
1. Restricted
retained earnings
2. Earnings per
share
3. Share split
4. Share dividend
5. Treasury share
6. Reverse share
split

An act by a corporation to call in its shares and replace
each share with more than one new share.
Shares that were reacquired and are still held by the
issuing corporation.
Limits that identify how much of the retained earnings
balance is not available for dividends or the repurchase of
shares.
An act by a corporation to call in its shares and replace
each share with less than one new share.
A distribution of shares to existing shareholders.
(Net income - Preferred dividends)/Weighted-average
common shares outstanding.
3
5
1
6
4
2
Match each of the following terms with the appropriate definition.
A component of a company's operations that serves a
particular line of business or class of customers and that
1. Earnings per
has assets, activities, and financial results of operations that
share
can be distinguished from other parts of the business.
The amount of income earned by each share of a
2. Treasury shares
company's outstanding common stock.
3. Retirement of
Occurs when a corporation repurchases and cancels its
shares
own shares.
4. Segment of a
An account that includes gains and losses that are not
business
part of net income but affect equity.
5. Other
Corrections to previous estimates or predictions about
comprehensive
future events and outcomes, such as residual values and
income
useful lives of operating assets.
6. Changes in
accounting
Shares that were reacquired and are still held by the
estimates
issuing corporation.
7. Share dividend
A distribution of shares to existing shareholders.
Arises when a corporation has a debit balance in
8. Deficit
retained earnings.
16-7
4
1
3
5
6
2
7
8

Match each of the following terms with the appropriate definition.
1. Changes in
accounting estimates
2. Reverse share split
3. Restricted retained
earnings
4. Share dividend
5. Discontinued
operation
Corrections to previous estimates or predictions about
future events and outcomes, such as residual values and
the useful lives of operating assets.
When a company with operations in different
segments sells a segment.
An act by a corporation to call in its shares and
replace each share with less than one new share.
Retained earnings that are not available for dividends
because of legal or contractual limitations.
A corporation's distribution of its own shares to its
shareholders without receiving any payment in return.
16-8
1
5
2
3
4