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Unit1 statement of changes in equity

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Unit 1 - Financial Statements
Topic 4 - Statement of Changes in Equity
PRETEST
In a separate sheet, write TRUE if the statement is correct or FALSE if the statement is incorrect.
1. Entity A's total equity at the beginning of the period was P100. During the period, Entity A earns
profit of P20 and declares dividends of P5. Entity A's total equity at the end of the period is
P125.FALSE
2. Entity B's total equity at the beginning of the period was P20. During the period Entity B incurs
loss of P2 and declares total dividends of P5. Entity B's total equity at the end of the period is
P13.TRUE
3. Entity C's total equity at the end of the period is P115. During the period Entity C earns profit
of P20 and declares total dividends of P5. Entity C's total equity at the beginning of the period was
P100.TRUE
4. Entity D's total equity at the beginning of the period was P50. During the period. Entity D reports
total comprehensive income of 20 and declares total dividends of 5. The net change in Entity D's
equity during the period is an increase of P20.TRUE
5. The equity section of the statement of financial position of a corporate business shows more
than one equity component. TRUE

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ASSESSMENT
ACTIVITY 1
True or False. Write True if the statement is correct otherwise write false.
1. A corporation is incorporated in only one state regardless of the number of states in which it
operates. TRUE
2. The preemptive right allows stockholders the right to vote for directors of the company.
FALSE
3. Common stock is the residual corporate interest that bears the ultimate risks of loss. TRUE
4. Earned capital consists of additional paid-in capital and retained earnings. FALSE
5. True no-par stock should be carried in the accounts at issue price without any additional paid-
in capital reported. TRUE
6. Companies allocate the proceeds received from a lump-sum sale of securities based on the
securities’ par values. FALSE
7. Companies should record stock issued for services or noncash property at either the fair value
of the stock issued or the fair value of the consideration received. TRUE
8. Treasury stock is a company’s own stock that has been reacquired and retired. FALSE
9. The cost method records all transactions in treasury shares at their cost and reports the treasury
stock as a deduction from capital stock. FALSE
10. When a corporation sells treasury stock below its cost, it usually debits the difference
between cost and selling price to Paid-in Capital from Treasury Stock. TRUE
11. Participating preferred stock requires that if a company fails to pay a dividend in any year, it
must make it up in a later year before paying any common dividends. FALSE
12. Callable preferred stock permits the corporation at its option to redeem the outstanding
preferred shares at stipulated prices. TRUE
13. The laws of some states require that corporations restrict their legal capital from distribution
to stockholders. TRUE
14. The SEC requires companies to disclose their dividend policy in their annual report. FALSE
15. All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a
corporation. FALSE
16. Dividends payable in assets of the corporation other than cash are called property dividends
or dividends in kind. TRUE

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17. When a stock dividend is less than 20-25 percent of the common stock outstanding, a
company is required to transfer the fair value of the stock issued from retained earnings. TRUE
18. Stock splits and large stock dividends have the same effect on a company’s retained earnings
and total stockholders’ equity. FALSE
19. The rate of return on common stock equity is computed by dividing net income by the
average common stockholders’ equity. FALSE
20. The payout ratio is determined by dividing cash dividends paid to common stockholders by
net income available to common stockholders. TRUE
ACTIVITY 2
21. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
22. The pre-emptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
23. The pre-emptive right enables a stockholder to
a. share proportionately in any new issues of stock of the same class.
b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. receive the same amount of dividends on a percentage basis as the preferred stockholders.
S24. In a corporate form of business organization, legal capital is best defined as

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