Deck 13: Accounting for Corporations

Question 1

Common stock always carries a preference for receiving dividends over preferred stock.

Answer 1

False

Question 2

Stated value stock is no-par stock that is assigned a "stated" value per share by the corporation's board of directors.

Answer 2

True

Question 3

Stockholders' equity consists of paid-in capital and retained earnings.

Answer 3

True

Question 4

The total number of shares outstanding is the authorized stock.

Question 5

Minimum legal capital requirements are intended to protect creditors.

Question 6

The price at which a share of stock is bought or sold is known as par value.

Question 7

A corporation may be authorized to issue both common and preferred stock.

Question 8

Stock is attractive to investors because stockholders are not liable for the corporation's actions and debts and because stock is easily transferred.

Question 9

Cumulative preferred stock carries the right to be paid both current and all prior periods' unpaid dividends before any dividends are paid to common shareholders.

Question 10

Paid-in capital is the total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock.

Question 11

Common shareholders always share equally with all other shareholders in dividends.

Question 12

A corporation is a legal entity separate from its owners.

Question 13

Special rights often granted to preferred stock include a preference for receiving dividends and additional voting privileges.

Question 14

Corporations avoid many of the state regulations and controls that proprietorships and partnerships are subject to.

Question 15

If a corporation is authorized to issue 1,000 shares of $5 common stock, it is said to have $5,000 of stock outstanding.

Question 16

Shareholders in a corporation have the power to bind the corporation to contracts.

Question 17

Organization expenses of a corporation often include legal fees and promoter fees.

Question 18

A proxy is a document that gives a designated agent the right to vote a shareholder's stock.

Question 19

A preemptive right means shareholders can purchase their proportional share of common stock issued later by the corporation.

Question 20

A registrar keeps stockholder records and prepares official lists of stockholders and dividend payments.

Question 21

The price-earnings ratio reveals information about the stock market's expectations for a company's future earnings growth.

Question 22

Dividend yield is defined as the annual cash dividends per share divided by the market price per share of a company's stock.

Question 23

Robin Company had net income of $67,000. The company had 9,000 weighted average common shares outstanding. The basic earnings per share equal $7.44 per share.

Question 24

A company made an error in recording the Year 1 purchase of computer equipment as an expense. This was discovered in Year 2. The item should be reported as a prior period adjustment on the Year 2 income statement.

Question 25

If the dividends account is not recorded as a reduction to Retained Earnings on the date of declaration, the dividends account is closed to Retained Earnings at the end of the accounting period.

Question 26

Retained earnings are part of the stockholders' claims on the company's net assets.

Question 27

If a company has no preferred stock, basic earnings per share is equal to net income divided by the number of weighted average common shares outstanding.

Question 28

Changes in accounting estimates are accounted for in current and future periods.

Question 29

The term restricted retained earnings refers to statutory but not contractual restrictions.

Question 30

Stocks with a price-earnings ratio less than 20 to 25 are likely to be overpriced.

Question 31

Book value per share reflects the value per share if a company is liquidated at balance sheet amounts.

Question 32

The price-earnings ratio is computed by dividing earnings per share by the market price per share.

Question 33

Dividend yield is computed by dividing earnings per share by the market value per share.

Question 34

Growth stocks generally pay large dividends on a regular basis.

Question 35

Earnings per share is the amount of income earned per share of a company's outstanding (weighted-average) common stock.

Question 36

Retained earnings generally consist of a company's cumulative net income less any net losses and dividends declared since its inception.

Question 37

A common statutory restriction is reported on the income statement whereas; a common contractual restriction is reported in the stockholders' equity section of the balance sheet.

Question 38

If a company has noncumulative preferred stock, basic earnings per share is equal to net income less preferred dividends declared divided by the number of weighted average common shares outstanding.

Question 39

Dividend yield shows the annual amount of cash dividends distributed to common shares relative to the stock's market price.

Question 40

A company has earnings per share of $6.50. Its dividend per share is $0.50, and its market price per share is $80. Its price-earnings ratio equals 13.

Question 41

Declaration of a stock dividend results in a liability being recorded.

Question 42

A stock split increases total stockholders' equity.

Question 43

Common Stock Dividend Distributable is a liability account.

Question 44

The date of record is the date that directors vote to pay a cash dividend to shareholders.

Question 45

Large stock dividends are recorded at par or stated value.

Question 46

A stock dividend does not reduce a corporation's assets or its stockholders' equity.

Question 47

A corporation may not legally give shares of its stock to promoters in exchange for their services in organizing the corporation.

Question 48

A debit balance in retained earnings is referred to as an accumulated deficit.

Question 49

Small stock dividends are recorded at par or stated value.

Question 50

The declaration of cash dividends increases retained earnings.

Question 51

Common Stock Dividend Distributable is an equity account.

Question 52

When no-par stock is not assigned a stated value, the total amount received is recorded in the Common Stock account.

Question 53

If a corporation receives assets other than cash in exchange for stock, it records the assets received at their market value as of the date of the transaction.

Question 54

A large stock dividend only occurs when a distribution of more than 50% of previously outstanding shares is issued.

Question 55

A stock dividend is a distribution of corporate assets that returns part of the original investment to shareholders.

Question 56

Dividing stockholders' equity applicable to common shares by the number of common shares outstanding yields the book value per common share.

Question 57

The journal entry to record the declaration of dividends on common stock includes a debit to Retained Earnings and a credit to Common Dividend Payable.

Question 58

A reverse stock split increases the market value per share and the par value per share of stock.

Question 59

The main limitation in using book value per share for stock valuation models is the potential difference between recorded value and market value for both assets and liabilities.

Question 60

A stock split is the distribution of additional shares of stock to stockholders according to their percent of ownership.

Question 61

A stock dividend decreases the market price of the company's stock.

Question 62

Corporations issue preferred stock to raise capital without sacrificing control of the corporation and/or to boost the return earned by common shareholders.

Question 63

Cumulative preferred stock has a right to be paid both current and prior periods' unpaid dividends before any dividend is paid to common shareholders.

Question 64

Participating preferred stock has a feature that allows its holders to share with common shareholders in any dividends paid in excess of the percent or dollar amount stated on the preferred stock.

Question 65

A proxy is:

A) A contractual commitment by an investor to purchase unissued shares of stock.
B) An arbitrary amount assigned to no-par stock by the corporation's board of directors.
C) A document that delegates a stockholder's voting rights to an agent.
D) An amount of assets defined by state law that stockholders must invest and leave invested in a corporation.
E) The right of common stockholders to protect their proportionate interests in a corporation by having the first opportunity to purchase additional shares of common stock issued by the corporation.

Question 66

Treasury stock is stock that has been authorized, issued, and is outstanding.

Question 67

The Paid-in Capital, Treasury Stock account can never have a debit balance.

Question 68

When a corporation has only one class of stock, the stock is called:

A) Preferred stock.
B) No-par value stock.
C) Common stock.
D) Stated value stock.
E) Par value stock.

Question 69

All stock dividends are recorded at par value so there would never be a credit to the paid-in capital in excess of par value account.

Question 70

The number of shares that a corporation's charter allows it to sell is referred to as:

A) Preferred stock.
B) Common stock.
C) Authorized stock.
D) Outstanding stock.
E) Issued stock.

Question 71

The right of common shareholders to purchase their proportional share of any common stock later issued by the corporation is called a:

A) Right to call.
B) Proxy right.
C) Voting right.
D) Preemptive right.
E) Financial leverage.

Question 72

Paid and declared preferred dividends are called dividends in arrears.

Question 73

Purchasing treasury stock reduces the corporation's assets and stockholders' equity by unequal amounts.

Question 74

A liability for a dividend does not exist until the directors declare a dividend.

Question 75

If a company resells treasury stock below the acquisition cost, a loss from the sale of treasury stock is recorded.

Question 76

The Paid-in Capital, Treasury Stock account can have a zero or credit balance.

Question 77

The costs of bringing a corporation into existence, including legal fees, promoter fees, and amounts paid to obtain a charter are called:

A) Minimum legal capital.
B) Selling expenses.
C) Prepaid fees.
D) Organization expenses.
E) Stock subscriptions.

Question 78

The board of directors of a corporation:

A) Do not have the power to bind the corporation to contracts, due to lack of mutual agency.
B) Are elected by the corporate registrar.
C) Are responsible for and have final authority for managing corporate activities.
D) Are responsible for day-to-day operations of the business.
E) May not also be executive officers of the corporation, due to the separate entity principle.

Question 79

A stock dividend, declared by a corporations's directors, is a distribution of additional shares of the corporation's own stock to its stockholders without the receipt of any payment in return.

Question 80

Par value of a stock refers to the:

A) Market value of the stock on the date of the financial statements.
B) Issue price of the stock.
C) Dividend value of the stock.
D) Maximum selling price of the stock.
E) Value assigned per share by the corporate charter.