Deck 13: Accounting for Corporations

Question 1

The stockholders' equity in a corporation consists of capital contributed by stockholders and retained earnings.

Answer 1

True

Question 2

Limited liability can be viewed as both an advantage and a disadvantage.

Answer 2

True

Question 3

Financing a business with common stock is more risky than financing it with bonds.

Answer 3

False

Question 4

The par value of stock is an arbitrary amount assigned to each share of stock.

Question 5

The board of directors carries out the day-to-day operations of the business.

Question 6

Corporate earnings are subject to double taxation.

Question 7

The entry required to record start-up and organization costs will cause a increase in assets.

Question 8

To form a corporation,most states require persons called underwriters to sign and file it with proper state official.This application contains the articles of incorporation.

Question 9

One advantage of a corporation is the lack of mutual agency.

Question 10

Legal capital of a corporation is the maximum amount that can be reported as contributed capital.

Question 11

The number of outstanding shares should exceed the number of authorized shares.

Question 12

Stockholders elect the board of directors who then appoint the officers of a corporation.

Question 13

The liability of a stockholder is usually limited to the stockholder's investment in the corporation.

Question 14

Corporations are subject to more government control and regulation than are other forms of business.

Question 15

A corporation often uses an underwriter to guarantee the sale of stock in an initial public offering (IPO).

Question 16

Start-up and organization costs should be expensed as incurred.

Question 17

The sale of shares in a corporation by one stockholder to another does not affect the total capital of the corporation.

Question 18

Stockholders who own preferred stock usually do not have voting rights,whereas stockholders who own common stock usually have voting rights.

Question 19

Underwriters typically charge 1 percent of the selling price to guarantee the sale of initial public offerings of stock.

Question 20

An advantage of the corporate form is the separation of ownership and control.

Question 21

The word preferred in the phrase preferred stock means that an owner of preferred stock has some advantages over a bondholder.

Question 22

Retained earnings are a component of contributed capital.

Question 23

The sale of treasury stock at an amount less than cost results in a loss to be reported on the income statement.

Question 24

Treasury stock usually is recorded at cost when purchased.

Question 25

Callable preferred stock is preferred stock that may be redeemed or retired at the option of the issuing corporation.

Question 26

The par value of treasury stock is deducted from total Contributed Capital and Retained Earnings in determining total stockholders' equity.

Question 27

For accounting purposes,stated value is treated the same way as par value.

Question 28

If a corporation issues par value common stock and the proceeds are less than par value,the
Common Stock account is credited for the par value.

Question 29

Preferred stock is considered the residual equity of a corporation.

Question 30

When no-par common stock has a stated value,the stated value of the shares issued normally is considered the legal capital of the corporation.

Question 31

When no-par common stock without a stated value is issued for cash,the Common Stock account is credited for an amount equal to the cash proceeds.

Question 32

A corporation cannot declare a dividend that would cause stockholders' equity to fall below the legal capital.

Question 33

Dividends in arrears on cumulative preferred stock are not paid until after dividends are paid on common stock.

Question 34

Treasury stock is considered a reduction in stockholders' equity,not a purchase of assets .

Question 35

Once an owner of convertible preferred stock has converted to common,he or she cannot convert back to preferred.

Question 36

Dividends in arrears pertain only to cumulative preferred stock.

Question 37

Dividends in arrears must be paid when a corporation calls in its preferred stock.

Question 38

When common stock with a par value is sold for a price that exceeds par value,the Common Stock account is credited for the cash proceeds received from the sale of the shares.

Question 39

Treasury shares are shares that are authorized but unissued.

Question 40

Dividends in arrears are disclosed as liabilities of a corporation.

Question 41

Treasury stock is reported as an asset on the balance sheet because treasury shares may be sold later.

Question 42

A stock split results in a transfer of the market value of the stock from Retained Earnings to Contributed Capital.

Question 43

A small stock dividend normally results in a transfer from Retained Earnings to Contributed Capital of an amount equal to the market value of the stock.

Question 44

Receiving dividends is the only way in which stockholders can earn a return on their investment in a corporation.

Question 45

The declaration of a cash dividend causes an increase in a corporation's liabilities at the date of declaration.

Question 46

A stock dividend exceeding 20 to 25 percent is properly treated as a stock split.

Question 47

A stock dividend is a pro rata distribution of cash to a corporation's stockholders.

Question 48

The entry to record the purchase of treasury stock will cause total stockholders' equity to decrease by the amount of the cost of the treasury shares.

Question 49

A stock dividend will cause an increase in total contributed capital at the date the dividend is declared.

Question 50

A corporation's board of directors may influence dividend policies,but the company's senior management has sole authority to declare dividends.

Question 51

The entry to record the retirement of treasury stock will include a debit to Common Stock for the par value of the retired shares.

Question 52

When treasury stock is sold at a price below its cost,the entry to record the sale has the effect of reducing total stockholders' equity.

Question 53

A stock dividend increases the total amount of stockholders' equity.

Question 54

No entry is required on the date of payment for a cash dividend.

Question 55

A stock split normally increases total stockholders' equity.

Question 56

A dividend that represents a return to the stockholders of a part of their paid-in capital rather than a distribution out of retained earnings is called a liquidating dividend.

Question 57

When the date of declaration and the payment date occur in the same period,the amount of dividends shown on the statement of stockholders' equity and on the statement of cash flows will be equal.

Question 58

Cash dividends become a liability of a corporation when the stock goes ex-dividend.

Question 59

A liquidating dividend is usually paid when a company is going out of business or reducing its operations.

Question 60

The account Common Stock Distributable is classified as a current liability.

Question 61

Return on equity equals net income divided by average stockholders' equity.

Question 62

Stock options often are granted by a corporation to management personnel as a means of additional compensation and motivation of these employees.

Question 63

A stock dividend will cause a decrease in the total number of shares issued and outstanding.

Question 64

A statement of stockholders' equity can take the place of a statement of retained earnings.

Question 65

The effects on individual contributed capital accounts of a conversion of preferred stock to common stock during the period are disclosed on the statement of stockholders' equity.

Question 66

The declaration of cash dividends will increase the book value per share of common stock.

Question 67

A disadvantage of the corporate form of business is

A)lack of mutual agency.
B)professional management.
C)ease of transfer of ownership.
D)tax treatment.

Question 68

Which of the following is a correct statement relating to the concept of mutual agency and the corporate form of business?

A)There is no mutual agency with the corporate form of business.
B)Mutual agency may or may not exist in a corporation,depending on the individual state law.
C)Mutual agency always exists in the corporate form of business.
D)Mutual agency may or may not exist in a corporation,depending on a vote by the shareholders.

Question 69

Book value per share of stock represents the amount the shareholder will receive per share if the company is sold or liquidated.

Question 70

The price/earnings (P/E)ratio is a measure of investors' confidence in a company's future.

Question 71

The date on a statement of stockholders' equity is for a specific point in time.

Question 72

A 2-for-1 stock split will have the same effect on the number of shares outstanding as a 200 percent stock dividend.

Question 73

Dividend yield is the most important ratio associated with stockholders' equity and is a common measure of management's performance.

Question 74

Compensation expense related to employee stock options is a tax-deductible expense for the corporation.

Question 75

Which of the following phrases is not descriptive of the corporate form of business?

A)Professional management
B)Continuous existence
C)Double taxation
D)Unlimited liability

Question 76

In computing book value per share of common stock,common stock distributable is included in the divisor.

Question 77

An advantage of the corporate form of business is

A)separation of ownership and control.
B)tax treatment.
C)lack of mutual agency.
D)government regulation.

Question 78

The book value of one share of callable preferred stock is equal to the call value of the preferred share minus any dividends in arrears.

Question 79

When the dividends yield is relatively low,investors must expect some of their return to come from increases in the price of the shares.

Question 80

A disadvantage of the corporate form of business is

A)centralized authority and responsibility.
B)its status as a separate legal entity.
C)government regulation.
D)continuous existence.