Deck 11: Reporting and Analyzing Equity

Question 1

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

Answer 1

True

Question 2

The total number of shares outstanding is the authorized stock.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

A corporation is a legal entity separate from its owners.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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 14

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

Question 15

Minimum legal capital requirements are intended to protect creditors.

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

Growth stocks generally pay large dividends on a regular basis.

Question 22

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

Question 23

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 24

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

Question 25

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

Question 26

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.
Price-Earnings Ratio = Market Price per Share/Earnings per Share; $80/$6.50 = 12.3

Question 27

If the dividends declared are 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 28

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

Question 29

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

Question 30

A company made an error in recording the 2016 purchase of computer equipment as an expense. This was discovered in 2017. The item should be reported as a prior period adjustment on the 2017 income statement.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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 37

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

Question 38

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 39

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

Question 40

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

Question 41

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

Question 42

Callable preferred stock gives a corporation the option of exchanging preferred shares into common shares at a specified rate.

Question 43

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

Question 44

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

Question 45

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

Question 46

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 47

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

Question 48

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

Question 49

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 50

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 51

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 52

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

Question 53

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

Question 54

A stock split increases total stockholders' equity.

Question 55

Paid and declared preferred dividends are called dividends in arrears.

Question 56

The declaration of cash dividends increases retained earnings.

Question 57

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

Question 58

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

Question 59

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

Question 60

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 61

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

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

Question 62

If the purchase price of retired stock exceeds the net amount removed from paid-in capital, the excess is debited to Retained Earnings.

Question 63

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

Question 64

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

Question 65

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

Question 66

Retained earnings:

A)Generally consists of a company's cumulative net income less any net losses and dividends declared since its inception.
B)Can only be appropriated by setting aside a cash fund.
C)Represent an amount of cash available to pay shareholders.
D)Are never adjusted for anything other than net income or dividends.
E)Represents the amount shareholders are guaranteed to receive upon company liquidation.

Question 67

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

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

Question 68

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

Question 69

Stockholders' equity consists of which of the following?

A)Long-term assets.
B)Paid-in capital and retained earnings.
C)Paid-in capital and par value.
D)Retained earnings and cash.
E)Premiums and discounts.

Question 70

A class of stock that can usually be issued at any price without creating a minimum legal capital deficiency is called:

A)Convertible stock.
B)No-par stock.
C)Callable stock.
D)Noncumulative stock.
E)Discounted stock.

Question 71

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)Stock subscriptions.
C)Organization expenses.
D)Selling expenses.
E)Prepaid fees.

Question 72

The board of directors of a corporation:

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

Question 73

Stock that is retired is the same as authorized and unissued stock.

Question 74

Par value of a stock refers to the:

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

Question 75

A corporation's minimum legal capital is established by recording the par or stated value of the number of shares:

A)Issued.
B)Authorized.
C)Subscribed.
D)Outstanding.
E)In treasury.

Question 76

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

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

Question 77

The total amount of cash and other assets received by a corporation from its stockholders in exchange for its stock is:

A)Always equal to its par value.
B)Always equal to its stated value.
C)Referred to as paid-in capital.
D)Referred to as retained earnings.
E)Always below its stated value.

Question 78

A proxy is:

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

Question 79

In many states, the minimum amount that stockholders must contribute to the corporation, and which is intended to protect the creditors of the corporation, is called the:

A)Par value of preferred.
B)Minimum legal capital.
C)Premium capital.
D)Stated value.
E)Working capital.

Question 80

Stated value of no-par stock is:

A)Another name for redemption value.
B)An amount assigned to par value stock by the state of incorporation.
C)The market value of the stock on the date of issuance.
D)The difference between the par value of stock and the amount below or above par value paid-in by the stockholder.
E)An amount assigned to no-par stock by the corporation's board of directors.