Deck 10: Stockholders Equity

Question 1

In the event a corporation is dissolved,common stockholders receive preference over preferred stockholders in the distribution of assets.Preferred stockholders receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved.

Answer 1

False

Question 2

Convertible preferred stock allows the stockholder to convert shares of preferred stock into common stock at a specified conversion ratio.

Answer 2

True

Question 3

We usually record preferred stock as equity and report it in the stockholders' equity section of the balance sheet just above common stock.

Answer 3

True

Question 4

A corporation has limited liability and attracting outside investment is easier relative to sole-proprietorships and partnerships.Two advantages of a corporation relative to sole-proprietorships and partnerships are (1)limited liability and (2)the ability to raise capital and transfer ownership.

Question 5

Limited liability means that even in the event of bankruptcy,stockholders in a corporation can lose no more than the amount they invested in the company.

Question 6

Outstanding stock is the number of shares held by investors.Issued stock is the number of shares that have been sold to investors.Outstanding stock is the number of shares held by investors.Issued stock includes treasury stock.Outstanding stock excludes treasury stock.

Question 7

Paid-in Capital is the amount stockholders have invested in the company.

Question 8

Authorized stock is the number of shares that have been sold to investors.Authorized stock is the total number of shares available to sell,stated in the company's articles of incorporation.Issued stock is the number of shares that have been sold to investors.

Question 9

Owners in a sole proprietorship or a partnership can be held personally liable for debts the company has incurred,over and beyond the investment they have made.

Question 10

Par value has a direct relationship to the market value of the common stock.Par value is the legal capital per share of stock that's assigned when the corporation is first established.Par value has no relationship to the market value of the common stock.

Question 11

A company credits Additional Paid-in Capital for the portion of the cash proceeds above par value received for the issuance of stock.

Question 12

Retained Earnings is the amount stockholders have invested in the company.Paid-in capital is the amount stockholders have invested in the company.

Question 13

Cumulative preferred stock means that dividends accumulate interest during the year.Cumulative preferred stock means shares receive priority for future dividends,if dividends are not paid in a given year.

Question 14

Angel investors are investors that focus on companies at or near bankruptcy.Angel investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture.

Question 15

An S Corporation allows a company to enjoy limited liability as a corporation,but tax treatment as a partnership.

Question 16

All publicly held corporations in the United States are regulated by the Securities and Exchange Commission.

Question 17

The number of shares outstanding is equal to the number of shares issued minus the number of shares repurchased.

Question 18

A corporation has lower taxes and less paperwork relative to sole-proprietorships and partnerships.A corporation has higher taxes and more paperwork relative to sole-proprietorships and partnerships.

Question 19

Assets plus liabilities equal stockholders' equity.Assets equal liabilities plus stockholders' equity.

Question 20

Par value is the legal capital per share of stock that's assigned when the corporation is first established.

Question 21

We can estimate the average purchase cost of treasury stock per share by dividing the treasury stock balance by the number of shares repurchased.

Question 22

Treasury stock is a contra-equity account because treasury stock increases total stockholders' equity.Treasury stock is a contra-equity account because treasury stock decreases total stockholders' equity.

Question 23

The stockholders' equity section of the balance sheet shows how each equity account changed during the year.The stockholders' equity section of the balance sheet presents the balance of each equity account at a point in time.The statement of stockholders' equity shows how each account changed during the period.

Question 24

We record treasury stock at the cost of the shares acquired.

Question 25

When we reissue treasury stock,we report the difference between its cost and the cash received as an increase/decrease in additional paid-in capital.

Question 26

Stock repurchases reduce the number of shares outstanding,thereby increasing earnings per share.

Question 27

Total assets,total liabilities,and total stockholders' equity do not change as a result of a stock dividend.

Question 28

Common stock is listed before preferred stock in the balance sheet.Preferred stock is listed before common stock in the balance sheet.

Question 29

Small stock dividends are recorded by debiting Retained Earnings for the par value per share.Small stock dividends are recorded by debiting Retained Earnings for the market value,rather than the par value,per share.

Question 30

If a company has expenses that are more than revenues,the net loss decreases retained earnings.

Question 31

The statement of stockholders' equity shows how each equity account changed during the year.

Question 32

If a company purchases shares of another company,it records this transaction as treasury stock.If a company purchases shares of another company,it records this transaction as an investment and not as treasury stock.

Question 33

No journal entry is made to record a stock split.

Question 34

Treasury stock is the repurchase of a company's own issued stock.

Question 35

We compute the return on equity ratio by dividing net income by ending stockholders' equity.We compute the return on equity ratio by dividing net income by average stockholders' equity.

Question 36

Dividends are paid on all shares issued by the company including treasury stock.Dividends are not paid on treasury shares repurchased by the company.

Question 37

The return on equity measures the ability of company management to generate earnings from the resources that owners provide.

Question 38

Retained earnings represent the earnings retained in the corporation - earnings not paid out as dividends to stockholders.

Question 39

The amount of retained earnings equals net income minus dividends for the current year.The amount of retained earnings equals all net income,less all dividends,since the company began operations.

Question 40

A stock split has no effect on the total of any account in stockholders' equity.

Question 41

Advantages of the corporate form of business include which of the following? I.Double taxation
II)Ability to raise capital
III)Ability to transfer ownership
IV)More paperwork
V)Limited liability

A)II.
B)II. ,III. ,V.
C)I. ,II. ,III.

Question 42

Advantages of the corporate form that have led to the growth of this form of business ownership include all of the following except:

A)Ability to raise capital.
B)Low government regulation.
C)Limited liability.

Question 43

Which of the following statements regarding the corporate form of business is correct?

A)The disadvantages are that generating capital is difficult and that owners have limited liability.
B)Disadvantages are that the business is subject to government regulations and double taxation on its income.
C)One disadvantage is that ownership is easy to transfer.

Question 44

The disadvantages of the corporate form of business include:

A)Ability to transfer ownership.
B)Additional taxes.
C)Limited liability.

Question 45

We calculate the PE ratio as the stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis.

Question 46

We calculate earnings per share as net income divided by the average shares outstanding during the period.

Question 47

Which of the following stages of equity financing comes last in the traditional order of progression?

A)Investment by friends and family of the founders.
B)Investment by the founders of the business.
C)Initial public offering (IPO).

Question 48

All publicly held corporations are regulated by what government organization?

A)The Financial Accounting Standards Board.
B)The Commission on Accounting Procedures.
C)The Accounting Principles Board.
D)The Securities and Exchange Commission.

Question 49

Issued stock refers to the number of shares:

A)Outstanding plus treasury shares.
B)Authorized.
C)In the hand of stockholders.

Question 50

In terms of total sales,assets,and earnings,the dominant form of business organization is a:

A)Sole proprietorship.
B)Partnership.
C)Corporation.

Question 51

Authorized common stock refers to the total number of shares:

A)Outstanding.
B)Issued.
C)Issued and outstanding.
D)That can be issued.

Question 52

Earnings per share is useful in comparing earnings performance across companies.Earnings per share is useful in comparing earnings performance for the same company over time.Earnings per share cannot be used to compare across companies because of differences in the number of shares outstanding among companies.

Question 53

Which of the following accounts is not reported in the stockholders' equity section of the balance sheet?

A)Treasury Stock.
B)Common Stock.
C)Sales Revenue.

Question 54

Earnings per share (EPS)measures the net income earned per share of common stock outstanding.

Question 55

Outstanding common stock refers to the total number of shares:

A)Issued.
B)Issued plus treasury stock.
C)Issued less treasury stock.

Question 56

Common stockholders usually have all of the following rights except:

A)To receive dividends when declared.
B)To share in the distribution of assets.
C)To elect board of directors.
D)To participate in the day-to-day operations.

Question 57

Which of the following stages of equity financing comes first in the traditional order of progression?

A)Investment by friends and family of the founders.
B)Initial Public Offering.
C)Investment by the founders of the business.

Question 58

Which of the following is a disadvantage of an S Corporation?

A)Double Taxation
B)Liability
C)Restrictions on number of stockholders

Question 59

The correct order from the smallest number of shares to the largest number of shares is:

A)Authorized,issued,and outstanding.
B)Outstanding,issued,and authorized.
C)Issued,outstanding,and authorized.

Question 60

Which of the following is a reason that a corporation would prefer to issue stock instead of bonds?

A)Dividend payments can be deducted for income tax purposes but interest payments cannot.
B)Expansion is accomplished without surrendering ownership control.
C)The risk of going bankrupt is less.

Question 61

Preferred stock is called preferred because it usually has two preferences over common stock.These preferences relate to:

A)Dividends and voting rights.
B)Par value and dividends.
C)The preemptive right and voting rights.
D)Dividends and distribution of assets if the corporation is dissolved.

Question 62

Which of the following is not a potential feature of preferred stock?

A)Convertible.
B)Redeemable.
C)Cumulative.
D)They all are potential features of preferred stock.

Question 63

Which of the following has the highest expected return to the investor?

A)Common Stock.
B)Preferred Stock.
C)Bonds.

Question 64

Outstanding common stock specifically refers to:

A)Stock that is performing well.
B)Stock that has been authorized for issuance.
C)Stock issued plus treasury stock.
D)Stock in the hands of stockholders.

Question 65

Jade Jewelers issued 15,000 shares of $1 par value stock for $20 per share.What is true about the journal entry to record the issuance?

A)Credit Common Stock $300,000.
B)Credit Cash $300,000.
C)Credit Common Stock $15,000.

Question 66

When a company issues 25,000 shares of $1 par value common stock for $10 per share,the journal entry for this issuance would include:

A)A debit to Cash for $25,000.
B)A debit to Additional Paid-in Capital for $25,000.
C)A credit to Additional Paid-in Capital for $250,000.
D)A credit to Common Stock for $25,000.

Question 67

The par value of shares issued is normally recorded in the:

A)Additional Paid-in Capital account.
B)Common Stock account.
C)Retained Earnings account.

Question 68

The Surf's Up issues 1,000 shares of 6%,$100 par value preferred stock at the beginning of 2017.All remaining shares are common stock.The company was not able to pay dividends in 2017,but plans to pay dividends of $18,000 in 2018.Assuming the preferred stock is cumulative,how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?

A)$6,000 to preferred stockholders and $12,000 to common stockholders.
B)$18,000 to preferred stockholders and $0 to common stockholders.
C)$12,000 to preferred stockholders and $6,000 to common stockholders.

Question 69

Preferred stock:

A)Is always recorded as a liability.
B)Is always recorded as part of stockholders' equity.
C)Can have features of both liabilities and stockholders' equity.

Question 70

If a company issues 1,000 shares of $1 par value common stock for $20 per share,what would be the effect on the accounting equation?

A)Increase assets and increase liabilities.
B)Increase assets and increase revenue.
C)Increase assets and increase stockholders' equity.

Question 71

A company issued 1,000 shares of $1 par value preferred stock for $5 per share.What is true about the journal entry to record the issuance?

A)Debit Preferred Stock $5,000.
B)Credit Cash $5,000.
C)Credit Preferred Stock $5,000.
D)Credit Additional Paid-In Capital $4,000.

Question 72

When a company issues 25,000 shares of $1 par value common stock for $10 per share,the journal entry for this issuance would include:

A)A debit to Cash for $25,000.
B)A debit to Additional Paid-in Capital for $25,000.
C)A credit to Common Stock for $250,000.
D)A credit to Additional Paid-in Capital for $225,000.

Question 73

Wright Inc.issued 20,000 shares of $1 par value common stock for $80,000.The journal entry to record this issuance includes a:

A)Credit to Common Stock for $80,000
B)Debit to Additional Paid-In Capital for $60,000
C)Credit to Cash for $80,000
D)Credit to Common Stock for $20,000

Question 74

Hayes Corporation issues 100 shares of its $1 par value common stock for $15 per share.The entry to record the issuance will not include a:

A)Debit to Cash $1,500.
B)Credit to Additional Paid-In Capital $1,400.
C)Credit to Common Stock of $100.
D)All of these.

Question 75

Which of the following financing alternatives has the highest preference of payment in a case where the company liquidates its assets?

A)Common Stock.
B)Preferred Stock.
C)Bonds.

Question 76

If a company issues 1,000 shares of $1 par value common stock for $20 per share,which of the following accounts would be credited?

A)Treasury Stock
B)Cash
C)Additional Paid-in Capital

Question 77

Which of the following has the lowest expected return to the investor?

A)Bonds.
B)Preferred Stock.
C)Common Stock.

Question 78

The par value of common stock represents:

A)The amount received when the stock was issued.
B)The liquidation value of a share.
C)The market value of a share of stock.
D)The legal capital per share of stock assigned when the corporation was first established.

Question 79

Which of the following is the most likely to have voting rights?

A)Common Stock.
B)Preferred Stock.
C)Bonds.

Question 80

South Beach Apparel issued 10,000 shares of $1 par value stock for $5 per share.What is true about the journal entry to record the issuance?

A)Debit Common Stock $10,000.
B)Credit Cash $50,000.
C)Credit Common Stock $50,000.
D)Credit Additional Paid-In Capital $40,000.