Question 1

A retained earnings statement shows the same information as a corporation income statement.

Accepted Answer

A retained earnings statement shows the changes in a company's retained earnings over a period of time due to net income/loss and dividends. While an income statement shows a company's revenues and expenses over a period of time to determine its net income/loss. The retained earnings statement does not show the same information as a corporation income statement.

Question 2

Return on common stockholders' equity is computed by dividing net income by ending stockholders' equity.

Accepted Answer

Return on common stockholders' equity is computed by dividing net income by average common stockholders' equity for the period, not just ending stockholders' equity.

Question 3

Dividends may be declared and paid in cash or stock.

Accepted Answer

Dividends can be paid in either cash or stock, also known as a stock dividend.

Question 4

A successful corporation can have a continuous and perpetual life.

Accepted Answer

A corporation is a separate legal entity from its owners/shareholders, so it can continue to exist even if ownership or management changes.

Question 5

The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.

Accepted Answer

The amount of a cash dividend liability is recorded on the date of declaration, not the date of record, because it is on that date that the company's board of directors authorizes the payment of the dividend. The date of record is used to determine which shareholders are eligible to receive the dividend, but does not impact the recording of the liability itself.

Question 6

Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.

Accepted Answer

Restricted retained earnings are funds that are not available for dividend distribution, whether for preferred or common stock dividends, as they are reserved for specific purposes such as legal requirements or contractual obligations.

Question 7

The payout ratio is computed by dividing total cash dividends declared by retained earnings.

Accepted Answer

The payout ratio is computed by dividing total cash dividends declared by net income, not by retained earnings.

Question 8

Retained earnings that are restricted are unavailable for dividends.

Accepted Answer

Restricted retained earnings refer to profits that are required to be set aside for a specific purpose, such as future capital expenditures or debt repayment, and are therefore not available for distribution as dividends.

Question 9

Many companies prepare a stockholders' equity statement instead of presenting a detailed stockholders' equity section in the balance sheet.

Accepted Answer

It is true that some companies prepare a separate stockholders' equity statement instead of presenting the details in the balance sheet. This statement shows the changes in the various components of equity over a period of time.

Question 10

Common Stock Dividends Distributable is shown within the Paid-in Capital subdivision of the stockholders' equity section of the balance sheet.

Accepted Answer

Common Stock Dividends Distributable represents dividends declared by the company but not yet paid to shareholders, and is classified under the Paid-in Capital subdivision of the stockholders' equity section of the balance sheet.

Question 11

Cash dividends are not a liability of the corporation until they are declared by the board of directors.

Accepted Answer

Cash dividends become a liability of the corporation only once they are declared, as at that point the corporation is legally obligated to pay them to its shareholders. Until then, they are a potential liability and are recorded in the dividend payable account as a current liability.

Question 12

A detailed stockholders' equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.

Accepted Answer

The stockholders' equity section of the balance sheet will detail the various types of stock issued and outstanding, any additional paid-in capital, retained earnings or accumulated deficit, and any treasury stock. While this information may provide insight into the number of shares of common stock outstanding, it will not typically list the names of individual stockholders who are eligible to receive dividends on the date of record.

Question 13

The Accumulated Other Comprehensive income account can have either a debit or credit balance.

Accepted Answer

The Accumulated Other Comprehensive Income (AOCI) account can have either a debit or credit balance depending on the amounts of unrealized gains or losses that have been recorded in the account. Unrealized gains will increase the balance of AOCI, resulting in a credit balance, while unrealized losses will decrease the balance of AOCI, resulting in a debit balance.

Question 14

Treasury stock purchased for $25 per share that is reissued at $20 per share, results in a Loss on Sale of Treasury Stock being recognized on the income statement.

Accepted Answer

When treasury stock is reissued at a price lower than its cost, it results in a gain on sale of treasury stock, not a loss. Therefore, the statement given in the question is false.

Question 15

Net income of a corporation should be closed to retained earnings and net losses should be closed to paid-in capital accounts.

Accepted Answer

Net losses should be closed to retained earnings and any excess amount required to cover the losses should be closed to paid-in capital accounts.

Question 16

A 3-for-1 common stock split will increase total stockholders' equity but reduce the par or stated value per share of common stock.

Accepted Answer

A 3-for-1 common stock split does not change the total stockholders' equity; it only reduces the par or stated value per share of common stock and increases the number of shares outstanding.

Question 17

A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease.

Accepted Answer

A 10% stock dividend increases the number of shares outstanding, which dilutes the book value per share since the total equity remains the same while the number of shares increases.

Question 18

Retained earnings represents the amount of cash available for dividends.

Accepted Answer

Retained earnings represents the portion of net income that is kept by the company instead of being distributed as dividends. It is not the amount available for dividends but rather the amount that can be used for reinvesting in the business, paying off debt, or holding as reserves.

Question 19

Treasury stock should not be classified as a current asset.

Accepted Answer

Treasury stock is a contra equity account that represents the amount of capital paid in by shareholders that has been repurchased by the company. It is not a current asset as it does not have the ability to generate cash or be easily converted to cash within one year.

Question 20

A debit balance in the Retained Earnings account is identified as a deficit.

Accepted Answer

A debit balance in the Retained Earnings account indicates that the company has accumulated net losses or dividend payments that exceed profits. This is often referred to as a deficit.

Quiz 11: Corporations: Organization, Stock Transactions, and Stockholders Equity