Question 1

Two of the three primary account classifications within shareholders' equity are:
A) Preferred stock and retained earnings.
B) The par of common stock and retained earnings.
C) Paid-in capital and retained earnings.
D) Preferred and common stock.

Accepted Answer

The two primary account classifications within shareholders' equity are paid-in capital (which represents the amount of capital that has been contributed by shareholders) and retained earnings (which represents the portion of a company's profits that have been retained rather than distributed as dividends). Preferred and common stock are types of shares issued by a company, but they are not considered account classifications within shareholders' equity. The par value of common stock is not an account classification within shareholders' equity.

Question 2

The Model Business Corporation Act:
A) Uses the words "common" and "preferred" in describing distinguishing characteristics of stock.
B) Defines legal capital as the amount of net assets not available for distribution to shareholders.
C) Provides guidance for choosing an appropriate par for new issues of stock.
D) Has affected the laws of most states.

Accepted Answer

The Model Business Corporation Act has indeed influenced the laws of most states, serving as a template for many state statutes regulating corporate governance and operations. Option A is partially correct, as the Act does use the words "common" and "preferred," but it also uses other terms to describe the characteristics of stock. Option B is incorrect, as legal capital is defined as the amount of capital the corporation must retain to protect creditors in case of insolvency, rather than net assets not available for distribution to shareholders. Option C is also incorrect, as the Act does not provide guidance on the appropriate par value for new issues of stock.

Question 3

Cash dividends become a binding liability as of the record date.

Accepted Answer

Cash dividends become a binding liability on the declaration date, not the record date. The declaration date is when the board of directors officially approves and announces the dividend.

Question 4

Details of each class of stock must be reported:
A) On the face of the balance sheet only.
B) In disclosure notes only.
C) On the face of the balance sheet or in disclosure notes.
D) On the face of the balance sheet and in disclosure notes.

Accepted Answer

Details of each class of stock can be reported either on the face of the balance sheet or in the disclosure notes, as per accounting standards. This provides flexibility in how companies present their financial information.

Question 5

Corporations are formed in accordance with:
A) The Model Business Corporation Act.
B) Federal statutes.
C) The laws of individual states.
D) Federal trade commission regulations.

Accepted Answer

Corporations are formed in accordance with the laws of individual states. Each state has its own laws and regulations governing the formation of corporations. However, some states have adopted the Model Business Corporation Act as a guide for their own corporate laws. Federal statutes and Federal Trade Commission regulations may apply to certain aspects of corporations, but the formation process is primarily governed by state laws.

Question 6

In terms of business volume, the dominant form of business organization is the:
A) Partnership.
B) Corporation.
C) Limited liability company.
D) Proprietorship.

Accepted Answer

Corporations typically have the largest business volume due to their ability to raise large amounts of capital through the sale of stocks and bonds. Additionally, they can hire a large number of employees and expand their operations across multiple locations, further increasing their business volume. While partnerships, limited liability companies, and proprietorships can also be successful, they often have more limitations in terms of access to capital and resources.

Question 7

Dividends in arrears on cumulative preferred stock are liabilities to be paid at a later date.

Accepted Answer

Dividends in arrears on cumulative preferred stock are not considered liabilities until a dividend is declared by the company's board of directors. Until then, they are simply an indication of unpaid dividends that may be paid in the future.

Question 8

The net assets of a corporation are equal to:
A) Contributed capital.
B) Retained earnings.
C) Shareholders' equity.
D) None of these answer choices are correct.

Accepted Answer

The net assets of a corporation are equal to the shareholders' equity, which is the residual interest in the assets of the corporation after deducting liabilities. Contributed capital and retained earnings are two components of equity, but on their own, they do not represent the total equity or net assets of the corporation.

Question 9

Investors should be wary of stock buybacks during down times because the resulting decrease in shares and increase in earnings per share can be used to mask a slowdown in earnings growth.

Accepted Answer

During down times, companies may use stock buybacks to artificially increase earnings per share and mask a decline in earnings growth. Investors should be cautious of this and look at other financial indicators before making investment decisions.

Question 10

Stock designated as preferred usually has preferential rights over other classes of stock relative to dividends and liquidating distributions.

Accepted Answer

This is the typical characteristic of preferred stock.

Question 11

Paid-in capital must consist solely of amounts invested by shareholders.

Accepted Answer

Paid-in capital can also include the excess amount received from shareholders over the par value of the shares, not just the initial amounts invested.

Question 12

Treasury stock transactions never increase retained earnings or net income.

Accepted Answer

Treasury stock transactions involve buying back shares of the company's own stock, which reduces the number of outstanding shares. This does not generate any revenue or income for the company, therefore it does not affect retained earnings or net income.

Question 13

Issued stock refers to the number of shares:
A) Outstanding plus treasury shares.
B) Shares issued for cash.
C) Owned by shareholders.
D) That may be issued under state law.

Accepted Answer

Issued stock refers to the total number of shares that a company has sold to investors, including both outstanding shares (shares owned by shareholders) and treasury shares (shares held by the company itself). Therefore, choice A, outstanding plus treasury shares, is the correct answer. Choice B, shares issued for cash, only refers to a subset of issued stock. Choice C, owned by shareholders, refers specifically to outstanding stock. Choice D, that may be issued under state law, refers to authorized stock, which is different from issued stock.

Question 14

Noncash assets received as consideration for the issue of stock are always valued based on the fair value of the stock.

Accepted Answer

Noncash assets received as consideration for the issue of stock are valued based on the fair value of the noncash assets, not the stock.

Question 15

Stock dividends cause a reduction in retained earnings, but they never reduce total shareholders' equity.

Accepted Answer

Stock dividends are a redistribution of a company's earnings to its shareholders, reducing the amount of retained earnings. However, they do not affect the total amount of shareholders' equity, which is determined by adding retained earnings to other forms of equity, such as common stock and preferred stock.

Question 16

Outstanding common stock is:
A) Stock that is performing well on the New York Stock Exchange.
B) Stock that has been authorized by the state for issue.
C) Stock held in the corporate treasury.
D) Stock owned by shareholders.

Accepted Answer

Outstanding common stock refers to the total number of shares of common stock that are owned by shareholders and are currently available on the open market. This excludes any shares held in the corporate treasury or any authorized but unissued shares. Therefore, the correct answer is D - Stock owned by shareholders.

Question 17

The corporate charter sometimes is known as (a):
A) Articles of incorporation.
B) Statement of organization.
C) By-laws.
D) Registration statement.

Accepted Answer

The corporate charter is also known as the Articles of Incorporation, which outlines the basic information about a corporation's formation and structure.

Question 18

Restrictions on retained earnings must be disclosed in the body of the balance sheet.

Accepted Answer

Restrictions on retained earnings are typically disclosed in the notes to the financial statements, not in the body of the balance sheet.

Question 19

Under GAAP, the declaration of a property dividend may require the recognition of a gain or loss if the fair value of the property is different from its book value on the declaration date.

Accepted Answer

According to GAAP, when a property dividend is declared, the fair value of the property is used to determine the amount of the dividend. If the fair value is different from the book value, a gain or loss must be recognized at the time of the dividend declaration.

Question 20

Mandatorily redeemable preferred stock is reported as a liability.

Accepted Answer

Mandatorily redeemable preferred stock is a type of preferred stock that contains a mandatory redemption feature, meaning that the issuer is required to redeem the shares at a predetermined future date or upon the occurrence of a specific event. As a result, it is classified as a liability on the balance sheet, rather than as equity.

Quiz 18: Shareholders Equity

Two of the three primary account classifications within shareholders' equity are:

The Model Business Corporation Act:

Cash dividends become a binding liability as of the record date.

Details of each class of stock must be reported:

Corporations are formed in accordance with:

In terms of business volume, the dominant form of business organization is the: