Question 1

The consistency convention requires that

Accepted Answer

The consistency convention requires that a company use the same accounting procedures year after year. This ensures that financial statements are comparable over time and facilitates analysis and decision-making by investors and other stakeholders. While it is important for a company to disclose its accounting policies, this is not specifically required by the consistency convention. The use of independent auditors and industry-wide accounting methods are not directly related to consistency in accounting procedures.

Question 2

Par value or stated value is arbitrarily set when stock is authorized.

Accepted Answer

Par value or stated value is indeed arbitrarily set when stock is authorized, usually at a very low amount such as $0.01 per share. This value does not necessarily reflect the actual market value of the stock.

Question 3

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.

Accepted Answer

The book value of one share of callable preferred stock is typically calculated based on the company's equity on the balance sheet divided by the number of outstanding shares, and does not directly factor in the call value or dividends in arrears.

Question 4

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

Accepted Answer

The answer of A 2-for-1 stock split will have the...

Question 5

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

Accepted Answer

The answer of A stock dividend exceeding 20 to 25...

Question 6

The quality of a company's earnings may be affected by the

Accepted Answer

The accounting methods used by a company can significantly impact the quality of its earnings. Different accounting methods can result in different amounts of revenue recognition, expense recognition, and asset valuation, all of which can affect the reported earnings of a company. Companies can use various accounting tricks to manipulate their earnings and make them look better or worse than they actually are. Therefore, it is essential to consider the accounting policies and methods used by a company before evaluating its earnings quality.

Question 7

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

Accepted Answer

A stock dividend is a distribution of additional shares of stock to existing shareholders. As a result, the total contributed capital of the company will increase because the shareholders receive new shares without paying for them. However, the total amount of equity is not affected by the stock dividend, as the value of each share will decrease proportionally with the increase in the number of shares.

Question 8

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

Accepted Answer

Common stock distributable represents shares that have been issued but haven't been fully paid for yet. As the company receives payment for these shares, the common stock distributable account decreases and the common stock account increases. Since these shares are already issued but not fully paid for, they are included in the total number of shares outstanding when calculating the book value per share of common stock. Therefore, common stock distributable is included in the divisor.

Question 9

Which of the following is not a component of income from operations?

Accepted Answer

Extraordinary losses are not included in income from operations. Income from operations is calculated by subtracting all costs and expenses (including write-downs and restructuring costs) from revenue. Extraordinary losses are events that are rare and unusual in nature, such as natural disasters or unexpected lawsuits, and are reported separately on the income statement.

Question 10

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

Accepted Answer

A stock split does not result in a transfer of market value from Retained Earnings to Contributed Capital. Instead, it results in an increase in the number of outstanding shares, and a proportionate decrease in the share price. The overall market value of the stock remains the same, but the number of shares outstanding increases.

Question 11

A stock split normally increases total stockholders' equity.

Accepted Answer

A stock split does not change the total stockholders' equity; it merely increases the number of shares outstanding while proportionally decreasing the par value per share, leaving the overall equity unchanged.

Question 12

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

Accepted Answer

Common Stock Distributable is classified as part of stockholders' equity, not as a current liability. It represents shares that have been authorized for issuance but have not yet been issued.

Question 13

When common stock is originally issued, its market value per share should approximate its par or stated value per share.

Accepted Answer

When common stock is originally issued, its market value per share may differ from its par or stated value per share, as it is determined by the supply and demand in the market. The market value may be higher or lower than the par value per share.

Question 14

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

Accepted Answer

The declaration of cash dividends reduces the amount of retained earnings, leading to a decrease in the book value per share of common stock.

Question 15

The write-down of an asset will affect

Accepted Answer

The write-down of an asset reduces the recorded value of the asset on the balance sheet, which in turn reduces total assets. It also results in an expense being recognized on the income statement, which reduces net income. Therefore, both total assets and net income are affected.

Question 16

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

Accepted Answer

Book value per share of stock represents the net asset value of the company divided by the number of outstanding shares, not the amount shareholders will receive if the company is sold or liquidated.

Question 17

A stock dividend does not affect the total amount of stockholders' equity.

Accepted Answer

When a company issues a stock dividend, it does not affect the total amount of stockholders' equity as it is simply a redistribution of existing equity among shareholders. The total number of shares increases while the per-share value decreases proportionally, but the total value of the company remains the same.

Question 18

When alternative acceptable accounting methods exist, a better quality of earnings generally is produced from selecting an accounting method that has the effect of reporting the

Accepted Answer

Selecting an accounting method that reports the lowest amount of current earnings is often seen as more conservative and can lead to higher quality of earnings, as it avoids inflating current earnings and provides a more realistic view of the company's financial health.

Question 19

A stock dividend will cause an increase in the total number of shares issued and outstanding.

Accepted Answer

A stock dividend involves issuing additional shares to current shareholders, which increases the total number of shares outstanding.

Question 20

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

Accepted Answer

A small stock dividend typically results in a transfer from Retained Earnings to Contributed Capital at the market value of the stock, not the par value.

Quiz 14: The Corporate Income Statement and the Statement of Stockholders Equity