Question 1

A stock option is also called a stock dividend.

Accepted Answer

A stock option is not the same as a stock dividend. A stock option is a contract that gives the holder the right, but not the obligation, to buy or sell a certain number of shares at a set price, while a stock dividend is a distribution of additional shares of stock given to shareholders as a reward for holding the company's stock.

Question 2

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

Accepted Answer

This statement is false. Preferred stock typically carries a preference for receiving dividends over common stock.

Question 3

The total amount of stock that a corporation's charter allows it to issue is referred to as:
A)Issued stock
B)Outstanding stock
C)Common stock
D)Preferred stock
E)Authorized Stock

Accepted Answer

The correct term for the total amount of stock a corporation is authorized to issue is "authorized stock." It refers to the maximum number of shares that a company is allowed to sell, as stated in its articles of incorporation. Issued stock refers to the shares that have been sold to investors, while outstanding stock refers to the shares that are currently held by investors. Common stock and preferred stock refer to different classes of shares that a company can issue.

Question 4

A corporation is a separate legal entity from its owners.

Accepted Answer

A corporation is recognized as a separate legal entity under the law, meaning it can own property, enter into contracts, and sue or be sued independent of its owners or shareholders.

Question 5

Par value of a stock refers to the:
A)Issue price of the stock
B)Value assigned to a share of stock 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

Accepted Answer

The par value of a stock refers to the value assigned to a share of stock by the corporate charter, which is typically a nominal amount (e.g. $0.01). It is not the issue price, market value, maximum selling price, or dividend value of the stock.

Question 6

Earnings per share is calculated by dividing the total number of common shares outstanding by net income.

Accepted Answer

Earnings per share is calculated by dividing net income by the total number of common shares outstanding.

Question 7

Dividend yield is defined as the market price per share of a company's stock divided by its earnings per share.

Accepted Answer

Dividend yield is actually defined as the annual dividend per share divided by the market price per share. It is not related to earnings per share.

Question 8

Minimum legal capital requirements often prohibit dividends when the dividends reduce stockholders' equity below the minimum specified amount.

Accepted Answer

This is because the purpose of minimum legal capital requirements is to protect the company's creditors by ensuring that the company maintains a minimum level of equity to cover any potential liabilities. If dividends are distributed and reduce the equity below the minimum required amount, it may leave the company vulnerable to not being able to meet its obligations to its creditors.

Question 9

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

Accepted Answer

Changes in accounting estimates are adjustments to an estimate previously made in prior periods, and therefore they are accounted for in current and future periods. This is in contrast to accounting errors, which are corrections of past misstatements and are accounted for in the period of discovery.

Question 10

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

Accepted Answer

The board of directors is responsible for managing corporate activities and has final authority over them. They are not elected by the corporate registrar, are not responsible for day-to-day operations, do have the power to bind the corporation to contracts, and may also serve as executive officers of the corporation.

Question 11

The price-earnings ratio reveals information about the stock market's expectations for a company's future growth in earnings,dividends and economic opportunities.

Accepted Answer

The price-earnings ratio (P/E ratio) is a valuation metric used to compare a company's current share price to its earnings per share (EPS). It provides insight into the market's expectations for a company's future earnings growth potential and therefore reflects information about the stock market's expectations for a company's future growth in earnings, dividends, and economic opportunities.

Question 12

A proxy is:
A)A legal document that gives a designated agent of a stockholder the power to vote the stock
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

Accepted Answer

A proxy is a legal document that authorizes a designated agent of a stockholder to vote on behalf of the stockholder at a shareholder meeting.

Question 13

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 costs
D)Cumulative costs
E)Prepaid fees

Accepted Answer

The costs of bringing a corporation into existence, including legal fees, promoter fees, and amounts paid to obtain a charter, are called organization costs. Minimum legal capital refers to the minimum amount of capital that a corporation must have when it is incorporated. Stock subscriptions refer to the amount of stock that investors agree to purchase. Cumulative costs and prepaid fees are not relevant terms in this context.

Question 14

Authorized stock is the total number of shares outstanding.

Accepted Answer

Authorized stock is the maximum number of shares that a company is permitted to issue as per its articles of incorporation, but it does not represent the total number of shares outstanding. The actual number of shares outstanding may be less than the authorized stock.

Question 15

A discount on stock occurs when a corporation sells its stock for a price greater than par value.

Accepted Answer

A discount on stock occurs when a corporation sells its stock for a price less than par value, not greater than par value.

Question 16

A debit balance in retained earnings is often referred to as a retained earnings deficit.

Accepted Answer

A debit balance in retained earnings means that the company's accumulated losses and dividends have exceeded its earnings. This is also known as a retained earnings deficit.

Question 17

A corporation can issue both common and preferred stock.

Accepted Answer

A corporation has the option to issue both common and preferred stock to investors. Common stock represents ownership in the corporation and provides the right to vote at shareholder meetings and receive dividends. Preferred stock typically has a fixed dividend rate and priority over common stock in the event of bankruptcy or liquidation.

Question 18

The right of common shareholders to protect their proportionate interest in a corporation by having the first opportunity to buy additional proportionate shares of common stock issued by the corporation is called a:
A)Preemptive right
B)Proxy right
C)Right to call
D)Financial leverage
E)Voting right

Accepted Answer

The right described is the preemptive right, which allows common shareholders to maintain their proportionate ownership in a company by purchasing additional shares of common stock before they are offered to the general public. Proxy rights refer to the ability to vote on behalf of another shareholder, while the right to call refers to the ability to force the issuance of additional shares of stock. Financial leverage involves using debt to increase returns, and voting rights allow shareholders to have a say in corporate decisions.

Question 19

When a company declares cash dividends; retained earnings is reduced.

Accepted Answer

When a company declares cash dividends, the money is paid out to shareholders from the company's net income, which is a component of retained earnings. Therefore, retained earnings decrease as cash dividends are paid out.

Question 20

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

Accepted Answer

Earnings per share (EPS) is calculated by dividing the net income available to common shareholders by the total number of outstanding shares of common stock. It is a measure of a company's profitability on a per-share basis.

Quiz 11: Reporting and Analyzing Equity