Question 1

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

The statement is true. During downtimes, companies may use stock buybacks to artificially increase their earnings per share by reducing the number of outstanding shares. This can make it seem like the company is doing better than it actually is, leading investors to make misguided investment decisions.

Question 2

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

C

Question 3

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 can be valued based on either the fair value of the assets or the fair value of the stock, whichever is more reliably measurable. It is not always based on the fair value of the stock.

Question 4

Mandatorily redeemable preferred stock is reported as a liability.

Accepted Answer

Mandatorily redeemable preferred stock is considered to be a liability as it requires the issuer to redeem the stock for a predetermined amount at a specific date in the future. Therefore, it would be reported as a liability on the issuer's balance sheet.

Question 5

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 are the dominant form of business organization in terms of business volume because they offer various advantages such as limited liability, perpetual existence, ease of transfer of ownership, and access to resources from the sale of stocks. Corporations also have the ability to raise large amounts of capital through banks, investors, and the sale of securities, which is crucial for large-scale operations. Proprietorships and partnerships are suitable for small businesses, while limited liability companies are a relatively new form of business organization that is gaining popularity due to its flexible management structure and limited liability features. However, corporations are still the most preferred form of business organization for large businesses due to their ability to raise capital, expand operations, and limit the personal liability of shareholders.

Question 6

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

Accepted Answer

Issued stock includes all shares that have been issued by a company, whether they are still held by shareholders (outstanding) or have been repurchased by the company and are held in the treasury. Issued stock does not necessarily mean that all shares are currently in circulation or available for purchase.

Question 7

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 value for new issues of stock.
D)Has affected the laws of most states.

Accepted Answer

The Model Business Corporation Act has influenced the laws of most states in the US. Option A is incorrect because the Act uses the terms "voting" and "non-voting" shares to describe distinguishing characteristics of stock, not "common" and "preferred." Option B is incorrect because the Act defines legal capital as the amount of capital contributed by shareholders, not net assets. Option C is incorrect because the Act doesn't provide guidance for choosing a par value for new issues of stock.

Question 8

Two of the three primary account classifications within shareholders' equity are:
A)Preferred stock and retained earnings.
B)The par value 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 and retained earnings. Preferred and common stock are both types of paid-in capital, so D is a close option, but not the best answer as it only mentions two types of stock and excludes retained earnings. A and B are incorrect because they either only mention one type of equity account or incorrectly categorize common stock as a primary account classification within shareholders' equity.

Question 9

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

Accepted Answer

Net assets refer to the total assets minus total liabilities of a corporation. Shareholders' equity represents the residual interest in the assets of a corporation after deducting its liabilities. Therefore, shareholders' equity is equal to net assets. Contributed capital and retained earnings are components of shareholders' equity, but not equal to net assets.

Question 10

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 the individual states. Each state has its own set of laws and regulations that govern the formation and operation of corporations. Some states have more business-friendly laws and regulations than others, which can influence where a corporation chooses to incorporate. While federal statutes and regulations, such as those created by the Securities and Exchange Commission and the Federal Trade Commission, may apply to corporations, they do not govern the formation of the corporation itself. The Model Business Corporation Act is a suggested template for state laws governing corporations but is not a governing document itself.

Question 11

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

Accepted Answer

Preferred stock typically has preferential treatment with regards to dividends and liquidation payouts compared to other classes of stock such as common stock.

Question 12

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

Accepted Answer

The answer of Paid-in capital must consist solely of amounts...

Question 13

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

Accepted Answer

The answer of Dividends in arrears on cumulative preferred stock...

Question 14

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

Accepted Answer

The answer of Restrictions on retained earnings must be disclosed...

Question 15

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

Accepted Answer

The answer of Cash dividends become a binding liability as...

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 in the hands of shareholders.

Accepted Answer

Outstanding common stock refers to the total number of shares of common stock that has been issued by a company and is currently held by shareholders. This excludes any shares held in the corporate treasury, which are considered treasury stock.

Question 17

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, the recognition of a gain or loss is required if the fair value of the property distributed as a dividend is different from its book value on the declaration date.

Question 18

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

Accepted Answer

Stock dividends represent a distribution of earnings to shareholders, which reduces retained earnings on the balance sheet. However, they do not reduce the total amount of shareholders' equity. Instead, the value of the shareholders' equity is simply split between a larger number of shares after the distribution.

Question 19

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 articles of incorporation.

Question 20

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 but does not affect the earnings or income.

Quiz 18: Shareholders Equity

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.

Details of each class of stock must be reported:

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

Mandatorily redeemable preferred stock is reported as a liability.

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

Issued stock refers to the number of shares:

The Model Business Corporation Act:

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

The net assets of a corporation are equal to:

Corporations are formed in accordance with: