Question 1

The total amount of stock that a corporation's charter allows it to issue is referred to as:

Accepted Answer

The total amount of stock that a corporation's charter allows it to issue is referred to as authorized stock. Issued stock refers to the number of shares that have been sold or distributed to investors, outstanding stock refers to the number of shares that are currently held by investors, common stock represents ownership in a corporation and usually carries voting rights, and preferred stock represents ownership in a corporation but typically does not carry voting rights and instead pays a fixed dividend.

Question 2

The costs of bringing a corporation into existence, including legal fees, promoter fees and amounts paid to obtain a charter are called:

Accepted Answer

The costs of bringing a corporation into existence are called organization costs. These costs include legal fees, promoter fees, and amounts paid to obtain a charter. Minimum legal capital refers to the minimum amount of capital required by law for a corporation to be formed. Stock subscriptions are the agreements by which investors agree to purchase shares of stock in the corporation. Cumulative costs and prepaid fees are not common terms in this context.

Question 3

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 is a commonly used financial tool that helps investors to make informed decisions about the value of a company's stock. It compares a company's current stock price to its earnings per share over a specific period of time, and gives investors insight into the market's expectations for future growth and profitability. A high P/E ratio indicates that investors are optimistic about a company's future prospects, while a low P/E ratio may suggest that investors are more cautious or uncertain.

Question 4

Par value of a stock refers to the:

Accepted Answer

Par value of a stock refers to the value assigned to a share of stock by the corporate charter. It is a nominal amount per share that establishes the minimum amount that must be paid by investors to acquire a share of company stock. The par value has no relation to the market value or issue price of the stock. Therefore, options A, C, D, and E are incorrect.

Question 5

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 gives the holder the right to buy or sell a stock at a certain price, while a stock dividend is a distribution of additional shares of stock as a form of payment to shareholders.

Question 6

A corporation can issue both common and preferred stock.

Accepted Answer

A corporation can issue both common and preferred stock. Common stock represents ownership in the company and provides voting rights, while preferred stock has priority over common stock for dividend payments and assets in the event of liquidation.

Question 7

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 indeed the amount of income earned per share of a company's outstanding common stock. It's calculated by dividing the company's net income by the number of outstanding common shares.

Question 8

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

Accepted Answer

Minimum legal capital requirements are regulations that specify the minimum amount of capital that a company must maintain in order to protect the interests of its creditors. Dividends cannot be paid if they reduce the company's stockholders' equity below the minimum specified amount, as this would put the company in violation of the regulation.

Question 9

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:

Accepted Answer

Preemptive right is the right of common shareholders to protect their proportional interest in a corporation by having the first opportunity to buy additional proportionate shares of common stock issued by the corporation. This allows the shareholders to maintain their current ownership percentage and prevents dilution. Proxy right, right to call, financial leverage, and voting right do not relate to this concept.

Question 10

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

Accepted Answer

When a company declares cash dividends, it pays out a portion of its retained earnings to shareholders. As a result, retained earnings are reduced.

Question 11

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

Accepted Answer

Changes in accounting estimates are not adjusted retroactively, but are accounted for in the current and future periods affected by the change.

Question 12

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

Accepted Answer

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

Question 13

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 14

A proxy is:

Accepted Answer

A proxy is a legal document that grants a designated agent of a stockholder the authority to vote the stock in the absence of the actual stockholder. The designated agent is also known as a proxy.

Question 15

The board of directors of a corporation:

Accepted Answer

The board of directors is responsible for and has final authority for managing corporate activities. They are elected by shareholders, not the corporate registrar. They are not responsible for day-to-day operations, which is the role of executive officers. While they do not have mutual agency, their decisions can bind the corporation through their authority. It is possible for board members to also be executive officers, but there is a recommended separation of these roles for good corporate governance.

Question 16

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 defined as the annual dividend per share of a company's stock divided by its market price per share.

Question 17

Authorized stock is the total number of shares outstanding.

Accepted Answer

Authorized stock refers to the maximum number of shares a company is legally allowed to issue, while outstanding stock refers to the total number of shares that have been issued by the company and are currently in the hands of shareholders. These are two different concepts and should not be confused.

Question 18

A corporation is a separate legal entity from its owners.

Accepted Answer

A corporation is considered a legal entity that is separate from its owners, meaning it has its own legal rights and responsibilities. This enables corporations to enter into contracts, file lawsuits, and conduct business activities on their own behalf, separate from the personal affairs of their owners.

Question 19

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.

Question 20

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

Accepted Answer

This statement is true. A negative balance in retained earnings (where the accumulated losses and dividends paid exceed the company's earnings) is commonly known as a retained earnings deficit or accumulated deficit.

Quiz 11: Corporate Reporting and Analysis