Deck 11: Corporations: Organization, Stock Transactions, and Stockholders Equity

Question 1

Dividends in arrears on cumulative preferred stock are considered a liability.

Answer 1

False

Question 2

Stock can be issued only in exchange for cash.

Answer 2

False

Question 3

The number of common shares outstanding can never be greater than the number of shares issued.

Answer 3

True

Question 4

As soon as a corporation is authorized to issue stock, an accounting journal entry should be made recording the total value of the shares authorized.

Question 5

A corporation must be incorporated in each state in which it does business.

Question 6

The par value of common stock must always be equal to its market value on the date the stock is issued.

Question 7

Preferred stockholders generally do not have the right to vote for the board of directors.

Question 8

A stockholder has the right to vote in the election of the board of directors.

Question 9

The market value of a corporation's stock is determined by the number of shares that the corporation has been authorized to issue.

Question 10

Preferred stock has contractual preference over common stock in certain areas.

Question 11

A corporation acts under its own name rather than in the name of its stockholders.

Question 12

The acquisition of treasury stock by a corporation increases total assets and total stockholders' equity.

Question 13

The par value of stock issued for noncash assets is never a factor in determining the cost of the assets received.

Question 14

Treasury stock is a contra stockholders' equity account.

Question 15

A corporation can issue more shares than it is authorized in its charter, if the board of directors approves of an increase in the number of authorized shares.

Question 16

A proxy is a legal document that instructs a stockholder's agent how to vote shares of stock for the stockholder.

Question 17

A corporation is not an entity which is separate and distinct from its owners.

Question 18

A corporation can be organized for the purpose of making a profit or it may be not-for-profit.

Question 19

If a corporation pays taxes on its income, then stockholders will not have to pay taxes on the dividends received from that corporation.

Question 20

When no-par value stock does not have a stated value, the entire proceeds from the issuance of the stock becomes legal capital.

Question 21

A retained earnings statement shows the same information as a corporation income statement.

Question 22

Return on common stockholders' equity is computed by dividing net income by ending stockholders' equity.

Question 23

Dividends may be declared and paid in cash or stock.

Question 24

A successful corporation can have a continuous and perpetual life.

Question 25

The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.

Question 26

Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.

Question 27

The payout ratio is computed by dividing total cash dividends declared by retained earnings.

Question 28

Retained earnings that are restricted are unavailable for dividends.

Question 29

Many companies prepare a stockholders' equity statement instead of presenting a detailed stockholders' equity section in the balance sheet.

Question 30

Common Stock Dividends Distributable is shown within the Paid-in Capital subdivision of the stockholders' equity section of the balance sheet.

Question 31

Cash dividends are not a liability of the corporation until they are declared by the board of directors.

Question 32

A detailed stockholders' equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.

Question 33

The Accumulated Other Comprehensive income account can have either a debit or credit balance.

Question 34

Treasury stock purchased for $25 per share that is reissued at $20 per share, results in a Loss on Sale of Treasury Stock being recognized on the income statement.

Question 35

Net income of a corporation should be closed to retained earnings and net losses should be closed to paid-in capital accounts.

Question 36

A 3-for-1 common stock split will increase total stockholders' equity but reduce the par or stated value per share of common stock.

Question 37

A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease.

Question 38

Retained earnings represents the amount of cash available for dividends.

Question 39

Treasury stock should not be classified as a current asset.

Question 40

A debit balance in the Retained Earnings account is identified as a deficit.

Question 41

The two ways that a corporation can be classified by ownership are

A) publicly held and privately held.
B) stock and non-stock.
C) inside and outside.
D) majority and minority.

Question 42

Under the cost method, Treasury Stock is debited at the price paid to reacquire the shares, and the same amount is credited to Treasury Stock when the shares are sold.

Question 43

A stock dividend results in an increase in paid-in capital in the accounts.

Question 44

In the stockholders' equity section, paid-in capital and retained earnings are reported and the specific sources of paid-in capital are identified.

Question 45

Organizational costs are capitalized by debiting an intangible asset entitled Organization Costs.

Question 46

A dividend based on paid-in capital is termed a liquidating dividend.

Question 47

Which one of the following is a privately held corporation?

A) Intel
B) General Electric
C) Caterpillar Inc.
D) Cargill Inc.

Question 48

Under the corporate form of business organization

A) a stockholder is personally liable for the debts of the corporation.
B) stockholders' acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation.
C) the corporation's life is stipulated in its charter.
D) stockholders wishing to sell their corporation shares must get the approval of other stockholders.

Question 49

The cost of a noncash asset acquired in exchange for common stock should be either the fair value of the consideration given up or the consideration received, whichever is more clearly determinable.

Question 50

Common Stock Dividends Distributable is reported as additional paid-in capital in the stockholders' equity section.

Question 51

A factor which distinguishes the corporate form of organization from a sole proprietorship or partnership is that a

A) corporation is organized for the purpose of making a profit.
B) corporation is subject to more federal and state government regulations.
C) corporation is an accounting economic entity.
D) corporation's temporary accounts are closed at the end of the accounting period.

Question 52

The cash proceeds from issuing par value stock may be equal to or greater than, but not less than par value.

Question 53

The person responsible for maintaining the company's cash position is the

A) controller.
B) treasurer.
C) vice-president.
D) president.

Question 54

Which one of the following would not be considered an advantage of the corporate form of organization?

A) Limited liability of owners
B) Separate legal existence
C) Continuous life
D) Government regulation

Question 55

Which of the following would not be true of a privately held corporation?

A) It is sometimes called a closely held corporation.
B) Its shares are regularly traded on the New York Stock Exchange.
C) It does not offer its shares for sale to the general public.
D) It is usually smaller than a publicly held company.

Question 56

The dominant form of business organization in the United States in terms of dollar sales volume, earnings, and employees is

A) the sole proprietorship.
B) the partnership.
C) the corporation.
D) not known.

Question 57

Which of the following is not true of a corporation?

A) It may buy, own, and sell property.
B) It may sue and be sued.
C) The acts of its owners bind the corporation.
D) It may enter into binding legal contracts in its own name.

Question 58

The concept of an "artificial being" refers to which form of business organization?

A) Partnership
B) Sole proprietorship
C) Corporation
D) Limited partnership

Question 59

The two ways that a corporation can be classified by purpose are

A) general and limited.
B) profit and not-for-profit.
C) state and federal.
D) publicly held and privately held.

Question 60

Stockholders of a corporation directly elect

A) the president of the corporation.
B) the board of directors.
C) the treasurer of the corporation.
D) all of the employees of the corporation.

Question 61

A corporate board of directors does not generally

A) select officers.
B) formulate operating policies.
C) declare dividends.
D) execute policy.

Question 62

Which of the following statements concerning taxation is accurate?

A) Partnerships pay state income taxes but not federal income taxes.
B) Corporations pay federal income taxes but not state income taxes.
C) Corporations pay federal and state income taxes.
D) Only the owners must pay taxes on corporate income.

Question 63

Which one of the following is not an ownership right of a stockholder in a corporation?

A) To vote in the election of directors
B) To declare dividends on the common stock
C) To share in assets upon liquidation
D) To share in corporate earnings

Question 64

Jason Thomas has invested $200,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Thomas stand to lose?

A) Up to his total investment of $200,000.
B) Zero.
C) The $200,000 plus any personal assets the creditors demand.
D) $100,000.

Question 65

The chief accounting officer in a corporation is the

A) treasurer.
B) president.
C) controller.
D) vice-president of finance.

Question 66

The officer who is generally responsible for maintaining the cash position of the corporation is the

A) controller.
B) treasurer.
C) cashier.
D) internal auditor.

Question 67

Which of the following statements reflects the transferability of ownership rights in a corporation?

A) If a stockholder decides to transfer ownership, he must transfer all of his shares.
B) A stockholder may dispose of part or all of his shares.
C) A stockholder must obtain permission from the board of directors before selling shares.
D) A stockholder must obtain permission from at least three other stockholders before selling shares.

Question 68

Which of the following factors does not affect the initial market price of a stock?

A) The company's anticipated future earnings
B) The par value of the stock
C) The current state of the economy
D) The expected dividend rate per share

Question 69

If a stockholder cannot attend a stockholder's meeting, he may delegate his voting rights by means of

A) an absentee ballot.
B) a proxy.
C) a certified letter.
D) a telegram.

Question 70

If an investment firm underwrites a stock issue, the

A) risk of being unable to sell the shares stays with the issuing corporation.
B) corporation obtains cash immediately from the investment firm.
C) investment firm has guaranteed profits on the sale of the stock.
D) issuance of stock is likely to be directly to creditors.

Question 71

The authorized stock of a corporation

A) only reflects the initial capital needs of the company.
B) is indicated in its by-laws.
C) is indicated in its charter.
D) must be recorded in a formal accounting entry.

Question 72

The par value of a stock

A) is legally significant.
B) reflects the most recent market price.
C) is selected by the SEC.
D) is indicative of the worth of the stock.

Question 73

If a corporation has only one class of stock, it is referred to as

A) classless stock.
B) preferred stock.
C) solitary stock.
D) common stock.

Question 74

A typical organization chart showing delegation of authority would show

A) stockholders delegating to the board of directors.
B) the board of directors delegating to stockholders.
C) the chief executive officer delegating to the board of directors.
D) the controller delegating to the chief executive officer.

Question 75

The term residual claim refers to a stockholders' right to

A) receive dividends.
B) share in assets upon liquidation.
C) acquire additional shares when offered.
D) exercise a proxy vote.

Question 76

If no-par stock is issued without a stated value, then

A) the par value is automatically $1 per share.
B) the entire proceeds are considered to be legal capital.
C) there is no legal capital.
D) the corporation is automatically in violation of its state charter.

Question 77

A corporation has the following account balances: Common stock, $1 par value, $60,000; Paid-in Capital in Excess of Par, $1,300,000. Based on this information, the

A) legal capital is $1,360,000.
B) number of shares issued are 60,000.
C) number of shares outstanding are 1,360,000.
D) average price per share issued is $22.50.

Question 78

Which of the following statements is not considered a disadvantage of the corporate form of organization?

A) Additional taxes
B) Government regulations
C) Limited liability of stockholders
D) Separation of ownership and management

Question 79

The ability of a corporation to obtain capital is

A) enhanced because of limited liability and ease of share transferability.
B) less than a partnership.
C) restricted because of the limited life of the corporation.
D) about the same as a partnership.

Question 80

What is ordinarily the first step in the formation of a corporation?

A) Development of by-laws for the corporation
B) Issuance of the corporate charter
C) Application for incorporation to the appropriate Secretary of State
D) Registration with the SEC