Deck 11: Reporting and Analyzing Stockholders Equity

Question 1

Treasury stock is a contra stockholders' equity account.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

Treasury stock should not be classified as a current asset.

Question 6

Treasury stock is reported as an asset on the balance sheet because treasury stock may later be resold.

Question 7

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

Question 8

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

Question 9

The issuance of common stock affects both paid-in capital and retained earnings.

Question 10

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

Question 11

A corporation can be organized for the purpose of making a profit or it may be nonprofit.

Question 12

The liability of a stockholder is usually limited to the stockholder's investment in the corporation.

Question 13

When no-par common stock with a stated value is issued for cash, the common stock account is credited for an amount equal to the cash proceeds.

Question 14

The sale of shares in a corporation by one stockholder to another affects the total capital of the corporation.

Question 15

Paid-in capital is the amount paid in to the corporation by stockholders in exchange for shares of ownership.

Question 16

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

Question 17

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

Question 18

For accounting purposes, stated value is treated the same way as par value.

Question 19

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

Question 20

The tax laws can be a significant disadvantage of the corporate form of business.

Question 21

Retained earnings that are restricted are unavailable for dividends.

Question 22

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

Question 23

A stock split results in a transfer at market value from retained earnings to paid-in capital.

Question 24

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 25

Dividends in arrears are liabilities of the corporation.

Question 26

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

Question 27

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

Question 28

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

Question 29

Retained earnings represents the amount of cash available for dividends.

Question 30

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

Question 31

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

Question 32

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

Question 33

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 34

Dividends may be declared and paid in cash or stock.

Question 35

The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders' equity.

Question 36

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 37

When preferred stock is cumulative, preferred dividends not declared in a given period are called dividends in arrears.

Question 38

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

Question 39

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

Question 40

The journal entry to record the purchase of treasury stock will cause total stockholders' equity to decrease by the amount of the cost of the treasury stock.

Question 41

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

Question 42

A corporate board of directors does not generally

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

Question 43

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 of the board of directors before selling shares.
D) A stockholder must obtain permission from at least three other stockholders before selling shares.

Question 44

Those most responsible for the major policy decisions of a corporation are the

A) stockholders.
B) board of directors.
C) management.
D) employees.

Question 45

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

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

Question 46

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 47

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 48

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 49

A stock dividend is a pro rata distribution of cash to a corporation's stockholders.

Question 50

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

Question 51

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 52

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 53

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 54

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 55

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

Question 56

A liability arises when the board of directors declares a stock dividend.

Question 57

Jason Hansen has invested $600,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Hansen stand to lose?

A) Up to his total investment of $600,000.
B) Zero.
C) The $600,000 plus any personal assets the creditors demand.
D) $400,000.

Question 58

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

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

Question 59

The chief accounting officer in a company is known as the

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

Question 60

The payout ratio is computed by dividing total cash dividends paid on common stock by retained earnings.

Question 61

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 62

Which of the following phrases is not descriptive of the corporate form of business?

A) Professional management.
B) Double taxation on distributed earnings.
C) Unlimited liability.
D) Continuous existence.

Question 63

If a stockholder cannot attend a stockholders' meeting, he may delegate his voting rights by means of a(n)

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

Question 64

A disadvantage of the corporate form of organization is

A) professional management.
B) tax treatment.
C) ease of transfer of ownership.
D) lack of mutual agency.

Question 65

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 66

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 67

If Lantz Company issues 5,000 shares of $5 par value common stock for $210,000, the account

A) Common Stock will be credited for $25,000.
B) Paid-in Capital in Excess of Par Value will be credited for $25,000.
C) Paid-in Capital in Excess of Par Value will be credited for $210,000.
D) Cash will be debited for $185,000.

Question 68

A corporation has the following account balances: Common Stock, $1 par value, $80,000; Paid-in Capital in Excess of Par Value, $2,700,000. Based on this information, the

A) legal capital is $2,780,000.
B) number of shares issued is 80,000.
C) number of shares outstanding is 2,780,000.
D) average price per share issued is $3.48.

Question 69

Par value

A) represents what a share of stock is worth.
B) represents the original selling price for a share of stock.
C) is established for a share of stock after it is issued.
D) is the value assigned per share in the corporate charter.

Question 70

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 71

If Norben Company issues 4,000 shares of $5 par value common stock for $140,000, the account

A) Common Stock will be credited for $140,000.
B) Paid-in Capital in Excess of Par Value will be credited for $20,000.
C) Paid-in Capital in Excess of Par Value will be credited for $120,000.
D) Cash will be debited for $120,000.

Question 72

Alt Corp. issues 3,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to:

A) Common Stock $30,000 and Paid-in Capital in Excess of Stated Value $12,000.
B) Common Stock $28,000.
C) Common Stock $30,000 and Paid-in Capital in Excess of Par Value $12,000.
D) Common Stock $30,000 and Retained Earnings $12,000.

Question 73

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 74

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 75

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 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

The term legal capital is a descriptive term for

A) stockholders' equity.
B) par value.
C) residual equity.
D) market value.

Question 78

A disadvantage of the corporate form of business is

A) its status as a separate legal entity.
B) continuous existence.
C) government regulation.
D) ease of transfer of ownership.

Question 79

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 80

The amount of stock that may be issued according to the corporation's charter is referred to as the

A) authorized stock.
B) issued stock.
C) unissued stock.
D) outstanding stock.