Deck 15: Financial Reporting for Owners Equity

Question 1

The book value of owners' equity gives an accurate picture of potentially legal asset distributions in states that have adopted the 1984 Revised Model Business Corporation Act.

Answer 1

False

Question 2

If a company purchases treasury stock its earnings per share will increase.

Answer 2

True

Question 3

Mandatorily redeemable preferred stock is considered equity because the issuing firm has the option,but not the obligation,to redeem the shares.

Answer 3

False

Question 4

Issuing preferred stock is advantageous to financially weak companies because of the flexibility associated with the timing of the dividend payments.

Question 5

Corporate distributions to shareholders are governed by state law and are consistent from state to state.

Question 6

Mandatorily redeemable preferred stock dividends are reported as interest expense on the income statement.

Question 7

A $3,000 increase in total owners' equity occurs if treasury stock costing $11,500 is sold for $14,500.

Question 8

Preferred stock is viewed by many to be similar to a debt issue due to the fact that preferred stock dividends are a deductible corporate expense.

Question 9

Under current GAAP a stock dividend declaration and distribution will not reduce either total assets or total owners' equity.

Question 10

The par value of common stock is set by the state government.

Question 11

Corporations that issue preferred stock do so because preferred stock is less risky than debt.

Question 12

A reason prompting a firm to purchase treasury stock is that management believes the stock is undervalued in the marketplace and therefore represents a good investment opportunity.

Question 13

Net income or loss generally arises from transactions with owners who provide net capital to the firm.

Question 14

The 1984 Revised Model Business Corporation Act would potentially allow a corporation to have negative book value of net assets after an asset distribution occurred.

Question 15

A stock's par value does not necessarily have any relationship with a stock's market value.

Question 16

A $1,500 loss will be reported in the income statement when a company sells treasury stock for $8,500 if the treasury stock was initially purchased for $10,000.

Question 17

The 1984 Revised Model Business Corporation Act redefined solvency as a situation where the fair value of assets exceed the fair value of liabilities after a distribution to shareholders.

Question 18

Treasury stock is considered to be a deduction from shareholders' equity.

Question 19

When a loan agreement restricts a company from distributing its entire balance of retained earnings as dividends to shareholders,restricted retained earnings must be reported separately from unrestricted retained earnings on the face of the balance sheet.

Question 20

Dividends paid by a corporation represent a distribution of earnings to shareholders and are reported as an expense in the income statement.

Question 21

Current GAAP requires that all convertible bonds be considered as if converted and included in the denominator of diluted earnings per share.

Question 22

The diluted EPS figure is a conservative measure of the earnings flow to each share of stock.

Question 23

Many start-up high-growth companies use stock options as a means of attracting talented employees while attempting to conserve cash.

Question 24

Under IFRS,preference shares are reported as equity and dividends are treated as interest expense on the income statement.

Question 25

One reason that companies issue stock options is to attempt to align employees' interests with the interests of the owners.

Question 26

If a firm has a complex capital structure,GAAP requires that both basic and fully diluted earnings per share must be reported.

Question 27

Current GAAP requires that share-based compensation be expensed at the grant date of the stock options award.

Question 28

A convertible bond's net-of-tax interest expense is added back to net income when determining diluted earnings per share only if the bond is known to be dilutive.

Question 29

Current GAAP requires companies to measure the fair value of stock options at the grant date.

Question 30

Under IFRS a company may report either a statement of financial position or a statement of changes in shareholders' equity but it need not provide both statements.

Question 31

SFAS No.123 was issued as a compromise to the FASB's original position regarding stock options as it allowed companies to choose either the APB No.25 intrinsic value method or to expense the fair value of the options.

Question 32

Diluted earnings per share will always be shown on the income statement for companies with complex capital structures.

Question 33

Opposition to the FASB review of APB No.25 on stock options arose because stock options do not involve a cash outflow,and to treat them as an expense violates materiality.

Question 34

Convertible bonds that were outstanding during the entire year will not have an impact on the weighted average number of common shares outstanding used in the calculation of basic earnings per share.

Question 35

When a company has no convertible securities and no stock options or warrants outstanding,the company has a simple capital structure.

Question 36

SFAS No.123 required companies to use the fair value approach when determining compensation expense pertaining to stock options.

Question 37

When a company repurchases its own shares,the transaction may not result in treasury stock being reported on the balance sheet.

Question 38

The "if-converted" method for computing earnings per share dilution understates diluted earnings per share when a company's share price is substantially below the conversion price of the debt.

Question 39

The comparability of earnings per share across firms is influenced by the relative amount of capital raised by the various firms and by the ability of the firms to manage their reported earnings per share.

Question 40

A company has stock options outstanding which allow the holders of the options to buy 12,000 shares of common stock;therefore 12,000 shares will be added to the denominator when calculating diluted earnings per share.

Question 41

Which of the following does not accurately describe the "ownership" perspective of the firm?

A)Its focus is on the firm's net capital deployed.
B)It is the prevailing view of GAAP.
C)Its focus is on owners' capital.
D)It requires that financing transactions generate income or loss.

Question 42

When a dividend is not declared on preferred stock,and the common share­holders cannot receive a dividend until all past and current dividends are paid to the preferred shareholders,the preferred stock is

A)cumulative.
B)noncumulative.
C)participating.
D)nonparticipating.

Question 43

Two companies,Company A and Company B,issue convertible bonds at par.If Company A uses IFRS and Company B follow U.S.GAAP,the amount Company A records for interest expense will be greater than the amount Company B records for interest expense.

Question 44

Companies with a history of net operating losses are prone to issue which one of the following to raise money?

A)Debenture bonds
B)Serial bonds
C)Preferred stock
D)Notes payable

Question 45

Shareholders who sell back shares of the company stock as treasury stock are

A)not taxed.
B)taxed at ordinary rates.
C)taxed at capital gains rates.
D)subject to tax penalties.

Question 46

What is the retained earnings balance on December 31,2015?

A)$1,994,050
B)$2,219,050
C)$2,216,100
D)$2,246,550

Question 47

Treasury stock is reported within the balance sheet as

A)a long-term investment.
B)a short-term investment.
C)an account contra to retained earnings.
D)an account contra to owners' equity.

Question 48

According to current GAAP,convertible bonds must be recorded at the value of debt only,with no value assigned to the conversion feature.

Question 49

Two companies,Company A and Company B,issue convertible bonds at par.If Company A uses IFRS and Company B follow U.S.GAAP,the amount Company A records for the debt will be greater than the amount Company B records for the debt.

Question 50

Which one of the following is the correct entry to record the sale of treasury stock?

A) $\begin{array} { l l l } DR &\text { Cash } & 128,000 \\CR & \text { Common stock } & & 128,000 \end{array}$
B) DR $\quad$ Cash $\quad 128,000$
$\quad$ CR Treasury stock $\quad 96,000$
$\quad$ CR Paid in capital in excess of par $\quad$ 32,000
C) $\begin{array}{l}\text { DR }& \text { Cash } &128,000 \\\text { CR } & \text { Treasury stock } & 96,000 \\\text { CR } & \text { Gain on sale of treasury stock } & 32,000\end{array}$
D) $\begin{array} { l l l l l } \text { DR } & & \text { Cash } & 128,000 & \\& \text { CR } & \text { Treasury stock } & 96,000 \\& \text { CR } & \text { Retained earnings } & 32,000\end{array}$

Question 51

Current GAAP requires the allocation of total share-based compensation cost to expense on a straight-line basis over the vesting period.

Question 52

A corporation reported the following during 2015: Net income $175,250;a sale of 10,000 shares of $5 par value common stock for $8.75 per share;a purchase of treasury stock costing $24,750;a sale of treasury stock costing $15,500 for $14,695;a declaration and distribution of a $39,000 cash dividend;a declaration and distribution of a "small" stock dividend of 5,000 shares of $5 par value common stock at a total market value of $50,000.What was the increase in owners' equity during 2015?

A)$213,695
B)$188,695
C)$198,195
D)$173,195

Question 53

Cash dividends paid by a corporation

A)are an expense of the corporation that declared the dividend.
B)reduce the net income of the corporation that declared the dividend.
C)reduce the retained earnings of the corporation that declared the dividend.
D)reduce the retained earnings of the corporation that declared the dividend because net income is reduced by the amount of the dividenD.

Question 54

What is the owners' equity balance on December 31,2015?

A)$8,663,350
B)$8,738,350
C)$8,865,850
D)$8,934,300

Question 55

Which of the following statements is correct if treasury stock costing $25,000 was sold for $27,500?

A)Total owners' equity increases $2,500.
B)Total owners' equity increases $27,500.
C)Net income increases $2,500.
D)Total owners' equity increases $25,000.

Question 56

Which of the following is not a reason why a company would purchase its own stock?

A)The company needs shares in order to meet employee stock option plans.
B)The company's management may have concluded that the company's stock is undervalued at the prevailing market price.
C)The company wants to increase its earnings per share.
D)The company wants to manipulate its net income.

Question 57

Which one of the following is the entry to record the original sale of the stock?

A)
B)
C)
D)

Question 58

Financial analysts should always review stock repurchase plans carefully because

A)the plans always produce above-market returns.
B)the plans usually produce above-market returns.
C)it is important to determine the reasons for the buyback.
D)the plans are always beneficial to the shareholders.

Question 59

By using the book value method to record the conversion of convertible bonds,managers are able to protect themselves from recording conversion losses.

Question 60

Which one of the following is the correct entry to record the purchase of treasury stock?

A) DR Treasury stock $\quad$$\quad$ 96,000
CR Cash $\quad$$\quad$$\quad$ 96,000
B) DR Investments $\quad$ 96,000
CR Cash $\quad$$\quad$ 96,000
C) DR Common stock $\quad$$\quad$ 96,000
CR Cash $\quad$$\quad$ 96,000
D) DR Retained earnings $\quad$$\quad$ 96,000
CR Cash $\quad$$\quad$ 96,000

Question 61

Which of the following statements is correct when a company has a complex capital structure?

A)Diluted earnings per share must be shown on the income statement.
B)Diluted earnings per share and basic earnings per share must both be shown on the income statement.
C)The company might have convertible bonds outstanding.
D)The company must have participating preferred stock outstanding.

Question 62

Mandatorily redeemable preferred stock is reported on the balance sheet as

A)a liability.
B)an equity item.
C)a temporary investment.
D)a separate line between liabilities and shareholders' equity.

Question 63

When a company does not have any convertible securities or options or warrants outstanding,the company has

A)a complex capital structure.
B)a simple capital structure.
C)to report only diluted earnings per share.
D)to report both basic and diluted EPS.

Question 64

The weighted average number of common shares used to compute earnings per share for 2015 is

A)100,000.
B)102,500.
C)105,000.
D)110,000.

Question 65

A 3-for-1 stock split will reduce the per share par value and will

A)decrease the number of shares proportionately.
B)decrease earnings per share.
C)increase owners' equity.
D)increase the total par value of the common stock.

Question 66

Earnings per share (EPS)data are prominent in corporate annual reports,but EPS suffers as a financial performance measure because EPS ignores the amount of

A)revenue required to generate reported earnings.
B)capital required to generate reported earnings.
C)liabilities required to generate reported earnings.
D)expenses required to generate reported earnings.

Question 67

Ace Industries has the following shareholders' equity accounts at December 31, 2015:
$\begin{array}{lr}\text { Preferred stock, S100 par value, } 10 \% \text { dividend, } 50,000 \text { shares issued and outstanding } & \$ 5,000,000 \\\text { Common stock, S6 par value, } 1 \text { million shares issued and outstanding } & 6,000,000 \\\text { Paid-in capital in excess of par } & 119,000,000 \\\text { Unrestricted retained earnings } & 7,500,000 \\\text { Retained eamings restricted for plant expansion } & 2,500,000\end{array}$

-Assuming that the preferred stock is cumulative,and that there are no dividends in arrears,what is the maximum dividend that may be distributed to common shareholders at December 31,2015?

A)$9,500,000
B)$7,000,000
C)$7,500,000
D)$2,000,000

Question 68

The 1984 Revised Model Business Corporation Act redefined solvency as a situation where the fair value of

A)assets exceed the book value of liabilities after a distribution to shareholders.
B)assets exceed the fair value of liabilities after a distribution to shareholders.
C)liabilities exceed the fair value of assets.
D)liabilities exceed the fair value of assets after a distribution to shareholders.

Question 69

Which of the following is not indicative of a complex capital structure?

A)Outstanding convertible bonds.
B)Outstanding convertible preferred stock.
C)Outstanding cumulative preferred stock.
D)Outstanding stock options.

Question 70

A company that has earnings in Year 2 equal to the earnings of Year 1 can improve its Year 2 reported earnings per share by

A)selling additional common stock.
B)selling additional preferred stock.
C)selling shares of treasury stock at a price exceeding what was paid for the treasury stock.
D)purchasing shares of treasury stock.

Question 71

As a result of the passage of the 1984 Revised Model Business Corporation Act,it may be fair to state that

A)the book value of owners' equity may not give an accurate picture of potentially legal distributions.
B)the book value of owners' equity gives an accurate picture of potentially legal distributions.
C)the book value of owners' equity never gives an accurate picture of potentially legal distributions.
D)the book value of assets gives an accurate picture of potentially legal distributions.

Question 72

Which of the following statements pertaining to preferred stock is not correct?

A)Preferred stock may have an adjustable rate which pays a dividend that is adjusted,usually on a quarterly basis.
B)Preferred stock dividends are contractual obligations that must be paid in profitable years.
C)Most preferred stock issues are nonparticipating,meaning that the shareholders are entitled to receive only dividends based on the stated dividend rate.
D)Preferred shareholders are given preference with respect to both dividend distributions and in liquidation of the company.

Question 73

Ace Industries has the following shareholders' equity accounts at December 31, 2015:
$\begin{array}{lr}\text { Preferred stock, S100 par value, } 10 \% \text { dividend, } 50,000 \text { shares issued and outstanding } & \$ 5,000,000 \\\text { Common stock, S6 par value, } 1 \text { million shares issued and outstanding } & 6,000,000 \\\text { Paid-in capital in excess of par } & 119,000,000 \\\text { Unrestricted retained earnings } & 7,500,000 \\\text { Retained eamings restricted for plant expansion } & 2,500,000\end{array}$

-On December 15,2015 Ace Industries repurchased 200,000 shares of its common stock for $10 per share.Based on its shareholders' equity accounts,what can be inferred about this purchase?

A)Ace is holding $2,000,000 of treasury stock which is being disclosed in the notes to the financial statements.
B)Ace retired the shares by reducing the common stock and paid-in capital accounts.
C)Ace is reporting the shares as a $2,000,000 investment on the asset side of the balance sheet.
D)Not enough information is provided to determine how Ace recorded the purchase.

Question 74

The denominator used in the calculation of basic earnings per share is the

A)number of common shares outstanding at the end of the year.
B)number of preferred shares outstanding at the end of the year.
C)weighted average number of common shares outstanding during the year.
D)weighted average number of common shares and preferred shares outstanding during the year.

Question 75

The basic earnings per share for 2015 is (rounded)

A)$3.50 per share.
B)$3.94 per share.
C)$4.81 per share.
D)$6.10 per share.

Question 76

The basic earnings per share for 2015 is

A)$1.43 per share.
B)$1.50 per share.
C)$1.54 per share.
D)$1.73 per share.

Question 77

When a publicly traded company issues both common stock and preferred stock,the SEC requires that

A)preferred and common stock be combined in the equity section.
B)preferred and common stock be clearly differentiated on the balance sheet.
C)all preferred stock be shown as a liability.
D)mandatorily redeemable preferred stock be shown as a liability.

Question 78

The weighted average number of common shares used to compute earnings per share for 2015 is

A)150,000.
B)160,000.
C)165,000.
D)180,000.

Question 79

By examining the statement of shareholders' equity an investor can determine all of the following except

A)shares issued to employees for share-based compensation.
B)unrealized losses on available-for-sale securities.
C)the amount of convertible bonds issued during the year.
D)dividends declared on common stock.

Question 80

If each share of preferred stock is convertible into 8 shares of common stock,the diluted earnings per share for 2015 is (rounded)

A)$1.29 per share.
B)$1.45 per share.
C)$1.54 per share.
D)$1.73 per share.