Deck 13: Accounting for Corporations

Question 1

Common shareholders always share equally with all other shareholders in all dividends.

Answer 1

False

Question 2

Stated value stock is par stock that is assigned a value per share by the corporation's board of directors.

Answer 2

False

Question 3

Stock is attractive to investors because stockholders are not liable for the corporation's actions and debts and because stock is easily transferred.

Answer 3

True

Question 4

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

Question 5

Cumulative preferred stock carries the right to be paid both current and all prior periods' unpaid dividends before any dividends are paid to common shareholders.

Question 6

Par value per share is the price at which a share of stock is bought or sold.

Question 7

A proxy is a document that gives a designated agent the right to vote a shareholder's stock.

Question 8

Minimum legal capital requirements are intended to protect creditors by requiring a minimum level of legal minimum.

Question 9

A preemptive right means shareholders can purchase their proportional share of common stock issued later by the corporation.

Question 10

A corporation can issue two kinds of stock - common and preferred.

Question 11

The only way that a shareholder can affect the management of a corporation is to get elected to the corporation's board of directors.

Question 12

If a corporation is authorized to issue 1,000 shares of $50 common stock, it is said to have $50,000 of stock outstanding.

Question 13

Special rights often granted to preferred stock include a preference for receiving dividends and for the distribution of assets if the corporation is liquidated.

Question 14

Paid-in capital is the total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock.

Question 15

A transfer agent keeps stockholder records and prepares official lists of stockholders and dividend payments.

Question 16

Corporations are subject to substantially fewer regulations and laws than are proprietorships and partnerships.

Question 17

Stockholders' equity consists of paid-in capital and retained earnings.

Question 18

Organization expenses of a corporation often include legal fees and promoter fees.

Question 19

Authorized stock is the total number of shares outstanding.

Question 20

A corporation is a legal entity separate from its owners.

Question 21

The Perk's earnings per share is $3.11. Its common dividend is $0.36 per share and its stock price is $40 per share. Its dividend yield equals 0.9%.
$0.36/$40 = 0.9%

Question 22

A company made an error in recording the 2009 purchase of computer equipment as an expense. This was discovered in 2011. The item should be reported as a prior period adjustment on the 2009 income statement.

Question 23

The term restricted retained earnings refers to both statutory and contractual restrictions.

Question 24

Dividend yield is defined as the market price per share of a company's stock divided by its earnings per share.

Question 25

Retained earnings are not part of the stockholders' claims on the company's net assets.

Question 26

A common statutory restriction is reported on the income statement whereas; a common contractual restriction is reported in the stockholders' equity section of the balance sheet.

Question 27

Retained earnings generally consist of a company's cumulative net income less any net losses and dividends declared since its inception.

Question 28

Dividend yield shows the annual amount of cash dividends distributed to common shares relative to the stock's market price.

Question 29

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

Question 30

A company has earnings per share of $6.45. Its dividend per share is $0.20, and its market price per share is $80. Its price-earnings ratio equals 12.4.
$80/$6.45 = 12.4

Question 31

A company paid $2.10 in dividends. Its earnings per share is $5.40, and its stock price is $120 per share. The dividend yield equals 38.9%.
$2.10/$120 = 1.75%

Question 32

The price-earnings ratio reveals information about the stock market's expectations for a company's future growth in earnings.

Question 33

Earnings per share is the amount of income earned per share of a company's outstanding (weighted-average) common stock.

Question 34

Dividend yield is computed by dividing annual cash dividends per share by the market value per share.

Question 35

Stocks that pay large dividends on a regular basis are growth stocks.

Question 36

If the dividends account is not recorded as a reduction to Retained Earnings on the date of declaration, the dividends account is closed to Retained Earnings at the end of the accounting period.

Question 37

Stocks with a price-earnings ratio greater than 20 to 25 are likely to be underpriced.

Question 38

The price-earnings ratio is computed by dividing earnings per share by the market price per share.

Question 39

Sparrow Company had net income of $63,000. The company had 9,000 weighted average common shares outstanding. The basic earnings per share equal $7.00 per share.

Question 40

Book value per share reflects the value per share if a company is liquidated at balance sheet amounts.

Question 41

When no-par stock is not assigned a stated value, the total amount received is recorded as Common Stock.

Question 42

If a corporation receives assets other than cash in exchange for stock, it records the assets received at their market value as of the date of the transaction.

Question 43

Book value per common share is calculated by dividing stockholders' equity applicable to common shares by the number of common shares outstanding.

Question 44

A stock dividend reduces a corporation's assets and its stockholders' equity.

Question 45

A company has $424,000 in total stockholders' equity. The company has no preferred stock and has 40,000 common shares outstanding. Its book value per share is $10.60.
$424,000/40,000 shares = $10.60/share

Question 46

The journal entry to record the declaration of dividends on common stock includes a debit to Retained Earnings and a credit to Common Dividend Payable.

Question 47

All stock dividends are recorded at par value and no paid-in capital in excess of par value is ever recorded.

Question 48

A large stock dividend only occurs when a distribution of more than 50% of previously outstanding shares is issued.

Question 49

A reverse stock split reduces the market value per share and the par value per share of stock.

Question 50

A stock split is the distribution of additional shares of stock to stockholders according to their percent of ownership.

Question 51

A stock dividend is a distribution of corporate assets that returns part of the original investment to shareholders.

Question 52

The declaration of cash dividends reduces retained earnings.

Question 53

A company has $595,000 in total stockholders' equity. Preferred stock outstanding is valued at $150,000, and 75,000 shares of common stock are outstanding. Its book value per common share is $7.93.
($595,000 - $150,000)/75,000 shares = $5.93/share

Question 54

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

Question 55

A corporation sometimes gives shares of its stock to promoters in exchange for their services in organizing the corporation.

Question 56

A stock dividend decreases the market price of the company's stock.

Question 57

A stock split increases total stockholders' equity.

Question 58

The date of record is the date that directors vote to pay a cash dividend to shareholders.

Question 59

Recording of a stock dividend does not result in a liability being recorded.

Question 60

The main limitation in using book value per share for stock valuation models is the potential difference between recorded value and market value for both assets and liabilities.

Question 61

In many states, the minimum amount that stockholders must contribute to the corporation, and which is intended to protect the creditors of the corporation, is called the:

A) Par value of preferred.
B) Minimum legal capital.
C) Premium capital.
D) Stated value.
E) Working capital.

Question 62

Treasury stock is stock that has been authorized, issued, and is outstanding.

Question 63

A proxy is:

A) A document that gives a designated agent of a stockholder the right to vote the stock.
B) A contractual commitment by an investor to purchase unissued shares of stock.
C) An amount of assets defined by state law that stockholders must invest and leave invested in a corporation.
D) The right of common stockholders to protect their proportionate interests in a corporation by having the first opportunity to purchase additional shares of common stock issued by the corporation.
E) An arbitrary amount assigned to no-par stock by the corporation's board of directors.

Question 64

If a company resells treasury stock below the acquisition cost, a loss from the sale of treasury stock is recorded.

Question 65

The board of directors of a corporation:

A) Are elected by the corporate registrar.
B) Are responsible for day-to-day operations of the business.
C) Do not have the power to bind the corporation to contracts, due to lack of mutual agency.
D) May not also be executive officers of the corporation, due to the separate entity principle.
E) Are responsible for and have final authority for managing corporate activities.

Question 66

If the purchase price of retired stock exceeds the net amount removed from paid-in capital, the excess is debited to Retained Earnings.

Question 67

Buying stock in a corporation is attractive to investors because:

A) Stockholders are not liable for the corporate acts or debts.
B) Stock is easily transferred.
C) A corporation has unlimited life.
D) Shareholders are not mutual agents of the corporation.
E) All of these.

Question 68

Corporations issue preferred stock to raise capital without sacrificing control of the corporation and/or to boost the return earned by common shareholders.

Question 69

Unpaid and undeclared preferred dividends are called dividends in arrears.

Question 70

Callable preferred stock gives its holders the option of exchanging their preferred shares into common shares at a specified rate.

Question 71

Cumulative preferred stock has a right to be paid both current and prior periods' unpaid dividends before any dividend is paid to common shareholders.

Question 72

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:

A) Preemptive right.
B) Proxy right.
C) Right to call.
D) Financial leverage.
E) Voting right.

Question 73

When all of the authorized shares have the same rights and characteristics, the stock is called

A) Preferred stock.
B) Common stock.
C) Par value stock.
D) Stated value stock.
E) No-par value stock.

Question 74

The total amount of cash and other assets received by a corporation from its stockholders in exchange for its stock is:

A) Always equal to its par value.
B) Always equal to its stated value.
C) Referred to as paid-in capital.
D) Referred to as retained earnings.
E) Always below its stated value.

Question 75

Purchasing treasury stock reduces the corporation's assets and stockholders' equity by equal amounts.

Question 76

Par value of a stock refers to the:

A) Issue price of the stock.
B) Value assigned per share of stock by the corporate charter.
C) Market value of the stock on the date of the financial statements.
D) Maximum selling price of the stock.
E) Dividend value of the stock.

Question 77

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

A) Minimum legal capital.
B) Stock subscriptions.
C) Organization expenses.
D) Selling expenses.
E) Prepaid fees.

Question 78

Participating preferred stock has a feature that allows it to share with common shareholders in any dividends paid in excess of the percent or dollar amount stated on the preferred stock.

Question 79

Stock that is retired is the same as authorized and unissued stock.

Question 80

The number of shares that a corporation's charter allows it to sell is referred to as:

A) Issued stock.
B) Outstanding stock.
C) Common stock.
D) Preferred stock.
E) Authorized stock.