Deck 13: Accounting for Corporations

Question 1

The entry required to record start-up and organization costs will cause a increase in assets.

Answer 1

False

Question 2

One advantage of a corporation is the lack of mutual agency.

Answer 2

True

Question 3

Stockholders who own preferred stock usually do not have voting rights,whereas stockholders who own common stock usually have voting rights.

Answer 3

True

Question 4

Stockholders elect the board of directors who then appoint the officers of a corporation.

Question 5

The board of directors carries out the day-to-day operations of the business.

Question 6

Underwriters typically charge 1 percent of the selling price to guarantee the sale of initial public offerings of stock.

Question 7

The sale of shares in a corporation by one stockholder to another does not affect the total capital of the corporation.

Question 8

Start-up and organization costs should be expensed as incurred.

Question 9

Legal capital of a corporation is the maximum amount that can be reported as contributed capital.

Question 10

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

Question 11

The number of outstanding shares should exceed the number of authorized shares.

Question 12

The stockholders' equity in a corporation consists of capital contributed by stockholders and retained earnings.

Question 13

Corporations are subject to more government control and regulation than are other forms of business.

Question 14

Corporate earnings are subject to double taxation.

Question 15

An advantage of the corporate form is the separation of ownership and control.

Question 16

Limited liability can be viewed as both an advantage and a disadvantage.

Question 17

A corporation often uses an underwriter to guarantee the sale of stock in an initial public offering (IPO).

Question 18

Financing a business with common stock is more risky than financing it with bonds.

Question 19

To form a corporation,most states require persons called underwriters to sign and file it with proper state official.This application contains the articles of incorporation.

Question 20

The par value of stock is an arbitrary amount assigned to each share of stock.

Question 21

Callable preferred stock is preferred stock that may be redeemed or retired at the option of the issuing corporation.

Question 22

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

Question 23

Dividends in arrears are disclosed as liabilities of a corporation.

Question 24

The par value of treasury stock is deducted from total Contributed Capital and Retained Earnings in determining total stockholders' equity.

Question 25

The word preferred in the phrase preferred stock means that an owner of preferred stock has some advantages over a bondholder.

Question 26

Dividends in arrears must be paid when a corporation calls in its preferred stock.

Question 27

Preferred stock is considered the residual equity of a corporation.

Question 28

When common stock with a par value is sold for a price that exceeds par value,the Common Stock account is credited for the cash proceeds received from the sale of the shares.

Question 29

Dividends in arrears on cumulative preferred stock are not paid until after dividends are paid on common stock.

Question 30

Treasury stock is considered a reduction in stockholders' equity,not a purchase of assets .

Question 31

Dividends in arrears pertain only to cumulative preferred stock.

Question 32

Retained earnings are a component of contributed capital.

Question 33

Treasury shares are shares that are authorized but unissued.

Question 34

Treasury stock usually is recorded at cost when purchased.

Question 35

A corporation cannot declare a dividend that would cause stockholders' equity to fall below the legal capital.

Question 36

The sale of treasury stock at an amount less than cost results in a loss to be reported on the income statement.

Question 37

When no-par common stock has a stated value,the stated value of the shares issued normally is considered the legal capital of the corporation.

Question 38

If a corporation issues par value common stock and the proceeds are less than par value,the
Common Stock account is credited for the par value.

Question 39

Once an owner of convertible preferred stock has converted to common,he or she cannot convert back to preferred.

Question 40

When no-par common stock without a stated value is issued for cash,the Common Stock account is credited for an amount equal to the cash proceeds.

Question 41

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

Question 42

A corporation's board of directors may influence dividend policies,but the company's senior management has sole authority to declare dividends.

Question 43

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

Question 44

A stock dividend exceeding 20 to 25 percent is properly treated as a stock split.

Question 45

Receiving dividends is the only way in which stockholders can earn a return on their investment in a corporation.

Question 46

A small stock dividend normally results in a transfer from Retained Earnings to Contributed Capital of an amount equal to the market value of the stock.

Question 47

A stock dividend increases the total amount of stockholders' equity.

Question 48

When the date of declaration and the payment date occur in the same period,the amount of dividends shown on the statement of stockholders' equity and on the statement of cash flows will be equal.

Question 49

A stock split normally increases total stockholders' equity.

Question 50

The entry to record the retirement of treasury stock will include a debit to Common Stock for the par value of the retired shares.

Question 51

Cash dividends become a liability of a corporation when the stock goes ex-dividend.

Question 52

A dividend that represents a return to the stockholders of a part of their paid-in capital rather than a distribution out of retained earnings is called a liquidating dividend.

Question 53

When treasury stock is sold at a price below its cost,the entry to record the sale has the effect of reducing total stockholders' equity.

Question 54

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

Question 55

No entry is required on the date of payment for a cash dividend.

Question 56

A liquidating dividend is usually paid when a company is going out of business or reducing its operations.

Question 57

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

Question 58

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

Question 59

The declaration of a cash dividend causes an increase in a corporation's liabilities at the date of declaration.

Question 60

A stock split results in a transfer of the market value of the stock from Retained Earnings to Contributed Capital.

Question 61

Compensation expense related to employee stock options is a tax-deductible expense for the corporation.

Question 62

An advantage of the corporate form of business is

A)separation of ownership and control.
B)tax treatment.
C)lack of mutual agency.
D)government regulation.

Question 63

Return on equity equals net income divided by average stockholders' equity.

Question 64

A disadvantage of the corporate form of business is

A)centralized authority and responsibility.
B)its status as a separate legal entity.
C)government regulation.
D)continuous existence.

Question 65

The date on a statement of stockholders' equity is for a specific point in time.

Question 66

When the dividends yield is relatively low,investors must expect some of their return to come from increases in the price of the shares.

Question 67

A statement of stockholders' equity can take the place of a statement of retained earnings.

Question 68

In computing book value per share of common stock,common stock distributable is included in the divisor.

Question 69

The declaration of cash dividends will increase the book value per share of common stock.

Question 70

Stock options often are granted by a corporation to management personnel as a means of additional compensation and motivation of these employees.

Question 71

The price/earnings (P/E)ratio is a measure of investors' confidence in a company's future.

Question 72

A 2-for-1 stock split will have the same effect on the number of shares outstanding as a 200 percent stock dividend.

Question 73

Book value per share of stock represents the amount the shareholder will receive per share if the company is sold or liquidated.

Question 74

Dividend yield is the most important ratio associated with stockholders' equity and is a common measure of management's performance.

Question 75

The book value of one share of callable preferred stock is equal to the call value of the preferred share minus any dividends in arrears.

Question 76

A stock dividend will cause a decrease in the total number of shares issued and outstanding.

Question 77

The effects on individual contributed capital accounts of a conversion of preferred stock to common stock during the period are disclosed on the statement of stockholders' equity.

Question 78

Which of the following is a correct statement relating to the concept of mutual agency and the corporate form of business?

A)There is no mutual agency with the corporate form of business.
B)Mutual agency may or may not exist in a corporation,depending on the individual state law.
C)Mutual agency always exists in the corporate form of business.
D)Mutual agency may or may not exist in a corporation,depending on a vote by the shareholders.

Question 79

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

A)Professional management
B)Continuous existence
C)Double taxation
D)Unlimited liability

Question 80

A disadvantage of the corporate form of business is

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