Chapter 14
1. Shareholders’ equity is a residual interest. It represents the shareholders’ claim on the assets of a firm after
the firm satisfies all higher-priority claims.
2. All corporations must issue preferred stock.
3. Common and preferred stock usually do not have a par or stated value.
4. Firms may periodically distribute net assets generated by earnings to shareholders as a dividend. Firms
reduce net assets and retained earnings for the distribution.
5. Retained earnings on the balance sheet provides a measure of the cumulative net assets generated by earnings
in excess of dividends declared.
6. Only the corporate form of business organization provides the owner with limited liability.
7. If a corporation becomes insolvent, creditors can claim the assets of the individual owners.
8. To settle debts of general partnerships and sole proprietorships, creditors have a claim on the owners’
business and personal assets.
9. In recent years, many partnerships and sole proprietorships have become limited liability companies (LLCs),
or limited liability partnerships (LLPs), to limit their owners’ personal liability for business debts and other
obligations.
10. Both U.S. GAAP and IFRS require the disclosure of information about the rights of each type of capital
stock outstanding.
11. Convertible preferred shares require the holder of preferred shares to convert the preferred shares into a
specified number of common shares under certain specified conditions.
12. The issuing firm benefits from issuing convertible preferred shares, because these shares carry a lower
dividend rate than purchasers otherwise would have required to buy the shares for a given price.
13. U.S. GAAP and IFRS do not classify preferred stock subject to redemption only at the option of the issuing
firm as shareholders’ equity.
14. Preferred stock subject to redemption at the option of the preferred shareholders appears between liabilities
and shareholders’ equity in U.S. GAAP and as a liability in IFRS.
15. When firms issue common stock for assets other than cash, the firm records the shares exchanged for
noncash assets at the fair value of the shares given or, if the firm cannot make a reasonable estimate, at the fair
value of the assets received.
16. If a firm issues common stock in return for services other than from employees, the firm records the
transaction at the fair value of the services received if it can more reliably measure this amount. Otherwise, the
firm records the transaction at the fair value of the shares issued.
17. Corporations often sell, or exchange for goods and services, various call options on their shares. The excess
of the exercise price over the market price is the option’s intrinsic value.
18. Both U.S. GAAP and IFRS do not require firms to recognize the fair value of employee stock options in
the accounting records.
19. The value of a stock option results from the benefit element and the time value element.
20. Holders of a bond or preferred stock with common stock warrants attached cannot detach and redeem the
warrants separately from the bond or preferred stock.
21. U.S. GAAP and IFRS do not require the firm to measure the fair value of the stock warrants separately from
the value of the associated bond or preferred stock and allocate the issue price between the two securities.
22. In most cases U.S. GAAP requires firms to allocate the full issue price of Convertible Bonds or Convertible
Preferred Stock to the bonds or preferred stock and none of the price to the conversion feature.
23. IFRS does not require firms to allocate a portion of the issue price of convertible bonds and convertible
preferred stock to the conversion feature.
24. Financial statement notes must disclose significant limitations on dividend declarations.
25. Stock dividends have little economic substance for shareholders.
26. Usually firms treat small-percentage distributions, say less than a 25% increase in the number of shares, as
stock dividends and larger ones as stock splits.
27. U.S. GAAP and IFRS on accounting for repurchases and reissuances of treasury shares follow the principle
that treasury stock purchases and sales are operating transactions and therefore debits Cash (for economic gains)
or credits Cash (for economic losses).
28. U.S. GAAP provides several approaches to the accounting for treasury shares which include cost, par value,
and constructive retirement methods.
29. Firms use the par value method when management and the governing board do not intend to reissue shares
within a reasonable amount of time or when jurisdiction-specific corporation laws define reacquired shares as
retired shares.
30. Under U.S. GAAP, a discontinued operation is a component of an entity, comprising operations and cash
flows that clearly differ from he rest of the entity, both operationally and for financial reporting. Segments,
divisions, subsidiaries, and groups of assets can qualify as a component of an entity.
31. An example of an item likely to be extraordinary for most firms is a loss from an earthquake or confiscation
of assets by a foreign government.
32. U.S. GAAP and IFRS require firms to disclose unrealized gains and losses that historically have bypassed
the income statement in a category called other comprehensive income.
33. U.S. GAAP and IFRS require firms to account for correction of errors, regardless of whether they are
material or not, by retrospectively restating net income of prior periods and adjusting the beginning balance in
Retained Earnings for the current period.
34. U.S. GAAP and IFRS require firms to retrospectively apply any changes in accounting principle by
recalculating the income for prior periods under the new accounting principle, if it at all feasible.
35. Accrual accounting requires frequent, ongoing changes in estimates.
36. Publicly held firms that apply U.S. GAAP or IFRS must show earnings per common share data in the body
of the income statement.
37. Investors often apply multiples to earnings per common share and book value per common share in deciding
on a reasonable market price for a firm’s shares.
38. The annual reports to shareholders must explain the changes in all shareholders’ equity accounts.
39. Comprehensive income equals net income as reported on the income statement plus (minus) the increase
(decrease) in other comprehensive income for the year.
40. All corporations issue
41. Which of the following is not true?
42. Which of the following is not true?
43. Which of the following is not true?
44. Which of the following is not true?
45. Which of the following is not true?
46. The term capital can mean
47. Most publicly traded firms operate as corporations. The corporate form has which of the following
advantage(s)?
48. Most publicly traded firms operate as corporations. Which of the following is/are not true?
49. Most publicly traded firms operate as corporations. Which of the following is/are not true?
50. Most publicly traded firms operate as corporations. Which of the following is/are not true?
51. Most publicly traded firms operate as corporations. Which of the following is/are not true?
52. Various laws and contracts govern the rights and obligations of a shareholder. Which of the following is
not true?
53. Various laws and contracts govern the rights and obligations of a shareholder. Which of the following is
not true?
E. none of the above
54. Various laws and contracts govern the rights and obligations of a shareholder. Which of the following
istrue?
55. Which of the following is not true?
56. Which of the following is not true?
57. Which of the following is/are true?
58. Which of the following is/are not true?
59. Which of the following is/are not true?
60. Which of the following is/are not true?
61. Which of the following is/are not true?
62. Preferred shares may provide for redemption by the issuing firm in the future. Redeemable preferred shares
carry which of the following redemption rights or obligations?
63. In U.S. GAAP, preferred stock subject to redemption at the option of the preferred shareholders appears
64. In IFRS, preferred stock subject to redemption at the option of the preferred shareholders appears
65. In IFRS, preferred stock subject to mandatory redemption is disclosed
66. In U.S. GAAP, preferred stock subject to mandatory redemption is disclosed
67. Which of the following is/are true?
68. Which of the following is not true?
69. Which of the following is not true?
70. Which of the following is not true?
71. Which of the following is not true?
72. Corporations often sell, or exchange for goods and services, various call options on their shares. Which of
the following is not true?
73. Corporations often sell, or exchange for goods and services, various call options on their shares. Which of
the following is not true?
74. Firms sometimes issue bonds or preferred stock with stock warrants. Which of the following is not true?
75. An understanding of the accounting for employee stock options (ESOs) requires several definitions. Which
of the following is not true?
76. Regarding employee stock options (ESOs), which of the following is not true?
77. Which of the following is/are true concerning an employee stock options’ benefit element?
78. Which of the following is/are not true concerning an employee stock options’ benefit element?
79. Which of the following is/are true concerning an employee stock options’ time value element?
80. Which of the following is/are true concerning an employee stock options’ time value element?
81. Which of the following is/are not true concerning an employee stock options’ time value element?
82. The accounting for employee stock options involves
83. The accounting for employee stock options does not involve
84. The accounting for employee stock options involves the firm debiting _____ and crediting _____ for the
amortized amount of the fair value of the stock options on the date of the grant over the requisite service
period.
85. The accounting for employee stock options involves amortizing the fair value of the stock options on the
date of the grant over the requisite service period, which is
86. When employees exercise their employee stock options, the firm debits _____ for the proceeds, debits
_____ for any amounts credited to that account, credits _____ for the par value of the shares issued and credits
_____ for any excess of the cash received plus the amount amortized over the par value of the shares issued.
87. The accounting for stock options is complex because firms often include
88. Which of the following is/are true?
89. Which of the following is/are true?
90. Which of the following is/are true?
91. Which of the following is/are true regarding stock rights?
92. Which of the following is/are true regarding stock rights?
93. Which of the following is not true regarding stock rights?
the issue of new shares for cash.
95. Which of the following is/are not true?
96. Which of the following is/are true regarding stock warrants?
97. Which of the following is not true regarding stock warrants?
98. In most cases, U.S. GAAP requires firms to allocate the full issue price of Convertible Bonds or Convertible
Preferred Stock
99. Which of the following is/are true concerning convertible bonds or convertible preferred stock?
100. Which of the following is/aretrue concerning convertible bonds or convertible preferred stock?