Financial Accounting, 5e (Spiceland)
1) Assets plus liabilities equal stockholders’ equity.
2) Paid-in Capital is the amount stockholders have invested in the company.
3) Retained Earnings is the amount stockholders have invested in the company.
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4) Angel investors are investors that focus on companies at or near bankruptcy.
5) All publicly held corporations in the United States are regulated by the Securities and
Exchange Commission.
6) Limited liability means that even in the event of bankruptcy, stockholders in a corporation can
lose no more than the amount they invested in the company.
7) Owners in a sole proprietorship or a partnership can be held personally liable for debts the
company has incurred, over and beyond the investment they have made.
8) A corporation has limited liability and attracting outside investment is easier relative to sole-
proprietorships and partnerships.
9) A corporation has lower taxes and less paperwork relative to sole-proprietorships and
partnerships.
10) An S Corporation allows a company to enjoy limited liability as a corporation, but tax
treatment as a partnership.
11) Authorized stock is the number of shares that have been sold to investors.
12) Outstanding stock is the number of shares held by investors.
13) Par value is the legal capital per share of stock that’s assigned when the corporation is first
established.
14) Par value has a direct relationship to the market value of the common stock.
15) A company credits Additional Paid-in Capital for the portion of the cash proceeds above par
value received for the issuance of stock.
16) The number of shares outstanding is equal to the number of shares issued by the company
minus the number of the company’s own shares that it has purchased.
17) In the event a corporation is dissolved, common stockholders receive preference over
preferred stockholders in the distribution of assets.
18) Convertible preferred stock allows the stockholder to convert shares of preferred stock into
common stock at a specified conversion ratio.
19) Cumulative preferred stock means that dividends accumulate interest during the year.
20) We usually record preferred stock as equity and report it in the stockholders’ equity section
of the balance sheet just above common stock.
21) Treasury stock is the purchase of a company’s own issued stock.
22) If a company purchases shares of another company, it records this transaction as treasury
stock.
23) Treasury stock purchases reduce the number of shares outstanding, thereby increasing
earnings per share.
24) We record treasury stock at the cost of the shares acquired.
25) Treasury stock is a contra-equity account because treasury stock increases total stockholders’
equity.
26) When we resell treasury stock, we report the difference between its cost and the cash
received as an increase or a decrease in additional paid-in capital.
27) Retained earnings represent the earnings of the corporation that have not been distributed as
dividends to stockholders.
28) The amount of retained earnings equals net income minus dividends for the current year.
29) If a company has expenses that are more than revenues, the net loss decreases retained
earnings.
30) Dividends are paid on all shares issued by the company including treasury stock.
31) Total assets, total liabilities, and total stockholders’ equity do not change as a result of a stock
dividend.
32) Small stock dividends are recorded by debiting Stock Dividends for the par value per share.
33) No journal entry is made to record a stock split unless it is treated similar to a large stock
dividend.
34) A stock split has no effect on the total of any account in stockholders’ equity.
35) Common stock is listed before preferred stock in the balance sheet.
36) We can estimate the average purchase cost of treasury stock per share by dividing the
treasury stock balance by the number of shares purchased.
37) The statement of stockholders’ equity shows how each equity account changed during the
year.
38) The stockholders’ equity section of the balance sheet shows how each equity account
changed during the year.
39) The return on equity measures the ability of company management to generate earnings from
the resources that owners provide.
40) We compute the return on equity ratio by dividing net income by ending stockholders’
equity.
41) Earnings per share (EPS) measures the net income earned per share of common stock
outstanding.
42) We calculate earnings per share as net income divided by the average shares outstanding
during the period.
43) Earnings per share is useful in comparing earnings performance across companies.
44) We calculate the PE ratio as the stock price divided by earnings per share so that both stock
price and earnings are expressed on a per share basis.
45) Which of the following accounts is not reported in the stockholders’ equity section of the
balance sheet?
A) Treasury Stock.
B) Common Stock.
C) Sales Revenue.
D) Retained Earnings.
46) Which of the following is a disadvantage of an S Corporation?
A) Double Taxation
B) Liability
C) Restrictions on number of stockholders
D) Inability to transfer ownership
47) Which of the following stages of equity financing comes last in the traditional order of
progression?
A) Investment by friends and family of the founders.
B) Investment by the founders of the business.
C) Initial public offering (IPO).
D) Outside investment by “angel” investors and venture capital firms.
48) Which of the following stages of equity financing comes first in the traditional order of
progression?
A) Investment by friends and family of the founders.
B) Initial Public Offering.
C) Investment by the founders of the business.
D) Outside investment by “angel” investors and venture capital firms.
49) In terms of total sales, assets, and earnings, the dominant form of business organization is a:
A) Sole proprietorship.
B) Partnership.
C) Corporation.
D) Limited liability company (LLC).
50) Common stockholders usually have all of the following rights except:
A) To receive dividends when declared.
B) To share in the distribution of assets.
C) To elect board of directors.
D) To participate in the day-to-day operations.
51) All publicly held corporations are regulated by what government organization?
A) The Financial Accounting Standards Board.
B) The Commission on Accounting Procedures.
C) The Accounting Principles Board.
D) The Securities and Exchange Commission.
52) Which of the following is a reason that a corporation would prefer to issue stock instead of
bonds?
A) Dividend payments can be deducted for income tax purposes but interest payments cannot.
B) Expansion is accomplished without surrendering ownership control.
C) The risk of going bankrupt is less.
D) All of the other answer choices are correct.
53) The articles of incorporation describe:
A) The nature of the firm’s business activities.
B) The shares of stock to be issued.
C) The initial board of directors.
D) All of the other answer choices are correct.
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54) Advantages of the corporate form of business include which of the following?
I. Double taxation
II. Ability to raise capital
III. Ability to transfer ownership
IV. More paperwork
V. Limited liability
A) II.
B) II., III., V.
C) I., II., III.
D) II., IV., V.
55) Which of the following statements regarding the corporate form of business is correct?
A) The disadvantages are that generating capital is difficult and that owners have limited
liability.
B) Disadvantages are that the business is subject to government regulations and double taxation
on its income.
C) One disadvantage is that ownership is easy to transfer.
D) All of the other answer choices are correct.
56) The disadvantages of the corporate form of business include:
A) Ability to transfer ownership.
B) Additional taxes.
C) Limited liability.
D) Ability to raise capital.
57) The correct order from the smallest number of shares to the largest number of shares is:
A) Authorized, issued, and outstanding.
B) Outstanding, issued, and authorized.
C) Issued, outstanding, and authorized.
D) Issued, authorized, and outstanding.
58) Authorized common stock refers to the total number of shares:
A) Outstanding.
B) Issued.
C) Issued and outstanding.
D) That can be issued.
59) Issued stock refers to the number of shares:
A) Outstanding plus treasury shares.
B) Authorized.
C) In the hands of stockholders.
D) That may be issued under state law.
60) Outstanding common stock refers to the total number of shares:
A) Issued.
B) Issued plus treasury stock.
C) Issued less treasury stock.
D) Authorized.
61) Outstanding common stock specifically refers to:
A) Stock that is performing well.
B) Stock that has been authorized for issuance.
C) Stock issued plus treasury stock.
D) Stock in the hands of stockholders.
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62) The par value of shares issued is normally recorded in the:
A) Additional Paid-in Capital account.
B) Common Stock account.
C) Retained Earnings account.
D) Treasury Stock account.
63) The par value of common stock represents:
A) The amount received when the stock was issued.
B) The liquidation value of a share.
C) The market value of a share of stock.
D) The legal capital per share of stock assigned when the corporation was first established.