Financial and Managerial Accounting, 8e (Wild)
Chapter 11 Corporate Reporting and Analysis
1) A corporation is a legal entity separate from its owners.
2) Corporations avoid many of the state regulations and controls that proprietorships and
partnerships are subject to.
3) Organization expenses of a corporation often include legal fees and promoter fees.
4) Shareholders in a corporation have the power to bind the corporation to contracts.
5) A proxy is a document that gives a designated agent the right to vote a shareholder’s stock.
6) Common shareholders always share equally with all other shareholders (including preferred
shareholders) in dividends.
7) A preemptive right means shareholders can purchase their proportional share of common
stock issued later by the corporation.
8) Stock is attractive to investors because stockholders are not liable for the corporation’s actions
and debts and because stock is easily transferred.
9) A registrar keeps stockholder records for dividend payments and stockholder meetings.
10) Stockholders’ equity consists of paid-in capital and retained earnings.
11) The price at which a share of stock is bought or sold is known as par value.
12) Paid-in capital is the total amount of cash and other assets the corporation receives from its
stockholders in exchange for its stock.
13) The total number of shares outstanding is always equal to the number of shares authorized.
14) If a corporation is authorized to issue 1,000 shares of $5 common stock, it is said to have
$5,000 of common stock outstanding.
15) Minimum legal capital is the least amount that the buyers of stock must contribute to the
corporation or be at risk to pay creditors at a future date.
16) Stated value stock is no-par stock that is assigned a “stated” value per share.
17) A corporation may be authorized to issue both common and preferred stock.
18) Common stock always carries a preference for receiving dividends over preferred stock.
19) A special right often granted to preferred stock is additional voting privileges.
20) 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.
21) Retained earnings generally consists of a company’s cumulative net income less any net
losses and dividends declared.
22) Retained earnings are part of the stockholders’ claims on the company’s net assets.
23) The term restricted retained earnings refers to statutory but not contractual restrictions.
24) 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.
25) Cash dividends reduce Retained Earnings.
26) A company made an error in recording the Year 1 purchase of computer equipment as an
expense. This was discovered in Year 2. The item should be reported as a prior period
adjustment on the Year 2 income statement.
27) Changes in accounting estimates are accounted for in current and future periods.
28) Earnings per share is the amount of income earned per share of a company’s outstanding
(weighted-average) common stock.
29) If a company has no preferred stock, basic earnings per share is equal to net income divided
by the number of weighted average common shares outstanding.
30) If a company has noncumulative preferred stock, basic earnings per share is equal to net
income less preferred dividends declared divided by the number of weighted average common
shares outstanding.
31) Lewis Company had net income of $67,000. The company had 9,000 weighted average
common shares outstanding. The basic earnings per share equals $7.44 per share.
32) The price-earnings ratio reveals information about the stock market’s expectations for a
company’s future earnings growth.
33) Price-earnings ratio is computed by dividing annual dividends by average market value per
share.
34) The price-earnings ratio is computed by dividing earnings per share by the par value per
share.
35) A company has earnings per share of $6.50. Its dividend per share is $0.50, and its market
price per share is $80. Its price-earnings ratio equals 13.
36) Dividend yield shows the annual amount of cash dividends distributed to common shares
relative to the stock’s market price.
37) Dividend yield is defined as the annual cash dividends per share divided by the market price
per share of a company’s stock.
38) Growth stocks generally pay large dividends on a regular basis.
39) Dividend yield is computed by dividing earnings per share by the market value per share.
40) Book value per share reflects the value per share if a company is liquidated at balance sheet
amounts.
41) 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.
42) Dividing stockholders’ equity applicable to common shares by the number of common shares
outstanding yields the book value per common share.
43) If a corporation receives assets other than cash in exchange for stock, it records the assets
received at their market value.
44) A corporation may not legally give shares of its stock to promoters in exchange for their
services in organizing the corporation.
45) When no-par stock is not assigned a stated value, the total amount received is recorded in the
Common Stock account.
46) The date of record is the date that directors vote to pay a cash dividend to shareholders.
47) A debit balance in retained earnings is referred to as a retained earnings deficit.
48) The declaration of cash dividends increases retained earnings.
49) 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.
50) A stock split is the distribution of additional shares of stock to stockholders according to
their percent of ownership.
51) A stock dividend does not reduce a corporation’s assets or its stockholders’ equity.
52) Large stock dividends are recorded at par or stated value.
53) Common Stock Dividend Distributable is a liability account.
54) Common Stock Dividend Distributable is an equity account.
55) Small stock dividends are recorded at par or stated value.
56) A stock dividend is a distribution of corporate assets that returns part of the original
investment to shareholders.
57) A stock split can be done in any ratio.
58) Declaration of a stock dividend results in a liability being recorded.
59) A stock split increases total stockholders’ equity.
60) A large stock dividend only occurs when a distribution of more than 50% of previously
outstanding shares is issued.
61) A stock dividend decreases the market price of the company’s stock.
62) A stock dividend, declared by a corporation’s directors, is a distribution of additional shares
of the corporation’s own stock to its stockholders without any payment in return.
63) All stock dividends are recorded at par value so there would never be a credit to the paid-in
capital in excess of par value account.
64) Paid and declared preferred dividends are called dividends in arrears.
65) Accumulation of dividends in arrears on cumulative preferred stock does not guarantee the
dividends will be paid.
66) A liability for a cash dividend does not exist until the directors declare a cash dividend.
67) Participating preferred stock has a feature that allows its holders to share with common
shareholders in any dividends paid in excess of the amount stated on the preferred stock.
68) Corporations issue preferred stock to raise capital without giving up control of the
corporation and/or to boost the return earned by common shareholders.
69) Treasury stock is stock that has been authorized, issued, and is outstanding.
70) Purchasing treasury stock reduces the corporation’s assets and stockholders’ equity by
unequal amounts.
71) The Paid-in Capital, Treasury Stock account can never have a debit balance.
72) The Paid-in Capital, Treasury Stock account can have a zero or credit balance.
73) If a company resells treasury stock below the acquisition cost, a loss from the sale of treasury
stock is recorded.
74) The costs of bringing a corporation into existence, including legal fees and promoter fees, are
called:
A) Minimum legal capital.
B) Stock subscriptions.
C) Organization expenses.
D) Selling expenses.
E) Prepaid fees.
75) The right of common shareholders to purchase their proportional share of any common stock
later issued by the corporation is called a:
A) Preemptive right.
B) Proxy right.
C) Right to call.
D) Financial leverage.
E) Voting right.
76) Market value per share is:
A) The price at which a stock is bought and sold.
B) A contractual commitment by an investor to purchase unissued shares of stock.
C) Stock not assigned a value per share.
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 amount assigned to no-par stock.
77) 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 overseeing corporate activities.
78) 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.