Financial Accounting, 10e (Libby)
Chapter 11 Reporting and Interpreting Stockholders’ Equity
1) Shares which a corporation has the ability to issue, as documented in its charter in the state
where incorporated, are outstanding shares of stock.
2) There would be 100,000 shares of common stock outstanding when the number of shares
authorized was 150,000, issued shares totaled 120,000, and 20,000 shares were being held in the
treasury.
3) Treasury stock is a corporation’s own stock that was issued and then repurchased, and is still
held by the corporation.
4) Common stockholders have voting rights and can declare cash dividends.
5) Earnings per share is calculated by dividing net income by the number of outstanding shares
of common stock at year-end.
6) Earnings per share increases when a company purchases treasury stock.
7) When a company acquires treasury stock, assets and stockholders’ equity both decrease.
8) The issue of $5 par value common stock for $18 per share results in an $18 credit to the
common stock account for each share issued.
9) The issue of $1 par value common stock for $10 per share results in a $9 credit to the
Additional paid-in capital account for each share issued.
10) Stockholders’ equity decreases when a company purchases treasury stock.
11) Net income increases when treasury stock is resold for an amount in excess of the amount
paid when the common stock was repurchased.
12) Total stockholders’ equity increases when treasury stock is sold for an amount less than its
repurchase price.
13) Net income decreases when treasury stock is sold for an amount less than the original cost
when the shares of stock were repurchased.
14) Total stockholders’ equity of Grasse Company is not affected when a stockholder sells shares
of Grasse Company stock to another stockholder.
15) Total assets remain the same when a company uses cash to purchase treasury stock.
16) Shares of stock held as treasury stock do not have voting rights or the right to receive
dividends.
17) Most investors who are retired people prefer to receive their return on investment in common
stock in the form of stock price appreciation rather than in dividends.
18) A company’s assets and stockholders’ equity both decrease when a cash dividend is declared
by the company’s board of directors.
19) A company’s assets and liabilities both decrease when a previously declared cash dividend is
paid.
20) The declaration by a corporation’s board of directors of a cash dividend on common stock
creates a liability on the declaration date.
21) The declaration and payment of a cash dividend on common stock results in a reduction of
the issuing corporation’s total stockholders’ equity.
22) The dividend yield ratio is calculated as dividends per share divided by the number of shares
outstanding.
23) The dividend yield ratio increases when the market price per share increases.
24) The dividend yield ratio increases when a cash dividend is paid.
25) The declaration and distribution of a 2-for-1 stock split results in a reduction of retained
earnings.
26) A stock split results in the reduction of the par or stated value per share and a proportionate
increase in the number of shares outstanding.
27) The declaration and issuance of a stock dividend results in a reduction of the issuing
corporation’s total stockholders’ equity.
28) The declaration of a stock dividend by a corporation’s board of directors creates a liability on
the declaration date.
29) Preferred stock often has a preference over common stock in the distribution of assets in the
event of dissolution of the corporation.
30) Preferred stockholders do not have voting rights but do have a preference with respect to
dividend payments.
31) When a company sells its treasury stock, it creates a cash inflow from an investing activity
because treasury stock is an investment asset on the balance sheet.
32) When a company issues common stock in exchange for cash, a cash inflow from a financing
activity is reported.
33) When a company pays its previously declared cash dividend, an investing cash outflow is
reported.
34) Generally accepted accounting principles require a company to show two years of data on its
statement of stockholders’ equity.
35) The statement of stockholders’ equity is one of the four financial statements required by
GAAP.
36) Which of the following statements is false?
A) Common stockholders have a residual claim on assets in the event of liquidation.
B) Shares of stock held in the treasury are subtracted from the number of issued shares in the
determination of the number of outstanding shares.
C) Common stockholders have voting rights at annual stockholder meetings.
D) Corporations are governed by their stockholders.
37) The two primary sources of equity shown in a balance sheet are:
A) Residual equity and debt equity.
B) Capital equity and residual equity.
C) Contributed capital and earned capital.
D) Unearned capital and earned capital.
38) Which of the following represents the number of shares currently owned by investors?
A) Authorized shares.
B) Issued shares.
C) Outstanding shares.
D) Treasury shares.
39) Which of the following does not represent a description of shares of stock presented on the
balance sheet?
A) Authorized shares.
B) Issued shares.
C) Outstanding shares.
D) Contributed shares.
40) Watson Company has provided the following data about its common stock:
• Par value is $1 per share
• 10,000,000 authorized shares
• 4,300,000 shares are outstanding
• 4,700,000 shares are issued
How many shares of treasury stock are there?
A) 0.
B) 400,000.
C) 5,300,000.
D) 5,700,000.
41) Treasury stock shares are shares of stock that are:
A) Authorized and outstanding.
B) Authorized but not issued.
C) Authorized, issued, and outstanding.
D) Authorized and issued, but not outstanding.
42) Employees who receive stock options as compensation:
A) Have the right to receive dividends.
B) Have a residual claim in the event of liquidation of the company.
C) May vote in stockholders’ meetings.
D) Have no stockholder rights until they buy shares of stock as granted in the options.
43) During 2019, Thomas Corporation repurchased some shares of its own common stock. What
effect did this transaction have on 2019 stockholders’ equity and earnings per share,
respectively?
Stockholders’ Equity
Earnings Per Share
A.
Decrease
No effect
B.
Increase
No effect
C.
Decrease
Decrease
D.
Decrease
Increase
A) Option A
B) Option B
C) Option C
D) Option D
44) Rye Company has provided the following information:
• Weighted average number of outstanding common shares, 200,000
• Net income, $500,000
• Number of authorized common shares, 400,000
• Number of treasury shares, 25,000
If Rye has issued 225,000 shares, what is Rye’s earnings per share (EPS)?
A) $2.50
B) $1.25
C) $2.00
D) $1.33
45) Kirova Company has provided the following information:
• Number of issued common shares, 900,000
• Net income, $1,000,000
• Number of authorized common shares, 1,000,000
• Weighted average number of outstanding common shares, 800,000
• Number of treasury shares, 100,000
What is Kirova’s earnings per share (EPS)?
A) $1.43
B) $1.25
C) $1.11
D) $1.00
46) Which of the following statements about earnings per share (EPS) is correct?
A) Increased net income would cause earnings per share to decrease.
B) Issuance of more common shares would cause earnings per share to increase.
C) Purchasing treasury shares would cause earnings per share to decrease.
D) EPS is calculated using the weighted average number of common shares of stock outstanding
47) Which of the following statements incorrectly describes earnings per share (EPS)?
A) Earnings per share is a ratio calculated per common share.
B) An increase in the market price per common share does not result in a decrease in earnings
per share.
C) An increase in dividends per share results in an increase in earnings per share.
D) The reissue of treasury stock decreases earnings per share.
48) Which of the following statements about earnings per share (EPS) is correct?
A) EPS is an indicator of how well a company will perform in the future.
B) Net income in dollar amount is a better measure to use in comparing different companies.
C) EPS can be used to compare companies of different sizes.
D) EPS is expected to remain constant over a period of time.
49) RKJ Company has provided the following information:
• 100,000 shares of $5 par value common stock are authorized
• 70,000 shares have been issued
• 65,000 shares are outstanding
Which of the following statements is correct?
A) RKJ has 35,000 shares of treasury stock.
B) RKJ has 30,000 shares of treasury stock.
C) RKJ can issue an additional 35,000 shares of common stock.
D) RKJ can issue an additional 30,000 shares of common stock.
50) RKJ Company has provided the following information:
• 100,000 shares of $5 par value common stock are authorized
• 70,000 shares have been issued
• 65,000 shares are outstanding
Which of the following statements is correct?
A) RKJ can issue an additional 30,000 shares of treasury stock.
B) RKJ has 30,000 shares of treasury stock.
C) RKJ can resell 5,000 shares of treasury stock.
D) RKJ can issue an additional 35,000 shares of common stock.
51) RKJ Company has provided the following information:
• 100,000 shares of $5 par value common stock are authorized
• 70,000 shares have been issued
• 65,000 shares are outstanding
The 70,000 shares of issued common stock were issued for $9 per share.
Which of the following statements is correct?
A) Common stock is reported at $630,000 on the balance sheet.
B) Additional paid-in capital is reported at $260,000 on the balance sheet.
C) Common stock is reported at $350,000 on the balance sheet.
D) Treasury stock is reported at $45,000 on the balance sheet.