Chapter 11 – Stockholders’ Equity
TRUE/FALSE
1. The price/earnings (P/E) ratio is a common measure of management’s performance.
2. The dividends yield is measured in terms of “times.”
3. Return on equity equals net income divided by average stockholders’ equity.
4. The board of directors carries out the day-to-day operations of the business.
5. Stockholders elect the officers who appoints the board of directors of a corporation.
6. The limited liability of a stockholder can be viewed as both an advantage and a disadvantage.
7. Corporate earnings are not subject to double taxation.
8. The par value of stock refers to its value on the open market.
9. One disadvantage of a corporation is the continuous existence of the corporation.
10. A corporation is a separate entity for legal purposes.
11. The liability of a stockholder is usually limited to the stockholder’s investment in the corporation and
the stockholder’s personal assets.
12. A corporation often uses an underwriter for an initial public offering (IPO).
13. An advantage of the corporate form is that the board cannot hire professional managers to attend to the
corporation’s affairs.
14. Stock options often are granted by a corporation to management personnel as a means of additional
compensation to and motivation of these employees.
15. The par value of stock is an arbitrary amount assigned to each share of stock.
16. Underwriters typically charge 5 percent of the selling price to guarantee the sale of initial public
offerings of stock.
17. 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 cash dividend.
18. Cash dividends become a liability of a corporation when the stock goes ex-dividend.
19. A cash dividend is usually paid when a company is going out of business or reducing its operations.
20. No entry is required on the date of record for a cash dividend.
21. The Dividends account is closed by transferring to Retained Earnings at the end of the period.
22. Start-up and organization costs should be amortized over ten years or more.
23. Start-up and organization costs include state incorporation fees and attorneys’ fees for drawing up the
articles of incorporation.
24. Corporations are subject to less government control and regulation than are other forms of business.
25. The sale of shares in a corporation by one stockholder to another does not affect the total capital of the
corporation.
26. The death of a stockholder results in the dissolution of the corporation.
27. Financing a business with common stock is riskier than financing it with bonds.
28. The declaration of a cash dividend causes an increase in a corporation’s liabilities at the date of record.
29. The entry required to record start-up and organization costs will cause a decrease in net income for the
period.
30. The stockholders’ equity in a corporation consists of capital contributed by stockholders and retained
earnings.
31. Stockholders who own common stock usually have voting rights, whereas stockholders who own
preferred stock usually do not have voting rights.
32. Preferred stock is considered the residual equity of a corporation.
33. Treasury shares are shares that are issued and outstanding.
34. Retained earnings are a component of contributed capital.
35. Retained earnings represent the stockholders’ claims to assets resulting from profitable operations.
36. The word preferred in the phrase preferred stock means that an owner of preferred stock has some
advantages over a bondholder.
37. Dividends in arrears are often disclosed in the notes to the financial statements.
38. Dividends in arrears pertain to noncumulative preferred stock.
39. Dividends on cumulative preferred stock become a liability of the corporation at the end of each year.
40. Callable preferred stock is preferred stock that may be redeemed or retired at the option of the
stockholder.
41. Stockholders are entitled to any dividends in arrears when a corporation calls in its preferred stock.
42. Once an owner of convertible preferred stock has converted to common, he or she cannot convert back
to preferred.
43. The number of authorized shares should always equal or exceed the number of outstanding shares.
44. No rights or privileges are associated with common stock.
45. When no-par common stock has a stated value, the stated value of the shares issued normally is not
considered the legal capital of the corporation.
46. The concept of legal capital exists to protect the corporation’s assets for the stockholders of the
corporation.
47. When common stock with a par value is sold for a price that exceeds par value, the Common Stock
account is credited for an amount equal to the cash proceeds.
48. The balance in the Additional Paid-in Capital account must be added to the balance of the Common
Stock account to compute the amount of legal capital for a corporation with a par value common stock.
49. For accounting purposes, stated value is treated differently than par value.
50. 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.
51. Treasury stock usually is recorded at cost when purchased.
52. The cost of treasury stock is deducted from total Contributed Capital and Retained Earnings in
determining total stockholders’ equity.
53. The sale of treasury stock at an amount greater than cost does not result in a gain on the income
statement.
54. Treasury stock is reported in the stockholders’ equity section of the balance sheet.
55. 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.
56. 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.
57. The entry to record the retirement of treasury stock will include a debit to Common Stock for the
amount of the par value of the shares.
58. A liability arises when the board of directors declares a stock dividend.
59. A person owning stock on the date of payment will receive stock dividends that have been declared.
60. A stock dividend is a pro rata distribution of cash to a corporation‘s stockholders.
61. A large stock dividend normally results in a transfer from Retained Earnings to Contributed Capital of
an amount equal to the par value of the stock.
62. A stock dividend does not affect the total amount of stockholders’ equity.
63. The account Common Stock Distributable is classified as a stockholders’ equity account.
64. A stock dividend exceeding 20 to 25 percent is properly treated as a stock split.
65. A stock split normally decreases total stockholders’ equity.
66. A stock split results in a transfer of the market value of the stock from Retained Earnings to
Contributed Capital.
67. A stock dividend will cause a decrease in total contributed capital at the date the dividend is declared.
68. A stock dividend will cause an increase in the total number of shares issued and outstanding.
69. A 3-for-1 stock split will have the same effect on the number of shares outstanding as a 300 percent
stock dividend.
70. A statement of retained earnings is not as informative as a statement of stockholders’ equity.
71. A statement of stockholders’ equity can take the place of a statement of retained earnings.
72. The date on a statement of stockholders’ equity is for a period of time rather than for a specific point in
time.
73. Book value per share of stock represents the amount of equity the shareholder of one share of stock
has in the net assets of the company.
74. In computing book value per share of common stock, common stock distributable is included in the
number of shares outstanding.
75. The declaration of cash dividends will increase the book value per share of common stock.
76. 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.
MULTIPLE CHOICE
1. The price/earnings (P/E) ratio is measured in terms of
a.
dollars.
b.
a percentage.
c.
times.
d.
days.
2. Dividend yield equals
a.
market price per share divided by dividends per share.
b.
net income divided by market price per share.
c.
net income divided by total equity
d.
dividends per share divided by market price per share.
3. Return on equity is measured in terms of
a.
days.
b.
times.
c.
a percentage.
d.
dollars.
4. A disadvantage of the corporate form of business is
a.
limited liability.
b.
professional management.
c.
ease of transfer of ownership.
d.
double taxation.
5. 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.
6. An advantage of the corporate form of business is
a.
possible lack of control by owners.
b.
possible restrictions due to lack of liability.
c.
continuous existence
d.
government regulation.
7. 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.
8. Which of the following phrases is not descriptive of the corporate form of business?
a.
Professional management
b.
Continuous existence
c.
Limited liability
d.
Single taxation
9. A corporation has
a.
government regulations.
b.
a limited existence.
c.
unlimited liability.
d.
no tax liability.
10. Par value
a.
is established for a share of stock after it is issued.
b.
is an arbitrary amount assigned to each share of stock.
c.
represents what a share of stock is worth.
d.
represents the current selling price for a share of stock.
11. A good measure of confidence in a corporation’s future is
a.
par value.
b.
price/earnings ratio.
c.
dividends yield.
d.
return on equity.
12. A corporation records the cash payment of the dividend
a.
on the payment date.
b.
on the record date.
c.
on the declaration date.
d.
when the stock sells ex-dividend.
13. A liquidating dividend is
a.
a dividend that exceeds current retained earnings.
b.
normally declared when a corporation is experiencing large profits.
c.
a dividend that exceeds current profits.
d.
legal in most states.
14. To evaluate the amount of dividends they receive, investors use the ratio called
a.
Price Earning ratio
b.
Dividend yield ratio
c.
Return on assets
d.
Dividend turnover
15. Start-up and organization costs for a corporation that is to operate a retail store would include the costs
of
a.
promoters’ fees and printing stock certificates.
b.
advertising for a grand opening sale.
c.
the initial purchase of inventory.
d.
counters and racks to display merchandise.
16. Which of the following statements is not descriptive of common stock?
a.
Stockholders are considered owners, not creditors, of a corporation.
b.
The payment of dividends is never required.
c.
Dividends paid are an expense for the issuing corporation.
d.
Issuing stock is less risky than issuing bonds.
17. Which of the following could be described as both an advantage and a disadvantage of incorporation?
a.
Ease of capital generation
b.
Limited liability
c.
Government regulations
d.
Lack of mutual agency
18. Which of the following statements is true of stock option plans?
a.
They give employees the right to purchase stock in the company at a fixed price on a
future date.
b.
They are not a form of motivating employees.
c.
The compensation expense from stock option plans is not tax deductible.
d.
They must be offered to all employees.
19. Which of the following is the appropriate entry to record the declaration of cash dividends?
a.
Dividends Payable – Debit; Cash – Credit
b.
Additional Paid-in Capital – Debit; Dividends Payable – Credit
c.
Dividends– Debit; Dividends Payable – Credit
d.
Retained Earnings– Debit; Cash – Credit
20. Start-up and organization costs include all of the following except
a.
rent of new office.
b.
accountants’ fees.
c.
attorney’s fees.
d.
state incorporation fees.
21. Start-up and organization costs
a.
are capitalized, but never amortized.
b.
are capitalized and amortized, usually over five years.
c.
are expensed in the year incurred.
d.
appear on the balance sheet as a current asset.
22. The board of directors of Autauga Corporation declared a cash dividend on July 15, 2013, to be paid
on August 15, 2013, to shareholders holding the stock on August 1, 2013. Given these facts, the date
August 1, 2013, is referred to as the
a.
date of declaration.
b.
date of payment.
c.
ex-dividend date.
d.
date of record.
23. The entry to close the Dividends account which has a balance of $10,000, at the end of an accounting
period will be:
a.
Dividends 10,000
Cash 10,000
b.
Retained Earnings 10,000
Cash 10,000
c.
Dividends 10,000
Retained Earnings 10,000
d.
Retained Earnings 10,000
Dividends 10,000
24. The board of directors of Blount Corporation declared a cash dividend of $5.00 per share on 57,000
shares of common stock on April 14, 2013. The dividend is to be paid on May 15, 2013, to
shareholders of record on May 1, 2013. The proper entry to be recorded on April 14, 2013, will be:
a.
Dividends 285,000
Dividends Payable 285,000
b.
Dividends payable 285,000
Cash 285,000
c.
Dividends 285,000
Retained Earnings 285,000
d.
Dividends payable 285,000
Dividends 285,000
25. The board of directors of Blount Corporation declared a cash dividend of $5.00 per share on 57,000
shares of common stock on April 14, 2013. The dividend is to be paid on May 15, 2013, to
shareholders of record on May 1, 2013. The effects of the entry to record the declaration of the
dividend on April 14, 2013, are to
a.
decrease stockholders’ equity and increase liabilities.
b.
increase stockholders’ equity and increase liabilities.
c.
decrease stockholders’ equity and decrease assets.
d.
increase stockholders’ equity and decrease assets.
26. The board of directors of Blount Corporation declared a cash dividend of $5.00 per share on 57,000
shares of common stock on April 14, 2013. The dividend is to be paid on May 15, 2013, to
shareholders of record on May 1, 2013. The proper entry to be recorded on May 15, 2013, will be:
a.
Cash 285,000
Dividends Payable 285,000
b.
Dividends Payable 285,000
Cash 285,000
c.
Cash 285,000
Dividends 285,000
d.
Dividends 285,000
Cash 285,000
27. The board of directors of Blount Corporation declared a cash dividend of $5.00 per share on 57,000
shares of common stock on April 14, 2013. The dividend is to be paid on May 15, 2013, to
shareholders of record on May 1, 2013. The effects of the entry to record the payment of the dividend
on May 15, 2013, are to
a.
increase assets and decrease stockholders’ equity.
b.
decrease stockholders’ equity and decrease liabilities.
c.
decrease liabilities and decrease assets.
d.
increase stockholders’ equity and decrease liabilities.
28. The entry to record the declaration of a cash dividend will
a.
not affect working capital.
b.
reduce working capital.
c.
not affect total stockholders’ equity.
d.
increase total stockholders’ equity.
29. The net effects on a corporation of the declaration and payment of a cash dividend are to
a.
increase assets and increase stockholders’ equity.
b.
decrease liabilities and decrease stockholders’ equity.
c.
decrease assets and decrease stockholders’ equity.
d.
increase stockholders’ equity and decrease liabilities.
30. The contributed capital of a corporation does not include
a.
additional paid-in capital.
b.
preferred stock.
c.
the stated value of common stock issued.
d.
retained earnings.
31. A corporation’s residual equity is its
a.
preferred stock.
b.
treasury stock.
c.
common stock.
d.
authorized shares of all stock.
32. The maximum number of shares of common stock that may be issued according to the corporation’s
charter is referred to as
a.
authorized shares.
b.
outstanding shares.
c.
unissued shares.
d.
issued shares.
33. Holders of preferred stock normally do not have
a.
preference as to dividends.
b.
preference as to assets in liquidations.
c.
full voting rights.
d.
ownership interests in the corporation.
34. Outstanding shares of stock are
a.
all shares that a corporation sells or transfers to stockholders.
b.
also called treasury shares.
c.
the maximum number of shares a corporation can issue.
d.
issued shares that are still in circulation.
35. Shares of treasury stock are
a.
issued shares that have been bought back by the corporation and are being held by the
corporation.
b.
shares held by the U.S. Treasury Department.
c.
part of the total outstanding shares but not part of the total issued shares of a corporation.
d.
unissued shares that are held by the treasurer of the corporation.
36. How should dividends in arrears be shown on a corporation’s balance sheet?
a.
As an increase in liabilities
b.
In a note or in the body of the financial statements
c.
As a decrease in assets
d.
As an increase in stockholders’ equity
37. When shares of preferred stock may be redeemed by the corporation at a certain price, the shares are
said to be
a.
cumulative.
b.
nonconvertible.
c.
convertible.
d.
callable.
38. Convertible preferred stock is preferred stock that may be exchanged for
a.
cash at the option of the corporation.
b.
common stock at the option of the corporation.
c.
cash at the option of the stockholder.
d.
common stock at the option of the stockholder.
39. Most preferred stocks are callable preferred stocks, which means that the callable feature may be
exercised by
a.
the state that issued the corporation’s charter.
b.
a preferred stockholder.
c.
the issuing corporation.
d.
either the issuing corporation or a preferred stockholder.
40. Dividends in arrears are dividends on
a.
noncumulative preferred stock that have not been declared for some specified period of
time.
b.
common stock that may never be declared.
c.
cumulative preferred stock that have been declared but not yet paid.
d.
cumulative preferred stock that have not been declared for some specified period of time.
41. Dividends in arrears cannot exist in conjunction with
a.
callable preferred stock.
b.
convertible preferred stock.
c.
noncumulative preferred stock.
d.
cumulative preferred stock.
42. When callable preferred stock is called and surrendered, the shareholder is entitled to all of the
following except
a.
dividends in arrears.
b.
the par value of the stock.
c.
a call premium.
d.
the market value of the stock.
43. Preferred stock is least likely to have which of the following characteristics?
a.
Preference as to dividends
b.
The right of the holder to vote at stockholders’ meetings
c.
Preference as to assets upon liquidation of the corporation
d.
The right of the holder to convert to common stock
44. All of the following are stockholders’ equity accounts except
a.
Common Stock.
b.
Preferred Stock.
c.
Retained Earnings.
d.
Cash.
45. All of the following normally are found in a corporation’s stockholders’ equity section except
a.
Common Stock.
b.
Additional Paid-in Capital.
c.
Retained Earnings.
d.
Dividends in Arrears.
46. Treasury shares plus outstanding shares equal
a.
unissued shares.
b.
subscribed shares.
c.
authorized shares.
d.
issued shares.
47. The number of shares of issued stock equals
a.
unissued shares plus authorized shares.
b.
outstanding shares plus treasury shares.
c.
authorized shares plus outstanding shares.
d.
authorized shares minus treasury shares.
48. Which of the following classifications represents the fewest shares of common stock?
a.
Outstanding shares
b.
Issued shares
c.
Treasury shares
d.
Impossible to determine
49. Holders of common stock must be made aware of possible restrictions on common dividends when the
preferred stock is
a.
convertible.
b.
cumulative.
c.
callable.
d.
noncumulative.
50. Which of the following would not be an account in the general ledger of a corporation?
a.
Dividends Payable
b.
Preferred Stock
c.
Common Stock
d.
Dividends in Arrears
51. Use the following information to answer the question below.
The following accounts appear in the ledger of Bullock Corporation on December 31, 2013:
Preferred Stock
$60,000
Common Stock
112,000
Additional Paid-in Capital, Preferred
14,000
Additional Paid-in Capital, Common
36,000
Retained Earnings
80,000
A balance sheet prepared on December 31, 2013, would report total contributed capital of
a.
$172,000.
b.
$186,000.
c.
$222,000.
d.
$302,000.
52. Use the following information to answer the question below.
The following accounts appear in the ledger of Bullock Corporation on December 31, 2013:
Preferred Stock
$60,000
Common Stock
94,000
Additional Paid-in Capital, Preferred
14,000
Additional Paid-in Capital, Common
36,000
Retained Earnings
80,000
A balance sheet prepared on December 31, 2013, would report total stockholders’ equity of
a.
$154,000.
b.
$168,000.
c.
$204,000.
d.
$284,000.