Chapter 11 Reporting and Interpreting Stockholders’ Equity Answer Key
True / False Questions
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 average 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.
Multiple Choice Questions
34.
Which of the following statements is false?
35.
The two primary sources of equity shown in a balance sheet are:
36.
Which of the following represents the number of shares currently owned by investors?
37.
Which of the following does not represent a description of shares of stock presented on the
balance sheet?
38.
Watson Company has provided the following data about its common stock:
39.
Treasury stock shares are shares of stock that are: