Chapter 11

Question 1

Major Advantage of the Corporate form of Business:

Answer 1

Ease of raising capital as both large and small investors can participate in corporate ownership.

Question 2

Other advantages of the corporate from of business:

Answer 2

(1) Simple to become an owner
(2) Easy to transfer ownership
(3) Provides limited liability

Question 3

Corporations can….

Answer 3

(1) Own assets
(2) Incur liabilities
(3) Sue and be sued
(4) Enter into contracts

Question 4

Stockholder Rights:

Answer 4

(1) Voting rights
(2) Dividends
(3) Residual Claims
(4) Preemptive Rights

Question 5

Ultimate control of a corporation rests with the ____________.

Answer 5

Stockholders

Question 6

Reports the amount of capital the company received from

investors’ contributions, in exchange for the company’s stock

Answer 6

Contributed Capital

Question 7

Reports the cumulative amount of net income earned by the
company less the cumulative amount of dividends declared since the corporation
was first organized.

Answer 7

Retained Earnings

Question 8

Reports shares that were previously owned by stockholders but
have been reacquired and are now held by the corporation

Answer 8

Treasury Stock

Question 9

Reports unrealized gains and losses,
which are temporary changes in the value of certain assets and liabilities the
company holds.

Answer 9

Accumulated Other Comprehensive Income

Question 10

The maximum number of shares of stock that can be issued to the public.

Answer 10

Authorized Shares

Question 11

True or False: The number of authorized shares is identified in the corporate charter of the corporation that is issued by the state.

Answer 11

True

Question 12

Authorized shares can be classified as either:

Answer 12

(1) Issued

(2) Unissued

Question 13

Authorized shares of stock that have been distributed to stockholders.

Answer 13

Issued Shares

Question 14

Authorized shares of stock that have never been issued to stockholders.

Answer 14

Unissued Shares

Question 15

Issued shares can be classified as either:

Answer 15

(1) Outstanding Shares

(2) Treasury Shares

Question 16

Shares that are currently owned by stockholders.

Answer 16

Outstanding Shares

Question 17

Shares that were once owned by stockholders but the corporation repurchased the shares in the stock market.

Answer 17

Treasury Shares

Question 18

Common stock normally has a par value which is usually a very _____ amount, such as _____ per share.

Answer 18

(1) Small

(2) One cent

Question 19

________ is an arbitrary amount assigned to each share of stock in the corporate charter.

Answer 19

Par Value

Question 20

True or False: Par value does NOT equal market price.

Answer 20

True

Question 21

______ is the amount that each share of stock will sell for in the market.

Answer 21

Market Price

Question 22

The first time a corporation issues stock to the public.

Answer 22

Initial Public Offering (IPO)

Question 23

Subsequent issues of new stock to the public.

Answer 23

Seasoned New Issue

Question 24

Transactions between two investors ________ the corporation’s accounting records.

Answer 24

Do not affect

Question 25

Corporations often buy their own stock back in the market. A corporation repurchases its stock to:

Answer 25

(1) Distribute excess cash to stockholders (2) Send a signal that the company believes its stock is worth acquiring (3) Obtain shares to reissue for the purchase of other companies (4) Obtain shares to reissue to employees as part of stock option plans.

Question 26

_____ can be used as a way to compensate employees and to encourage employees to work hard for a corporation

Answer 26

Stock

Question 27

______ are not paid on treasury stock, and a corporation holding its own stock cannot vote using these shares at the annual meeting.

Answer 27

Dividends

Question 28

______ is not an asset. It is reported in the Stockholders’ Equity portion of the balance sheet as a reduction from total equity.

Answer 28

Treasury Stock

Question 29

True or False: No profit or loss is recognized on treasury stock transactions.

Answer 29

True

Question 30

(1) Declared by board of directors (2) Not legally required (3) Creates liability at declaration (4) Requires sufficient retained earnings and cash.

Answer 30

Dividends on Common Stock

Question 31

Loan agreements can include restrictions on paying ____ below a certain amount of _________.

Answer 31

(1) Dividends | (2) Retained Earnings

Question 32

Three important aspects of dividends:

Answer 32

(1) Declaration date (2) Date of record (3) Date of payment

Question 33

The date the directors declare the dividend. At this time a liability is created and must be recorded.

Answer 33

Date of Declaration

Question 34

The date when the corporation determines the owners of record who will receive the dividend. No entry is required in the accounting records on this date.

Answer 34

Date of Record

Question 35

The date the corporation pays the dividend to the stockholders who owned the stock on the record date

Answer 35

Date of Payment

Question 36

(1) There is no change in total stockholders’ equity. (2) Par value per share does not change. (3) All stockholders retain the same percentage ownership.

Answer 36

Stock Dividends

Question 37

(1) All dividends are distributions of retained earnings (2) Stock dividends transfer an amount from retained earnings to contributed capital (3) No cash is involved (4) A rearrangement of the components of stockholders equity (5) The $ amount transferred depends on the size of the stock dividend

Answer 37

Stock Dividends

Question 38

A ______ stock dividend is a distribution of stock that is less than 20 - 25 percent of the outstanding shares.

Answer 38

Small

Question 39

______ stock dividends are recorded at the market value of the stock.

Answer 39

Small

Question 40

A ______ stock dividend is a distribution of stock that is greater than 20 - 25 percent of the outstanding shares.

Answer 40

Large

Question 41

______ stock dividends are recorded at the par value of the stock.

Answer 41

Large

Question 42

A _______ is the distribution of additional shares of stock to stockholders according to their percent ownership.

Answer 42

Stock Split

Question 43

In the process of a stock split, the _____ of the stock changes.

Answer 43

Par Value

Question 44

True of False: No journal entry is required for a stock split.

Answer 44

True

Question 45

(1) Different voting rights (2) Usually has a fixed dividend rate (3) Priority over a common stock

Answer 45

Preferred Stock

Question 46

Journal Entry for issuing shares of preferred stock:

Answer 46

dr. Cash cr. Preferred Stock cr. Additional paid in capital

Question 47

Journal Entry for redeeming shares of preferred stock:

Answer 47

dr. Preferred Stock dr. Additional paid in capital cr. Cash

Question 48

(Dividend Rate) x (Total par Value of Preferred Stock) =

Answer 48

Amount of Preferred Dividend

Question 49

Must be paid to preferred stockholders before any dividends are paid to common stockholders.

Answer 49

Current Dividend Preference

Question 50

Has the right to be paid both the current and all prior periods’ unpaid dividends before any dividends are paid to common stockholders.

Answer 50

Cumulative Dividend Preference

Question 51

_______ has no rights to prior periods’ dividends if they were not declared in those prior periods.

Answer 51

Noncumulative preferred stock

Question 52

(Cumulative amount of reported net income) - (Net losses + dividends) =

Answer 52

Retained Earnings

Question 53

Represents a corporation’s total earnings that have been retained in the business (rather than being distributed to stockholders).

Answer 53

Retained Earnings

Question 54

_____ is one of the most widely used ratios.

Answer 54

Earnings per share

Question 55

(Net Income - Preferred Dividends) / (Average Number of Common Shares Outstanding) =

Answer 55

Earnings per share (EPS)

Question 56

Tells us the amount earned for each dollar invested by common stockholders.

Answer 56

Return on Equity (ROE)

Question 57

(Net Income - Preferred Dividends) / (Average Common Stockholders Equity) =

Answer 57

Return on Equity (ROE)

Question 58

A measure of the value that investors place on a company’s common stock.

Answer 58

Price/Earnings (P/E) Ratio

Question 59

(Current Stock Price) / (Earnings Per Share)

Answer 59

Price/Earnings (P/E) Ratio