Chapter 15

Question 1

Preemptive Right

Answer 1

• to share proportionately in any new issues of stock of the same class
• protects an existing stockholder from involuntary dilution of ownership interest

Question 2

Common stock

Answer 2

is the residual corporate interest that bears the ultimate risks of loss and receives the benefits of success. Not guaranteed dividends

Question 3

Stockholder’s equity

Answer 3

1. capital stock
2. additional paid-in capital
3. retained earnings

represents the cumulative net contributions by stockholders plus retained earnings

Question 4

Retained Earning

Answer 4

represents the earned capital of the company

Question 5

Contributed (paid-in) capital

Answer 5

is the total amount paid in on capital stock- the amount provided by stockholders to the corporation for use in the business

Question 6

par value stock

Answer 6

stock that has a fixed per-share amount printed on each stock certificate

Question 7

secret reserve

Answer 7

excessive depreciation or amortization
charges, expensing capital expenditures, excessive write-downs of inventories or
receivables, or any other understatement of assets or overstatement of liabilities

Question 8

authorized stock

Answer 8

the maximum number of shares of stock a corporation

Question 9

issued stock

Answer 9

share of stock that have been issued by the corporation

Question 10

outstanding stock

Answer 10

stock held by the stockholders

Question 11

treasury stock

Answer 11

stock that was previously issued and later reacquired by the company(not outstanding)

Question 12

paid-in capital in excess of par

Answer 12

account indicates any excess over par value paid in by stockholders in return for the shares issued to them

Question 13

cumulative preferred stock

Answer 13

requires that if a corporation fails to pay a dividend in any year, it must make it up in a later yr before paying any dividends to common stockholders
-recorded as footnote

Question 14

redeemable preferred stock

Answer 14

• included as a liability

- has a mandatory redemption period or a redemption feature that the issuer cannot control

Question 15

participating preferred stock

Answer 15

share ratably with the common stockholders in any profit distributions beyond the prescribed rate

Question 16

convertible preferred stock

Answer 16

allows stockholders to exchange preferred shares for common stock at a predetermined ratio

Question 17

liquidating dividend

Answer 17

a dividend which is a return to stockholders of a portion of their original investment

Question 18

small(ordinary) stock dividends

Answer 18

less than 20-25 percent of the common shares outstanding at the time of dividends
-it must transfer fair market value from retained earning

Question 19

return on common stockholder’s equity

Answer 19

(net income-preferred dividends)/average stockholder’s equity

Question 20

payout ratio

Answer 20

cash dividends/net income

Question 21

book value per share

Answer 21

common stockholder’s equity/outstanding shares

Question 22

the cost method

Answer 22

results debiting the treasury stock account for the acquisition cost and in reporting this account as a deduction from the total paid-capital and retained earnings on the balance sheet

Question 23

stock splits

Answer 23

• decrease par value and increase number of shares

- to reduce the market value of shares