Chapter 15: Shareholders' equity Flashcards
Which of the following is true of your investment in a company’s shares?
A.) You can only sell your shares to other company shareholders.
B.) You can generally sell your shares to anyone you want without the knowledge or permission of the company.
C.) You can sell your shares to anyone you want as long the company is notified before the sale.
D.) You can only sell your shares back to the company.
B
The value of a single owner’s investment in a corporation depends on the corporation’s
A.) net assets.
B.) goodwill.
C.) profitability.
D.) payout ratio.
A
Because common shareholders are residual owners, they
A.) have the rights to specific assets of the business.
B.) bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.
C.) can negotiate individual contracts on behalf of the enterprise.
D.) are entitled to a dividend every year in which the business earns a profit.
B
Which of the following rights is not automatically included when common shares are issued by a corporation?
A.) To share proportionately in management of the corporation.
B.) To share proportionately in profits and losses.
C.) To share proportionately in any new issue of shares or bonds by the corporation.
D.) To share proportionately in corporate assets upon liquidation.
C
Which of the following is the most common preference that preferred shareholders have over common shareholders?
A.) They are assured a dividend, usually at a stated rate, before any amount may be distributed to common shareholders.
B.) They have the right to convert preferred shares to common shares on a basis determined in the preferred shares’ indenture.
C.) They have the right to receive dividends at the same rate as the common shareholders.
D.) Preferred shareholders receive a larger dividend than do common shareholders because they have given up the right to vote.
A
All of the following are primary considerations management must make before declaring a cash dividend except
A.) the effect of inflation on the company and alternative uses of the cash to be paid for dividends.
B.) the availability of funds to pay the dividend.
C.) the tax effect on shareholders of the receipt of the dividends.
D.) the legal permissibility of the dividend.
C
When journalizing the sale of no par common shares, a debit to cash that is greater than the credit to the common shares account means that
A.) a gain on the sale of shares is a part of the transaction.
B.) the common shares were sold at a discount.
C.) an accounting error has been made.
D.) the common shares are worth more than their current market value.
C
Which of the following accurately describes subscribed shares?
A.) Subscribed shares are shares owned by the directors of the company.
B.) Subscribed shares are included in issued shares.
C.) Subscribed shares are a current asset.
D.) Subscribed shares are not yet fully paid for.
D
On January 1, 2019, Hanson Incorporated had an initial public offering of 10,000 common shares. The shares sold for $15 each. Six months later, Hanson reacquired 1,000 shares for $12 per share. The acquisition of these shares
A.) decreased total shareholders’ equity by $15,000.
B.) resulted in a gain of $3,000.
C.) decreased total shareholders’ equity by $12,000.
D.) did not change total shareholders’ equity.
C
O’Brien Industries paid $12 per share to acquire 1,000 of its common shares, which were originally issued for $15 each. Several months later the company issued 1,000 common shares at a price of $15. What effect would these transactions have on paid-in capital, retained earnings, and total shareholders’ equity?
A.) It would have no effect on paid-in capital or retained earnings, but total shareholders’ equity would increase.
B.) It would decrease both paid-in capital and total shareholders’ equity and have no effect on retained earnings.
C.) It would increase paid-in capital, total shareholders’ equity, and retained earnings.
D.) It would increase both paid-in capital and total shareholders’ equity and have no effect on retained earnings.
A
Dean & Associates paid a cash dividend to shareholders that was declared two weeks ago. If their current ratio (current assets ÷ current liabilities) is 2:1, how will the current ratio and working capital be affected by the payment of the dividend?
A.) Both the current ratio and working capital will decrease.
B.) Both the current ratio and working capital will increase.
C.) The current ratio will increase and the working capital will not change.
D.) Working capital will decrease and the current ratio will not change.
C
Fuller Enterprises reports a credit balance in retained earnings. If they decide not to use the offsetting assets in their business operations, they could
A.) distribute the assets to creditors.
B.) issue common shares.
C.) distribute the assets to their shareholders as a dividend in kind.
D.) declare a stock split.
C
How should a company record a property dividend?
A.) Record the dividend by debiting retained earnings for an amount equal to the book value of the property to be distributed.
B.) Record the dividend by debiting retained earnings for an amount equal to the fair value of the property to be distributed.
C.) Record the dividend at the carrying value of the property distributed and inform shareholders as to the fair value of the property so they may individually recognize a gain or loss.
D.) Record the dividend by crediting retained earnings for an amount equal to the fair value of the property to be distributed.
B
Total shareholders’ equity will increase
A.) after a stock split, but not after a stock dividend.
B.) after either a stock dividend or a stock split.
C.) after a stock dividend, but not after a stock split.
D.) after neither a stock dividend nor a stock split.
D
Why does a stock dividend require a formal journal entry in the financial accounting records while a stock split does not?
A.) Stock dividends are payable on the date they are declared.
B.) Stock dividends increase the relative book value of an individual’s shareholdings.
C.) Stock splits increase the relative book value of an individual’s shareholdings.
D.) Stock dividends represent a transfer from retained earnings to share capital.
D
