Corporate Finance Concepts Quiz

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Questions and Answers

Which statement regarding no-par value stock is incorrect?

Many states do not require a par value for stock.

The board of directors can assign a stated value to no-par shares.

No-par value stock can provide flexibility in capital raising.

No-par value stock is fairly uncommon today. (correct)

What does legal capital primarily aim to do?

Maximize shareholders' dividends.

Ensure a higher market price for shares.

Increase the stock's liquidity.

Protect stockholders by maintaining a certain value. (correct)

Which of the following statements about the corporate structure is true?

Stockholders have unlimited liability similar to partners.

It is challenging for corporations to acquire capital through stock issuance.

The journal entry for authorized capital stock includes a debit to R&D expenses.

The separation of ownership and management is a disadvantage. (correct)

Which statement about capital stock authorization is false?

It requires a formal accounting entry. Signup and view all the answers

Which statement about par value requirements is true?

Most states do not require par value for capital stock. Signup and view all the answers

What advantage does a corporation have regarding liability?

Limited liability of stockholders protects personal assets. Signup and view all the answers

How does a corporation typically acquire capital?

By issuing stock to investors. Signup and view all the answers

Which characteristic allows a corporation to maintain its existence regardless of its ownership?

Separate legal existence. Signup and view all the answers

What is a consequence of the corporate structure relating to taxation?

Corporations pay taxes on profits and shareholders pay taxes on dividends. Signup and view all the answers

Which of the following is NOT a characteristic that distinguishes corporations from partnerships?

Higher product quality standards. Signup and view all the answers

Which characteristic of a corporation allows for easy transfer of ownership?

Transferable ownership rights. Signup and view all the answers

What distinguishes the management structure of a corporation?

Management is separate and distinct from ownership. Signup and view all the answers

Which of the following is a disadvantage of operating as a corporation?

Subject to additional government regulations. Signup and view all the answers

What is the entry made when treasury stock is sold above cost?

Cash $10,000, Treasury Stock $8,000, Paid-in Capital from Treasury Stock $2,000 Signup and view all the answers

When a corporation sells its own treasury stock below cost, which account may be debited?

Retained Earnings Signup and view all the answers

In the sale of treasury stock, what is true about the corporation's financial position?

The corporation does not realize a gain or loss from transactions with its own stockholders. Signup and view all the answers

What was a potentially risky financial move made by Reebok regarding its shares?

It borrowed significant funds to repurchase nearly a third of its shares. Signup and view all the answers

What does the accounting entry for selling 800 shares of treasury stock at $7 per share look like?

Cash $5,600, Paid-in Capital from Treasury Stock $800, Treasury Stock $6,400 Signup and view all the answers

What amount was realized by Mead, Inc. when selling 2,200 shares of treasury stock at $7 per share?

$15,400 in total proceeds Signup and view all the answers

What is the purpose behind Reebok’s decision to repurchase shares?

To signal belief in future earnings. Signup and view all the answers

What is the net effect on treasury stock when it is sold at a price lower than its cost?

Decrease in treasury stock account and impact on retained earnings Signup and view all the answers

What is the total amount of cash dividends declared by IBR Inc. in 2020?

$50,000 Signup and view all the answers

How much dividends are in arrears for the preferred stock at the end of 2020?

$2,000 Signup and view all the answers

How much is allocated to common stockholders from the $50,000 declared dividend in 2020?

$40,000 Signup and view all the answers

What is the amount paid to preferred stockholders when the preferred stock is cumulative and dividends have been declared?

$8,000 Signup and view all the answers

If the cumulative preferred stock dividends were not fully declared in the previous years, which amount should be included in the allocation for the current year?

$8,000 Signup and view all the answers

What is the par value of the preferred stock issued by MasterMind Corporation?

$100 Signup and view all the answers

What would be the total dividend for preferred stockholders if the company had missed dividends in previous years?

$18,000 Signup and view all the answers

What is the estimated cash dividend per preferred share if a total of $12,000 is distributed to 2,000 shares?

$2.00 Signup and view all the answers

What amount will preferred stockholders receive if the preferred stock is noncumulative and a $60,000 cash dividend is declared?

$12,000 Signup and view all the answers

If the preferred stock is cumulative and the company has not paid dividends for two years, how much will preferred stockholders receive from a $60,000 dividend?

$36,000 Signup and view all the answers

What portion of the declared $60,000 dividend will common stockholders receive if the preferred stock is noncumulative?

$48,000 Signup and view all the answers

If a corporation issues stock dividends, what is one advantage of this action?

It satisfies dividend expectations without using cash. Signup and view all the answers

In the case of cumulative preferred stock, what must the company do about previous unpaid dividends?

Pay missed dividends in arrears. Signup and view all the answers

What is the total annual dividend for 2,000 shares of $100 par value preferred stock with a 6% dividend rate?

$12,000 Signup and view all the answers

Which of the following is NOT a reason why corporations issue stock dividends?

To accumulate cash reserves. Signup and view all the answers

Under what condition do preferred stockholders receive dividends that the company did not pay in prior years?

When the dividends are cumulative. Signup and view all the answers

What does IFRS refer to when discussing equity accounts excluding contributed capital?

Reserves Signup and view all the answers

Which of the following best describes how gains or losses from purchases of treasury stock are treated under GAAP and IFRS?

Neither GAAP nor IFRS allows recording of gains or losses. Signup and view all the answers

What is the name of the income statement used under IFRS?

Statement of comprehensive income Signup and view all the answers

How is income tax expense treated in the statement of comprehensive income under IFRS?

Required to be reported Signup and view all the answers

What distinguishes the two-statement approach from the single-statement approach in IFRS?

It requires separate recognition of comprehensive income. Signup and view all the answers

Which of the following elements is NOT required in the financial reporting of stockholders' equity under GAAP?

Gains on treasury stock transactions Signup and view all the answers

In the context of companies operating in different countries, which group is often the largest corporate stockholder in Germany?

Financial institutions like banks Signup and view all the answers

What is a significant similarity between GAAP and IFRS regarding earnings per share calculations?

The computations are essentially the same. Signup and view all the answers

What does paid-in capital represent in a corporation?

The total amount of cash and other assets paid in by stockholders in exchange for capital stock Signup and view all the answers

Which of the following accounts is included under the equity section of a corporation?

Common Stock Account Signup and view all the answers

Which of the following is a primary source of equity for a corporation?

Paid-in capital Signup and view all the answers

What is excluded from the paid-in capital account of a corporation?

Retained earnings generated from the corporation's operations Signup and view all the answers

What type of stock is primarily associated with paid-in capital?

Both Common and Preferred Stock Signup and view all the answers

What is the residual claim in the context of stockholder rights?

The right to share in corporate assets upon liquidation. Signup and view all the answers

Which factor is NOT considered when determining the price for a new stock issue?

Past stock prices for similar companies. Signup and view all the answers

What is typically indicated by a corporation's charter?

The maximum number of shares the corporation can sell. Signup and view all the answers

If a company eliminates the preemptive right, what does it affect for existing stockholders?

Their percentage ownership during new stock issuances. Signup and view all the answers

In the stock issuance process, what aspect does NOT require a formal accounting entry?

Authorized stock. Signup and view all the answers

What does the term 'preemptive right' enable stockholders to do?

Purchase additional shares to maintain their ownership percentage. Signup and view all the answers

Which is a not a potential consideration when deciding how to issue stock?

Demographics of potential investors. Signup and view all the answers

What action can stockholders NOT take during a liquidation process?

Vote on the allocation of liquidation proceeds. Signup and view all the answers

What is the total amount of stockholders’ equity when paid-in capital common stock is $750,000 and retained earnings are $122,000?

$872,000 Signup and view all the answers

Which journal entry is correctly prepared when 1,000 shares of $1 par value common stock are issued for $5 per share?

Cash $5,000; Common Stock $1,000; Paid-in Capital in Excess of Par Value $4,000 Signup and view all the answers

How does the issuance of common stock primarily affect a company's accounts?

Affects only paid-in capital accounts Signup and view all the answers

What accounts are impacted when common stock with a par value is issued for cash?

Cash and Paid-in Capital in Excess of Par Value Signup and view all the answers

If Hydro-Slide, Inc. issues 5,000 shares of no-par common stock with a stated value of $5 at $8 per share, what is the total cash received?

$35,000 Signup and view all the answers

What entry reflects the closing entry for net income into retained earnings?

Income Summary $122,000; Retained Earnings $122,000 Signup and view all the answers

Which term is also known as Paid-in Capital in Excess of Par?

Capital Surplus Signup and view all the answers

What is the effect on retained earnings when a corporation issues common stock?

No effect on retained earnings Signup and view all the answers

What is one purpose of a corporation acquiring treasury stock?

To enhance the stock’s market value Signup and view all the answers

What accounting method do companies usually use when purchasing treasury stock?

Cost method Signup and view all the answers

Which account is debited when treasury stock is reacquired?

Treasury Stock Signup and view all the answers

What effect does treasury stock have on stockholders' equity?

It reduces stockholders' equity Signup and view all the answers

What is NOT a characteristic of treasury stock?

It earns dividends Signup and view all the answers

What occurs when treasury stock is sold at a price below its cost?

Total assets increase and equity decreases Signup and view all the answers

Which of the following would not typically be a reason for a corporation to acquire treasury stock?

To engage in stock market trading Signup and view all the answers

When a corporation reissues treasury stock, what is the expected effect on its equity?

Equity increases only if sold above cost Signup and view all the answers

What is the accounting treatment for a small stock dividend?

Recorded at fair market value Signup and view all the answers

When Medland Corporation declares a 10% stock dividend on its 50,000 shares at a fair market value of $15 per share, what is the total amount recorded in the Stock Dividends account?

$75,000 Signup and view all the answers

What is the nature of the accounts affected when a corporation declares a stock dividend?

Only equity accounts are affected Signup and view all the answers

How are large stock dividends recorded in the accounting books?

At par value Signup and view all the answers

What is the correct entry when Medland Corporation issues the dividend shares after declaring a stock dividend?

Debit Common Stock Dividends Distributable and Credit Common Stock Signup and view all the answers

What assumption underlies the accounting for a small stock dividend?

It will have little effect on the market price Signup and view all the answers

How is the 'Paid-in Capital in Excess of Par—Common' account impacted by the declaration of a stock dividend?

It increases by the fair market value of the stock less par value Signup and view all the answers

What is the first step in computing the book value per share?

Compute the preferred stock equity. Signup and view all the answers

What entry is recorded when the stock dividends are declared but not yet distributed?

Common Stock Dividends Distributable is credited Signup and view all the answers

How is preferred stock equity calculated if there is no call price?

Using the par value of the stock. Signup and view all the answers

What is the formula for calculating book value per share?

Common stock equity divided by shares of common stock outstanding. Signup and view all the answers

If dividends on preferred stock are in arrears for one year, what must be included in the preferred stock equity calculation?

The cumulative dividends in arrears. Signup and view all the answers

What does book value per share represent for common stockholders?

The amount they receive upon liquidation of the company. Signup and view all the answers

What can be said about the correlation between book value and market value?

Their relationship is often tenuous. Signup and view all the answers

In determining common stock equity, which value is subtracted from the total stockholders' equity?

Preferred stock equity. Signup and view all the answers

When computing preferred stock equity with a call price of $120 and cumulative dividends in arrears of $54,000, what is the total preferred stock equity?

$174,000. Signup and view all the answers

Study Notes

Financial Accounting - Corporations, Stock Transactions, and Stockholders' Equity

Corporations are separate entities distinct from their owners.
Corporations are classified by their purpose (for-profit, not-for-profit) and ownership (publicly held, privately held).
Examples of for-profit corporations include McDonald's, Nike, PepsiCo, Google, and the Salvation Army; examples of not-for-profit corporations include the American Cancer Society.
A corporation has separate legal existence, limited liability for stockholders, transferable ownership rights, continuous life, corporate management, government regulations, and pays additional taxes.
Stockholders' equity is part of the corporation's total assets.
Stockholders have the right to vote in the election of board members, participate in actions requiring stockholder approval, share in corporate earnings, keep the same percentage of ownership when new shares are issued, and share in assets upon liquidation (residual claim).
The corporation may retain earnings.
Issuing stock involves authorizing shares for sale or issue and considering factors such as future earnings, dividend rate, financial position, economic conditions, and market conditions.
A corporation acts under its own name.
Stockholders' liability is limited to their investment.
Stockholders have the right to sell their stock.
Corporations can obtain capital through stock issuance.
The corporation's going concern is not affected by the death, withdrawal, or incapacity of a stockholder, employee, or officer.
Managers who are not owners are often compensated based on the performance of the firm; this can lead to exaggerating performance figures.
The separation of ownership and management reduces an owner's ability to actively manage the company.
Corporations pay income taxes as a separate legal entity; stockholders pay taxes on cash dividends.
Companies usually incorporate in a state with favorable laws such as Delaware or New Jersey.
Corporations in interstate commerce require licenses from each state where they do business.
Articles of incorporation are often referred to as the charter.

Accounting for Common Stock

Paid-in capital is the total amount of cash and other assets paid to the corporation by stockholders in exchange for stock.
Retained earnings is net income that the corporation keeps for future use and, if negative, is a deficit.
Sources of paid-in capital include common stock, preferred stock, and paid-in capital in excess of par.

Accounting for Preferred Stock

Preferred stockholders typically have priority for dividends and assets in liquidation.
They usually do not have voting rights.
Accounting for preferred stock at issuance is similar to that for common stock; it can have par or no-par values.

Accounting for Treasury Stock

Treasury stock is a corporation's own stock that has been reacquired from stockholders but not retired.
Corporations reacquire treasury stock for various reasons, including reissuing shares to employees under plans, to enhance stock value, to have stock available for acquisitions, or for increased earnings per share.
Companies generally use the cost method to record treasury stock purchases.
Treasury stock is a contra-stockholders' equity account and decreases equity.

Cash Dividends

For a corporation to pay a cash dividend, it must have retained earnings, adequate cash, and a declaration of dividends by the board of directors.
Key dates include declaration date, record date, and payment date.
Dividends are generally paid to shareholders quarterly.

Dividend Preferences

Preferred stockholders receive dividends before common stockholders.
Dividends may be recorded as a percentage of par value or a stated amount.
Cumulative preferred stock dividends must include current-year and prior-year unpaid dividends.

Stock Dividends

A stock dividend is a pro-rata distribution of a company's own stock to its stockholders.
Reasons for stock dividends include satisfying stockholder expectations without spending cash and increasing stock marketability.
Small stock dividends are less than 20–25% of the outstanding shares and are recorded at fair market value.
Large stock dividends are over 20–25% of the outstanding shares and are recorded at par value.

Stock Splits

Stock splits are a pro rata issuance of additional shares to stockholders.
The par or stated value per share decreases in a stock split.
The number of shares outstanding increases; however, the percentage of company ownership remains the same.
Stock splits have no effect on total stockholders' equity.

Analysis of Stockholders' Equity

Payout ratio measures the portion of earnings distributed to common shareholders. (Cash Dividends Declared / Net Income).
Return on common stockholders' equity measures how many dollars of net income the company earned for each dollar invested by common stockholders. ((Net Income - Preferred Dividends) / ((Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2)).

IFRS Considerations

IFRS uses terminology different from U.S. GAAP for reporting stockholders' equity.
Terms such as "retained profits," "accumulated profit or loss," "revaluation surplus," "share premium," and different equity accounts are used.

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Description

Test your knowledge on corporate finance with this quiz that covers topics like no-par value stock, legal capital, and capital stock authorization. Determine which statements are true or false and enhance your understanding of corporate structure and par value requirements.