Corporate Finance Concepts Quiz

A corporation is a distinct entity from its owners (stockholders).

Stockholders' financial risk is limited to their investment in the corporation.

Stockholders can easily transfer their ownership shares.

Corporations can raise large amounts of capital by issuing stock.

A corporation's existence is not tied to the life of its owners.

A corporation has a structure for managing its affairs.

Corporations are subject to specific government rules.

Corporations face a different tax structure than other business entities.

The section in the balance sheet that shows how much money was invested by the company's owners.

Stock that doesn't have a designated value per share.

Common stock ownership usually grants the right to vote in corporate decisions.

Stockholders in a corporation are not personally responsible for the company's debts beyond their investment.

Corporations can raise substantial capital easily through issuing stock.

The payment made to preferred stockholders, based on a fixed percentage of the par value of their shares.

Preferred stock where unpaid dividends from previous years are not carried forward and do not have to be paid.

Preferred stock where unpaid dividends from previous years (dividends in arrears) must be paid before any common stock dividends can be distributed.

Unpaid dividends on cumulative preferred stock that have accumulated over time.

A distribution of a corporation's own stock to current stockholders, proportional to their ownership.

Corporations issue stock dividends to satisfy dividend expectations without cash, increase stock marketability, and emphasize permanent reinvestment.

A proportional allocation of something based on ownership, like a stock dividend.

Calculate preferred dividend using the formula: (Number of shares) x (Dividend rate) x (Par value).

Shares of a company's own stock that have been repurchased from the open market and held by the company. This stock is no longer outstanding and doesn't receive dividends.

The act of a company selling its treasury stock back into the market. This can generate cash flow.

When a company sells treasury stock for a higher price than it initially purchased it for. This sale results in a gain.

When a company sells treasury stock for a lower price than it initially purchased it for. This sale results in a loss, affecting retained earnings.

This account records the difference between the selling price and the cost of treasury stock when it's sold. It's a part of stockholders' equity.

A company buying back its own shares from the market, reducing shares outstanding. This can increase earnings per share and signal confidence in the company's future.

Companies repurchase shares to signal confidence in their future, increase EPS (earnings per share), and potentially improve market perception. It can also be done to reduce dilution from stock options.

Repurchasing a significant portion of shares can be risky if a company doesn't have enough cash flow. It can also negatively affect future growth opportunities due to reduced available funds.

The accounting for issuing shares and buying back treasury stock is similar under IFRS and GAAP, apart from some terminology differences.

Both IFRS and GAAP disallow recording gains or losses on the purchase of a company's own shares.

The accounting for prior period adjustments is essentially identical under IFRS and GAAP.

IFRS uses the term "statement of comprehensive income" for the income statement. This statement can be presented in a single or two-statement format.

In the single-statement approach, all items of income, expenses, and other comprehensive income or loss are presented together in a single statement.

The two-statement approach presents a traditional income statement followed by a separate statement of comprehensive income, which includes net income and other comprehensive income or loss items.

Under IFRS, "reserves" encompasses all equity accounts not related to contributed capital. This includes retained earnings, asset revaluations, and fair value differences.

The mix of investor groups in different countries can vary from the United States. For instance, banks often hold significant stock in German companies.

The formal process by which a company announces its intention to pay dividends to shareholders.

The journal entry to record a cash dividend declaration debits 'Cash Dividends' and credits 'Dividends Payable'.

When a dividend is declared, the preferred stockholders receive their dividends first, then the remaining amount goes to common stockholders. If preferred stock is cumulative and dividends are in arrears, these must be paid before any current dividend is paid.

If the company doesn't have enough funds to pay the full dividend, the preferred stockholders will receive their share of the available funds first, and the common stockholders will not receive any. For cumulative preferred stock, any unpaid dividends will be carried over to the next year.

Dividends decrease the company's cash balance and retained earnings. This can impact the company's liquidity and ability to invest in future growth.

Stockholders have the right to vote on important corporate decisions, such as electing board members or approving mergers.

Stockholders receive a portion of the company's profits in the form of dividends, which are paid out to shareholders based on their ownership.

Stockholders have the right to maintain their ownership percentage when the company issues new shares, ensuring they don't have their ownership diluted.

Stockholders are entitled to the remaining assets of the company after all debts and liabilities are paid in case of liquidation.

The maximum number of shares a company is legally allowed to issue.

The process of selling new shares of stock to investors, either directly or through investment banks, to raise capital.

Several factors affect the price of newly issued stock, including anticipated future earnings, expected dividend rate, current financial position, economic conditions, and the state of the securities market.

Each share of stock issued by a corporation is typically assigned a unique number for easy tracking and recordkeeping.

The total amount of money investors have contributed to a corporation in exchange for stock.

The accumulated profits of a company that have not been distributed to shareholders as dividends.

The two main sources of equity for a corporation are 'Paid-in Capital' and 'Retained Earnings'.

The Preferred Stock account records the par value of the preferred shares issued by a company.

This account records the excess amount received from the sale of stock above the par value.

When a company sells shares with a fixed value per share (the par value) and the sale price is either equal to or higher than the par value.

The amount of money received for shares beyond the par value. This is recorded as 'Paid-in Capital in Excess of Par Value'.

The most basic type of stock in a company, representing ownership proportional to the number of shares held.

A type of stock that pays dividends at a fixed rate before common stock dividends are distributed. It may have priority in liquidation.

An accounting step at year-end where the net income (or loss) from the income summary account is transferred to the retained earnings account.

The accounting method frequently used for treasury stock purchases, in which the treasury stock is recorded at the price paid to reacquire the shares.

Treasury stock is a contra stockholders' equity account. This means it reduces the total stockholders' equity balance.

When a company holds treasury stock, both the number of shares issued and the number of treasury shares are disclosed in the balance sheet.

Treasury stock transactions (buying and selling) are classified as capital stock transactions rather than revenue or expense transactions.

When a company sells treasury stock for a price higher than its cost, a gain is recorded. This increases both total assets and stockholders' equity.

When a company sells treasury stock for a price lower than its cost, a loss is recorded. This reduces retained earnings and stockholders' equity.

A stock dividend where the new shares issued represent less than 20-25% of the company's total outstanding shares. It's recorded at fair market value.

A stock dividend where the new shares issued represent more than 20-25% of the company's total outstanding shares. It's recorded at par value.

Stock dividends don’t affect total assets or stockholders' equity. They simply change the composition of equity. Retained earnings decrease and paid-in capital increases.

When a company declares a stock dividend, the journal entry credits 'Common Stock Dividends Distributable' and debits 'Stock Dividends' for the total market value of the dividend shares.

When a company issues the stock dividend shares, the journal entry debits 'Common Stock Dividends Distributable' and credits 'Common Stock' for the par value of the dividend shares.

Corporations can issue stock dividends to satisfy dividend expectations without cash, increase stock marketability, and emphasize permanent reinvestment of profits.

Represents the equity each common stockholder holds in the corporation's net assets. Calculated by dividing the common stock equity by the number of outstanding common shares.

The value of preferred stock, calculated by adding the call price (or par value if there's no call price) and any accumulated unpaid dividends (dividends in arrears).

The equity belonging to common stockholders, determined by subtracting the preferred stock equity from the total stockholders’ equity.

Book value per share reflects the historical cost of the company's assets, often differing significantly from the market value which reflects current investor sentiment and future prospects.

The price at which a company can redeem its preferred stock (buy it back) from shareholders before maturity.