Corporations and Financial Principles Quiz

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Questions and Answers

What is meant by the separate legal existence of a corporation?

Corporations are dependent on the personal assets of their shareholders.

Corporations do not exist apart from their owners.

Corporations can only act under the name of stockholders.

Corporations have the ability to enter contracts and own assets in their own name. (correct)

Which characteristic of a corporation allows shareholders to limit their financial risk?

Corporate management

Limited liability of stockholders (correct)

Transferable ownership rights

Ability to acquire capital

How does a corporation typically acquire capital?

By selling shares of stock to investors (correct)

By relying solely on bank loans

Through personal loans from shareholders only

Through government grants exclusively

Which of the following accurately describes the continuity of a corporation?

A corporation continues to exist regardless of changes in ownership. Signup and view all the answers

Which characteristic ensures that stockholders can freely transfer ownership interests?

Transferable ownership rights Signup and view all the answers

What is a potential drawback associated with operating a corporation?

Stringent government regulations Signup and view all the answers

What is one implication of the government regulations affecting corporations?

They require more formal structure and transparency in operations. Signup and view all the answers

How are corporations taxed differently compared to partnerships?

Corporations face additional taxes on their profits. Signup and view all the answers

What is the primary accounting impact when a company sells treasury stock above its cost?

Paid-in capital from treasury stock increases. Signup and view all the answers

What entry is made when treasury stock is sold below its cost?

Adjustment to retained earnings may be necessary. Signup and view all the answers

In the given examples, what is the primary factor that affects the financial statements when treasury stock is sold?

Transactions do not impact gain or loss recognition. Signup and view all the answers

Why did Reebok implement a bold repurchase strategy according to the content?

To convey confidence in future earnings. Signup and view all the answers

When selling treasury stock at a price lower than its acquisition cost, what is typically debited?

Paid-in capital from treasury stock and retained earnings. Signup and view all the answers

How was cash impacted by Reebok's share repurchase strategy?

Cash was dramatically reduced. Signup and view all the answers

What account is credited when treasury stock is sold above cost?

Paid-in capital from treasury stock account. Signup and view all the answers

What is the impact on retained earnings when treasury stock is sold below cost?

It can be decreased to cover the loss. Signup and view all the answers

What is the correct journal entry for Stine Corporation when issuing 10,000 shares of $10 par value preferred stock for $12 cash per share?

Cash $120,000; Preferred Stock $100,000; Paid-in Capital in Excess of Par $20,000 Signup and view all the answers

Which of the following statements about voting rights for preferred stock is true?

Preferred stockholders generally do not have voting rights. Signup and view all the answers

What is the total cash received by Cayman Corporation when it issues 100,000 shares of $1 par value common stock for cash at $12 per share?

$1,200,000 Signup and view all the answers

When Cayman Corporation issues 5,000 shares of common stock for a legal fee of $50,000, what is the journal entry?

Organizational Expense $50,000; Common Stock $5,000; Paid-in Capital $45,000 Signup and view all the answers

What is the value of the Preferred Stock issued by Cayman Corporation when 1,500 shares of $10 par value preferred stock are sold for $30 per share?

$10,000 Signup and view all the answers

For preferred stock with no par value, how is it accounted for at issuance?

The cash received is recorded as Preferred Stock at the balance received. Signup and view all the answers

In the recording of paid-in capital in excess of par, what does it represent?

The amount received above par value from issuing stock. Signup and view all the answers

What is the entry for water charges when Cayman Corporation issues 1,500 shares of preferred stock for settlement?

Water Expense $45,000; Preferred Stock $45,000; Signup and view all the answers

What might be a reason for Reebok’s management to repurchase shares?

To prevent takeover by another company. Signup and view all the answers

What was the cash amount when Santa Anita Inc. purchased treasury stock?

$180,000 Signup and view all the answers

Which document is necessary for a corporation to declare cash dividends?

Board of Directors' declaration. Signup and view all the answers

What is a requirement for a corporation to pay cash dividends?

Retained earnings and adequate cash. Signup and view all the answers

What is the selling price of each share when Santa Anita Inc. sold 1,000 shares of treasury stock?

$70 Signup and view all the answers

What is one type of dividend that corporations can issue?

Scrip dividends. Signup and view all the answers

How does depleting cash reserves affect a company's acquisition attractiveness?

It makes the company a less attractive acquisition target. Signup and view all the answers

What was the total cash received from the sale of 1,000 shares of treasury stock?

$70,000 Signup and view all the answers

What would be the result of a 10% stock dividend on retained earnings if they are currently $10,000,000?

Decrease by $1,000,000 Signup and view all the answers

Which of the following primarily affects par value per share during a 2-for-1 stock split?

Par value is halved Signup and view all the answers

How is retained earnings generally reported on a balance sheet?

As part of stockholders’ equity Signup and view all the answers

What type of restriction might prevent a corporation from paying dividends?

Legal restrictions Signup and view all the answers

Which of the following accounts would appear on the balance sheet under stockholders' equity?

Retained Earnings Signup and view all the answers

If a company's market price per share increased from $15 to $45, what could this indicate?

The company has had record earnings Signup and view all the answers

What impact does a 10% stock dividend have on total stockholders' equity?

Remains unchanged Signup and view all the answers

What could a debit balance in retained earnings indicate?

A deficit Signup and view all the answers

What is the total par value of the 4,000 shares of preferred stock issued?

$400,000 Signup and view all the answers

What is the total amount of paid-in capital for common stock?

$580,000 Signup and view all the answers

How much did the corporation spend to reacquire its shares?

$50,000 Signup and view all the answers

What is the amount of cumulative other comprehensive loss recorded?

$82,000 Signup and view all the answers

What is the total authorized shares for both common and preferred stock combined?

600,000 Signup and view all the answers

What is the effect of holding reacquired shares on the stockholders’ equity?

Decreases total equity Signup and view all the answers

What is the total retained earnings of the corporation?

$610,000 Signup and view all the answers

How does the payout ratio affect a company's retained earnings?

Decreases retained earnings Signup and view all the answers

Study Notes

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

Corporations are separate legal entities distinct from their owners.
Corporations are classified by purpose (for-profit or not-for-profit) and ownership (publicly held or privately held).
Examples of for-profit corporations include McDonald's, Nike, PepsiCo, and Google; examples of not-for-profit corporations include the Salvation Army and American Cancer Society.
Corporations have several advantages over other business structures including separate legal existence, limited liability for stockholders, transferable ownership rights, continuous life, ability to acquire capital, and corporate management.
Corporations also have disadvantages such as additional taxes and government regulations.
Stockholders in a corporation have limited liability limited to their investment,
Stockholders may sell their stock,
A corporation can obtain capital by issuing stock,
The corporation's existence as a going concern isn't affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer.
Stockholders elect the board of directors and vote on actions requiring stockholder approval.
Stockholders share in corporate earnings through dividends.
Stockholders maintain the same percentage ownership when new shares are issued (preemptive right).

Stock Issue Considerations

A corporation must consider the number of shares to authorize for sale, the issue method, and the assigned value.
The company's charter specifies the number of shares authorized for sale.
The number of authorized shares is typically included in the stockholders' equity section of the balance sheet.

Issuance of Stock

Companies can issue common stock either directly to investors or indirectly through an investment banking firm.
Factors in setting stock prices include the company's anticipated future earnings, the expected dividend rate per share, the current financial position, the current state of the economy, and the current state of the securities market.
The price of publicly held company stock is based on the interaction of buyers and sellers in an organized exchange.
Stock prices tend to reflect a company's earnings and dividends.
External factors may cause day-to-day fluctuations in market prices.

Accounting for Common Stock

The issuance of common stock primarily affects paid-in capital, not retained earnings.
Paid-in capital represents cash and/or other assets paid in by stockholders for stock.
Two main sources of paid-in capital are common and preferred stock.
Retained earnings are net income retained in the business.

Accounting for Preferred Stock

Typically, preferred stockholders have priority in receiving dividends and assets during liquidation
Preferred stock can have a par value or no par value.

Accounting for Treasury Stock

Treasury Stock is a corporation's own stock that it has reacquired but not retired.
Corporations may acquire treasury stock to reissue to officers and employees under bonus and stock compensation plans, to enhance the stock's market value, to have additional shares for acquisitions, or to increase earnings per share.
Treasury stock is a contra-stockholders' equity account, reducing the total stockholders' equity.

Cash Dividends

Cash dividends are a pro rata distribution of cash to stockholders.
The corporation must have retained earnings and adequate cash to pay a dividend.
A declaration of dividends by the Board of Directors is necessary.
Three important dates associated with cash dividends are the declaration, record, and payment dates.

Dividend Preferences

Preferred stockholders have a priority over common stockholders for dividend payments.
The amount of dividend per share is often stated as a percentage of the preferred stock's par value or as a specified amount.
Cumulative dividends are dividends in arrears for prior years that must be paid before common stockholders receive dividends.

Stock Dividends

Stock dividends are a pro rata distribution of the corporation's own stock to stockholders.
Stock dividends can satisfy stockholder expectations without spending cash, increase the marketability of the stock, and emphasize that a portion of stockholders’ equity has been permanently reinvested in the business.

Stock Splits

A stock split changes the par value per share but does not affect any balances in stockholders' equity.
Common types of stock splits include a 2-for-1 split, where each outstanding share is replaced by two shares, and a 4-for-1 split.

Stockholders' Equity

Stockholders' equity represents the owners' claim on the total assets of the corporation.
A debit balance in Retained Earnings is identified as a deficit on the Balance Sheet.

Analysis of Stockholders' Equity

Payout ratio measures the percentage of earnings distributed in the form of dividends.
Return on common stockholders' equity shows how many dollars of net income the company earned for each dollar invested by the common stockholders.

Appendices

Appendix 11A: Stockholders' equity statement
Appendix 11B: Book value per share

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Description

Test your knowledge on the characteristics and financial principles of corporations. This quiz covers topics such as separate legal existence, shareholder risks, capital acquisition, and the effects of treasury stock transactions. Assess your understanding of corporate structures and their implications in accounting.