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?

    <p>A corporation continues to exist regardless of changes in ownership. (A)</p> Signup and view all the answers

    Which characteristic ensures that stockholders can freely transfer ownership interests?

    <p>Transferable ownership rights (B)</p> Signup and view all the answers

    What is a potential drawback associated with operating a corporation?

    <p>Stringent government regulations (B)</p> Signup and view all the answers

    What is one implication of the government regulations affecting corporations?

    <p>They require more formal structure and transparency in operations. (D)</p> Signup and view all the answers

    How are corporations taxed differently compared to partnerships?

    <p>Corporations face additional taxes on their profits. (A)</p> Signup and view all the answers

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

    <p>Paid-in capital from treasury stock increases. (B)</p> Signup and view all the answers

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

    <p>Adjustment to retained earnings may be necessary. (B)</p> 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?

    <p>Transactions do not impact gain or loss recognition. (C)</p> Signup and view all the answers

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

    <p>To convey confidence in future earnings. (B)</p> Signup and view all the answers

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

    <p>Paid-in capital from treasury stock and retained earnings. (A)</p> Signup and view all the answers

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

    <p>Cash was dramatically reduced. (B)</p> Signup and view all the answers

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

    <p>Paid-in capital from treasury stock account. (C)</p> Signup and view all the answers

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

    <p>It can be decreased to cover the loss. (C)</p> 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?

    <p>Cash $120,000; Preferred Stock $100,000; Paid-in Capital in Excess of Par $20,000 (C)</p> Signup and view all the answers

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

    <p>Preferred stockholders generally do not have voting rights. (B)</p> 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?

    <p>$1,200,000 (B)</p> 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?

    <p>Organizational Expense $50,000; Common Stock $5,000; Paid-in Capital $45,000 (C)</p> 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?

    <p>$10,000 (A)</p> Signup and view all the answers

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

    <p>The cash received is recorded as Preferred Stock at the balance received. (D)</p> Signup and view all the answers

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

    <p>The amount received above par value from issuing stock. (C)</p> 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?

    <p>Water Expense $45,000; Preferred Stock $45,000; (C)</p> Signup and view all the answers

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

    <p>To prevent takeover by another company. (C)</p> Signup and view all the answers

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

    <p>$180,000 (D)</p> Signup and view all the answers

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

    <p>Board of Directors' declaration. (D)</p> Signup and view all the answers

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

    <p>Retained earnings and adequate cash. (A)</p> 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?

    <p>$70 (C)</p> Signup and view all the answers

    What is one type of dividend that corporations can issue?

    <p>Scrip dividends. (A)</p> Signup and view all the answers

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

    <p>It makes the company a less attractive acquisition target. (B)</p> Signup and view all the answers

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

    <p>$70,000 (C)</p> 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?

    <p>Decrease by $1,000,000 (D)</p> Signup and view all the answers

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

    <p>Par value is halved (D)</p> Signup and view all the answers

    How is retained earnings generally reported on a balance sheet?

    <p>As part of stockholders’ equity (D)</p> Signup and view all the answers

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

    <p>Legal restrictions (C)</p> Signup and view all the answers

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

    <p>Retained Earnings (C)</p> Signup and view all the answers

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

    <p>The company has had record earnings (C)</p> Signup and view all the answers

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

    <p>Remains unchanged (A)</p> Signup and view all the answers

    What could a debit balance in retained earnings indicate?

    <p>A deficit (B)</p> Signup and view all the answers

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

    <p>$400,000 (D)</p> Signup and view all the answers

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

    <p>$580,000 (C)</p> Signup and view all the answers

    How much did the corporation spend to reacquire its shares?

    <p>$50,000 (B)</p> Signup and view all the answers

    What is the amount of cumulative other comprehensive loss recorded?

    <p>$82,000 (B)</p> Signup and view all the answers

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

    <p>600,000 (D)</p> Signup and view all the answers

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

    <p>Decreases total equity (B)</p> Signup and view all the answers

    What is the total retained earnings of the corporation?

    <p>$610,000 (B)</p> Signup and view all the answers

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

    <p>Decreases retained earnings (D)</p> Signup and view all the answers

    Flashcards

    Separate Legal Existence

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

    Limited Liability

    Shareholders' liability is limited to their investment in the corporation. They're not personally responsible for its debts.

    Transferable Ownership

    Ownership shares in a corporation (stock) can easily be sold or transferred.

    Ability to Acquire Capital

    Corporations can raise large sums of money by issuing stock.

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    Continuous Life

    A corporation's existence isn't tied to the lives of its owners; it continues even if owners leave or die.

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    Corporate Management

    Corporations have a structure for managing the business, typically involving a board of directors and officers.

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    Government Regulations

    Corporations are subject to various regulations imposed by governmental authorities.

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    Additional Taxes

    Corporations are often subject to specific corporate taxes, beyond personal taxes for owners.

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    Preferred Stock Issuance

    The process of issuing preferred stock, similar to common stock issuance, but with potentially different features, like fixed dividends or preference in liquidation.

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    Par Value Preferred Stock

    Preferred stock with a specified monetary value per share, for accounting purposes.

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    Paid-in Capital in Excess of Par

    The amount received from issuing stock that exceeds the par value per share.

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    Common Stock Issuance

    The process of issuing common stock, a basic form of ownership in a corporation.

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    Organization Costs

    Expenses incurred during the formation and initial stages of a business.

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    Liquidation

    The process of winding down a business and selling its assets.

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    Stock Issuance Journal Entry

    A formal record of transacting an asset for stock issuance (i.e common stock or preferred stock).

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    Voting Rights (Stock)

    A characteristic of stock, usually related to common stock that gives holders influence over corporate decisions.

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    Treasury Stock

    Shares of a company's own stock that have been repurchased by the company and are held in the treasury.

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    Repurchase Treasury Stock

    The process of a company buying back its own outstanding shares from the open market, reducing the number of shares outstanding.

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    Cash Dividends

    Distributions of a company's profits to shareholders paid in cash.

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    Dividend Declaration

    The formal action by a company's Board of Directors to approve the payment of dividends to shareholders.

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    Retained Earnings

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

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    Reasons for Stock Repurchases

    Companies buy back their own stock for various reasons, such as to increase earnings per share, signal confidence, or prevent a hostile takeover.

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    Repurchase Impact on Acquisition

    A company buying back its own shares can make it less appealing for another company to acquire it by reducing its cash reserves and making it a less attractive target.

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    Cash Dividend Requirements

    To pay cash dividends, a company needs retained earnings, adequate cash on hand, and a declaration of dividends by the Board of Directors.

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    Stock Dividend

    A dividend paid in the form of additional shares of stock instead of cash, increasing the number of outstanding shares but not changing total stockholders' equity.

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    Stock Split

    A corporate action that increases the number of outstanding shares by dividing each existing share into multiple shares, typically resulting in a lower price per share but maintaining the total market value.

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    Retained Earnings Increase

    The increase in retained earnings represents the portion of net income that the company has kept and reinvested in the business.

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    Paid-in Capital

    The amount of money investors contribute to the company in exchange for shares of stock.

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    Total Stockholders' Equity

    The total value of the shareholders' ownership in the company, including paid-in capital, retained earnings, and any other equity accounts.

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    Par Value

    An arbitrary nominal value assigned to each share of stock, which is typically set low and doesn't reflect the actual market value.

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    Stock Dividend Impact

    A stock dividend distributes additional shares of stock to existing shareholders, which increases the number of shares outstanding, but does not change the total value of stockholders' equity or the par value per share.

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    Stock Split Impact

    A stock split reduces the par value per share and increases the number of outstanding shares, but maintains the total value of stockholders' equity.

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    Sale of Treasury Stock Above Cost

    When a company sells treasury stock for a price higher than the cost at which it was bought back, the difference is recorded as "Paid-in Capital from Treasury Stock".

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    Sale of Treasury Stock Below Cost

    If a company sells treasury stock for a price lower than the purchase cost, the difference is first deducted from "Paid-in Capital from Treasury Stock". If the difference exceeds the credit balance, the rest is deducted from Retained Earnings.

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    Treasury Stock Transaction Impact

    Transactions involving treasury stock don't affect the company's net income. They're not seen as gains or losses on the income statement.

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    Example: Sale of Treasury Stock for $10, Cost $8

    Cash: 10,000 (received from sale) Treasury Stock: 8,000 (cost of shares) Paid-in Capital from Treasury Stock: 2,000 (difference)

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    Example: Sale of Treasury Stock for $7, Cost $8

    Cash: 5,600 (received from sale) Paid-in Capital from Treasury Stock: 800 (reducing the balance from previous transactions) Treasury Stock: 6,400 (Cost of shares)

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    Example: Sale of Treasury Stock for $7, Cost $8 (Excess Loss)

    Cash: 15,400 (received from sale) Paid-in Capital from Treasury Stock: 1,200 (reducing the balance from previous transactions) Retained Earnings: 1,000 (to cover the remaining loss) Treasury Stock: 17,600 (Cost of shares)

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    Impact of Using Retained Earnings to Cover Treasury Stock Loss

    Using Retained Earnings to cover the loss on sale of treasury stock reduces the company's retained earnings balance, which is the accumulated profits of the company.

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    Cumulative Other Comprehensive Loss

    A loss that is not included in net income but affects the company's comprehensive income. It represents gains or losses that are not part of regular operations.

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    What is Preferred Stock?

    A type of stock that offers certain privileges over common stock, such as guaranteed dividend payments or preference in liquidation.

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    What is Retained Earnings?

    The accumulated portion of a company's net income that has not been distributed to shareholders as dividends.

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    What does a Stockholders' Equity Statement Show?

    It presents a detailed breakdown of the company's ownership structure, including the value of its common and preferred stock, retained earnings, and other equity accounts.

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    Payout Ratio

    The proportion of a company's net earnings paid out to its shareholders as dividends. It measures the percentage of earnings distributed.

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    Return on Common Stockholders' Equity (ROE)

    A financial metric that measures how much profit a company generates for each dollar invested by its common stockholders. It shows the efficiency of investments.

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    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.

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