Question 1

A major advantage of debt financing is that interest expense is tax deductible.

Accepted Answer

Interest expense paid on debt financing is tax deductible, which can lower a company's taxable income and save on taxes. This is a major advantage of debt financing compared to equity financing, where dividends paid to shareholders are not tax deductible.

Question 2

At the beginning of each accounting period, the capital account for a proprietor starts with a zero balance.

Accepted Answer

The capital account for a proprietor carries forward the ending balance from the previous accounting period, so it usually starts with a non-zero balance.

Question 3

State laws often restrict dividends to the amount of retained earnings.

Accepted Answer

State laws often restrict dividends to the amount of retained earnings in order to protect creditors and ensure that companies have sufficient funds to cover potential liabilities.

Question 4

The corporate form of business limits the legal liability of its owners.

Accepted Answer

The corporate form of business provides limited liability protection to its owners as they are separate legal entities from the business. Therefore, the owners cannot be held personally responsible for any debts or obligations incurred by the corporation beyond their investment in it.

Question 5

Preferred stock is generally classified as stockholders' equity.

Accepted Answer

Preferred stock is a type of stock that combines characteristics of both equity (ownership) and debt (fixed income). However, it is generally considered as part of stockholders' equity on a company's balance sheet.

Question 6

A 100 percent stock dividend is the same as a 2-1 stock split.

Accepted Answer

The answer of A 100 percent stock dividend is the...

Question 7

Treasury stock is an asset account.

Accepted Answer

Treasury stock is a contra-equity account, not an asset account. It represents shares that a company has repurchased and is held in the company's treasury, reducing the total equity.

Question 8

A corporation's charter establishes the market value of the company's stock.

Accepted Answer

A corporation's charter outlines the purpose and structure of the company, but it does not directly establish the market value of its stock. Market value of stock is determined by supply and demand in the stock market, as well as factors such as the company's financial performance and overall market conditions.

Question 9

The owner's salary is frequently the largest expense of a sole proprietorship.

Accepted Answer

In a sole proprietorship, the owner's withdrawal of funds for personal use (often referred to as a draw, rather than a salary) is not categorized as an expense but rather as a distribution of profits. The largest expenses are typically costs related to the operation of the business, such as rent, supplies, and payroll for any employees.

Question 10

Dividends in arrears does not apply to stock which does not have a cumulative dividend preference.

Accepted Answer

Dividends in arrears only apply to stock with a cumulative dividend preference, which means that any missed dividend payments must be paid before any dividends can be paid to common stockholders. If a stock does not have a cumulative dividend preference, any missed dividend payments are not obligated to be paid in the future.

Question 11

All other things equal, the higher the Return on Equity ratio the better the financial performance of the company.

Accepted Answer

A higher Return on Equity (ROE) ratio means that the company is generating more profit with the money invested by shareholders. This is usually seen as a positive indicator of the company's financial performance. However, it is important to consider other financial metrics along with ROE to get a comprehensive understanding of the company's financial health.

Question 12

Earnings per share is calculated for common stock (shares) outstanding.

Accepted Answer

Earnings per share (EPS) is calculated by dividing the net income available to common shareholders by the average number of common shares outstanding during a period of time. Therefore, EPS is calculated for common stock (shares) outstanding.

Question 13

When a company reissues shares of its treasury stock, it must report a gain or a loss on the sale.

Accepted Answer

When a company reissues shares of its treasury stock, it is not considered a sale, therefore there is no gain or loss to report. Instead, the cost of the treasury stock is simply transferred from the treasury stock account to the common stock account.

Question 14

Treasury stock is a corporation's own stock that has been issued and subsequently repurchased by the corporation.

Accepted Answer

This is the correct definition of treasury stock.

Question 15

Dividends in arrears are reported as liabilities on the balance sheet.

Accepted Answer

The answer of Dividends in arrears are reported as liabilities...

Question 16

The balance in Retained Earnings represents the amount of capital contributed by owners in exchange for stock plus the amount of net income earned.

Accepted Answer

The balance in Retained Earnings represents the amount of net income earned minus any dividends paid out. It does not include the amount of capital contributed by owners in exchange for stock.

Question 17

The liability for dividends is recorded on the date of record.

Accepted Answer

The liability for dividends is recorded on the date of declaration, not the date of record. The date of record only determines which shareholders are eligible to receive the dividend.

Question 18

One reason why a company may choose a stock split over a stock dividend is that the stock split does not reduce retained earnings.

Accepted Answer

When a company declares a stock split, the number of shares outstanding increases, but the value of each share decreases proportionately. This means that the total value of the company's equity does not change, and as a result, retained earnings are not reduced. However, when a company declares a stock dividend, additional shares are distributed to existing shareholders, which dilutes the value of each share and reduces retained earnings.

Question 19

A corporation does not have a legal obligation to pay dividends.

Accepted Answer

Dividends are optional payments made by corporations to their shareholders. While many corporations choose to pay dividends regularly, they are not legally required to do so.

Question 20

The market value of stock is the par value of the stock.

Accepted Answer

The market value of stock is determined by supply and demand in the stock market, and is often higher than the par value of the stock, which is just the nominal value assigned to the stock when it is issued.

Quiz 11: Reporting and Interpreting Stockholders Equity