Question 1

Which of the following is considered to be an important economic consequence of incentive compensation plans using stock options?
A) dilution of ownership interests.
B) the current ratio is affected.
C) the effects on the financial statements are costly to quantify.
D) the effect on cash flows

Accepted Answer

Dilution of ownership interests is a significant economic consequence of incentive compensation plans using stock options because when employees exercise their stock options, more shares are issued, which dilutes the ownership percentage of existing shareholders.

Question 2

Which one of the following represents the economic effects of declaring and issuing a stock dividend?
A) Has no effect on total assets or total shareholders' equity
B) Decreases the debt/equity ratio
C) Decreases total shareholders' equity
D) Increases the current ratio

Accepted Answer

A

Question 3

A corporation issued common stock instead of debt to finance the purchase of non-depreciable property. Which statement is true?
A) Ownership by existing shareholders will be diluted.
B) The company's debt/equity ratio will be higher.
C) Income tax expense will be lower because expenses increase.
D) Net income will be lower.

Accepted Answer

By issuing common stock, the company is diluting the ownership of existing shareholders. This means that they will own a smaller percentage of the company than they did before, as the new stockholders will also have a claim on the company's assets and earnings. This can lead to lower earnings per share and lower shareholder value in the long run. The other options are not necessarily true in this scenario.

Question 4

If a corporation uses retention of earnings to finance the purchase of property instead of issuing equity securities, then
A) it will have a higher debt/equity ratio.
B) it will pay more dividends.
C) leverage is being used.
D) a company's earnings per share will decrease.

Accepted Answer

The answer of If a corporation uses retention of earnings...

Question 5

On which date would you make no journal entry?
A) Date of declaration of cash dividend
B) Date of record of cash dividend
C) Date of payment of cash dividend
D) Date of declaring a stock dividend

Accepted Answer

Journal entries are made on the date of declaration of cash dividend and the date of declaring a stock dividend as they both involve a change in equity. However, the date of record of cash dividend and the date of payment of cash dividend do not require any journal entries as they do not result in a change in equity.

Question 6

Information related to Lamar Co. for the years ending December 31, 2010 and 2009 follows:  Dividends declared for 2010 totaled $20,000. How much was generated through operations?
A) $30,000
B) $50,000
C) $10,000
D) $70,000

Accepted Answer

The answer of Information related to Lamar Co. for the...

Question 7

Which one of the following transactions cause a decrease to retained earnings?
A) Selling treasury stock
B) Incurring net income for the period
C) Declaring a stock dividend
D) Paying a cash dividend that was previously declared

Accepted Answer

Declaring a stock dividend decreases retained earnings because it involves transferring a portion of retained earnings to paid-in capital.

Question 8

If preferred stock, which can be exchanged for long-term debt in three years, is classified as an equity financial instrument instead of a liability, then
A) the current ratio declines.
B) earnings per share is less than if the preferred stock was reported as debt.
C) fixed assets and net worth increase.
D) the debt/equity ratio is less than if the preferred stock was reported as debt.

Accepted Answer

If preferred stock, which can be exchanged for long-term debt in three years, is classified as an equity financial instrument instead of a liability, it will decrease the amount of reported debt and increase equity, leading to a lower debt/equity ratio compared to if it was reported as debt. However, it will not affect the current ratio, earnings per share, fixed assets, or net worth.

Question 9

Which one of the following is an effect when a company buys back it own shares of stock?
A) Leverage is affected.
B) It will pay more dividends.
C) It will have a higher debt/equity ratio.
D) Fixed assets will decrease.

Accepted Answer

The answer of Which one of the following is an...

Question 10

Which one of the following serves to differentiate debt from equity?
A) Interest on debt may be deferred, but dividends are a legal liability and must be paid every year.
B) Interest on debt is tax deductible while dividends to equity investors are not.
C) Debt has a maturity date which is much shorter than the maturity period of equity.
D) Debt holders are appointed while the board of directors elects equity holders.

Accepted Answer

The tax deductibility of interest payments on debt is a key difference between debt and equity. This is because interest payments on debt are considered a business expense and are therefore tax deductible, while dividends paid to equity investors are not considered an expense and are not tax deductible. This tax treatment can make debt financing more attractive to companies than equity financing. The other options listed are not necessarily true of all debt or equity instruments.

Question 11

Which one of the following represents the economic effects of issuing a 2-for-1 stock split?
A) No effect on par value per share or retained earnings
B) Decrease par value per share, and no effect on retained earnings
C) No effect on par value per share, and decrease retained earnings
D) Increase par value per share and retained earnings

Accepted Answer

A 2-for-1 stock split means that each shareholder will now have two shares for every one share they previously owned, but the overall value of their investment remains the same. Therefore, the par value per share is decreased (since each share is now worth half of what it was before), but there is no effect on retained earnings.

Question 12

Cash dividends are paid based on the number of shares which are
A) authorized.
B) issued.
C) outstanding.
D) outstanding minus the number of treasury shares.

Accepted Answer

Cash dividends are paid based on the number of outstanding shares, which are the shares that have been issued and are still being held by investors. Authorized shares are the maximum number of shares a company is allowed to issue, but they may not all be issued or outstanding. Treasury shares are shares that have been repurchased by the company and are not outstanding, so they do not count towards the dividend calculation. Therefore, the correct answer is C, outstanding shares.

Question 13

What is the effect of a corporation appropriating retained earnings for the cost of treasury stock purchased?
A) Contributed capital is overstated.
B) A portion of retained earnings is restricted from the payment of dividends.
C) Owner's equity is reduced by the amount of the appropriation.
D) Income is overstated.

Accepted Answer

When a corporation appropriates retained earnings for the cost of treasury stock purchased, a portion of retained earnings is restricted from the payment of dividends. This is because the funds have been used to repurchase the company's own shares instead of being available for distribution to shareholders as dividends.

Question 14

Baker Company has 200,000 shares of common stock outstanding. The company declares a stock dividend of 58,000 shares. According to GAAP, this dividend should be treated as:
A) a small stock dividend.
B) a prior period adjustment.
C) a large stock dividend.
D) a purchase of treasury stock.

Accepted Answer

A stock dividend is considered large if it is more than 20-25% of the existing shares outstanding. In this case, 58,000 shares on 200,000 shares outstanding is 29%, which qualifies it as a large stock dividend according to GAAP.

Question 15

On January 1, 2010, Garner Corp. had 10,000 shares of $1 par value common stock issued and outstanding. The stock was selling at $10 per share. During 2010, Garner declared and issued a 10% stock dividend. The stock dividend causes
A) total shareholders' equity to increase by $1,000.
B) net income to decrease by $1,000.
C) earnings per share to decrease by $10,000.
D) no change in total shareholders' equity

Accepted Answer

A stock dividend does not change the total shareholders' equity; it only reallocates amounts within equity by transferring from retained earnings to common stock and additional paid-in capital.

Question 16

If a corporation issues debt instead of common stock to finance the purchase of property, then the corporation has
A) a disadvantage of higher tax payments because dividends are a bigger deduction than interest.
B) no ability to avoid interest payments from the debt issuance under any circumstances.
C) required dividend payments that are usually double-taxed.
D) a higher earnings per share.

Accepted Answer

The answer of If a corporation issues debt instead of...

Question 17

Which one of the following is a characteristic of equity as opposed to debt?
A) Voting rights are typically attached.
B) There is a fixed maturity date.
C) There is a legal contract.
D) There is a fixed payment schedule.

Accepted Answer

Equity represents ownership in a company and typically comes with voting rights for shareholders, while debt represents a loan that must be paid back with interest and does not have voting rights attached. The other options (B, C, and D) are characteristics of debt, not equity.

Question 18

Which one of the following is a result of a company issuing common stock instead of debt to finance the purchase of property?
A) Leverage will be more effective.
B) The company will probably experience cash flow problems.
C) It will have a lower debt/equity ratio.
D) It will report a lower net income.

Accepted Answer

Issuing common stock instead of debt increases the equity portion of the company's capital structure, resulting in a lower debt/equity ratio. This can improve the company's creditworthiness and financial flexibility. However, it may dilute the ownership of existing shareholders. The other options (A, B, D) are not necessarily true or directly related to the issuance of common stock instead of debt for property purchase.

Question 19

Which one of the following is a valid reason for a stock split?
A) To increase ownership percentages of individual shareholders
B) To adjust the market price of the shares to a level where more individuals can afford to invest in the stock
C) To increase reported net income during subsequent accounting periods
D) To increase the book value per share of common stock

Accepted Answer

A stock split is typically done to adjust the market price of the shares to a level where more individuals can afford to invest in the stock. This is often viewed as a positive development as it can increase demand for the shares and potentially lead to increased liquidity and market value. A stock split does not have any impact on the ownership percentages of individual shareholders, reported net income, or book value per share of common stock.

Question 20

A corporation generated assets by issuing equity securities and through profitable operations. Which effects likely occurred?
A) Common stock and retained earnings increased.
B) Common stock increased and retained earnings stayed the same.
C) Retained earnings increased, and there was no effect on common stock.
D) Liabilities and common stock increased.

Accepted Answer

When a corporation issues equity securities, common stock increases. When the corporation is also generating profits, retained earnings increase. Therefore, both common stock and retained earnings likely increased.

Quiz 12: Shareholders Equity

Which of the following is considered to be an important economic consequence of incentive compensation plans using stock options?

Which one of the following represents the economic effects of declaring and issuing a stock dividend?

A corporation issued common stock instead of debt to finance the purchase of non-depreciable property. Which statement is true?

If a corporation uses retention of earnings to finance the purchase of property instead of issuing equity securities, then

On which date would you make no journal entry?

Information related to Lamar Co. for the years ending December 31, 2010 and 2009 follows: Dividends declared for 2010 totaled $20,000. How much was generated through operations?

Which one of the following transactions cause a decrease to retained earnings?

If preferred stock, which can be exchanged for long-term debt in three years, is classified as an equity financial instrument instead of a liability, then

Which one of the following is an effect when a company buys back it own shares of stock?

Which one of the following serves to differentiate debt from equity?

Which one of the following represents the economic effects of issuing a 2-for-1 stock split?

Cash dividends are paid based on the number of shares which are

What is the effect of a corporation appropriating retained earnings for the cost of treasury stock purchased?

Baker Company has 200,000 shares of common stock outstanding. The company declares a stock dividend of 58,000 shares. According to GAAP, this dividend should be treated as:

On January 1, 2010, Garner Corp. had 10,000 shares of $1 par value common stock issued and outstanding. The stock was selling at $10 per share. During 2010, Garner declared and issued a 10% stock dividend. The stock dividend causes

If a corporation issues debt instead of common stock to finance the purchase of property, then the corporation has

Which one of the following is a characteristic of equity as opposed to debt?

Which one of the following is a result of a company issuing common stock instead of debt to finance the purchase of property?

Which one of the following is a valid reason for a stock split?

A corporation generated assets by issuing equity securities and through profitable operations. Which effects likely occurred?