Question 1

Common stock always carries a preference for receiving dividends over preferred stock.

Accepted Answer

Preferred stock is typically issued with a preference for receiving dividends over common stock. Common stock dividends are only paid if the company has sufficient profits and chooses to distribute them, while preferred stock dividends must be paid before any dividends are paid to common stockholders.

Question 2

Minimum legal capital requirements are intended to protect creditors.

Accepted Answer

Minimum legal capital requirements are put in place to ensure that a company has a sufficient amount of capital to protect the interests of its creditors in case of liquidation or bankruptcy.

Question 3

Special rights often granted to preferred stock include a preference for receiving dividends and additional voting privileges.

Accepted Answer

Preferred stock typically includes a preference for receiving dividends but does not usually come with additional voting privileges; those are generally reserved for common stockholders.

Question 4

The total number of shares outstanding is the authorized stock.

Accepted Answer

The authorized stock refers to the maximum number of shares a company is allowed to issue, not the actual number of shares currently outstanding. The total number of shares outstanding is typically listed on a company's balance sheet.

Question 5

Stock is attractive to investors because stockholders are not liable for the corporation's actions and debts and because stock is easily transferred.

Accepted Answer

Stockholders' liability is limited to the amount of their investment in the company, and stock is transferable through buying and selling on the stock market.

Question 6

If a corporation is authorized to issue 1,000 shares of $5 common stock,it is said to have $5,000 of stock outstanding.

Accepted Answer

The fact that a corporation is authorized to issue a certain number of shares does not mean that all of those shares have been issued and are currently outstanding. The number of shares actually issued and in circulation among investors determines the amount of stock outstanding.

Question 7

Shareholders in a corporation have the power to bind the corporation to contracts.

Accepted Answer

Shareholders do not have the power to bind the corporation to contracts. This power lies with the board of directors and officers of the corporation. Shareholders typically only have the power to elect the board and approve certain major corporate actions.

Question 8

A corporation may be authorized to issue both common and preferred stock.

Accepted Answer

It is common for a corporation to have both common and preferred stock, as they serve different purposes and cater to different types of investors. Common stock typically represents ownership in the company and allows shareholders to vote on certain matters, while preferred stock typically guarantees a fixed dividend payment and priority in receiving assets in the event of liquidation.

Question 9

A preemptive right means shareholders can purchase their proportional share of common stock issued later by the corporation.

Accepted Answer

A preemptive right allows existing shareholders to purchase their proportional share of common stock issued later by the corporation before it is made available to the general public. This helps to maintain their ownership percentage and prevent dilution of their equity stake.

Question 10

Stockholders' equity consists of paid-in capital and retained earnings.

Accepted Answer

Stockholders' equity is the residual value of assets remaining after liabilities have been deducted. It includes paid-in capital (the amount of capital that has been invested by shareholders through purchasing stock) and retained earnings (profits that have been kept by the company rather than distributed to shareholders as dividends).

Question 11

Organization expenses of a corporation often include legal fees and promoter fees.

Accepted Answer

Organization expenses refer to the costs incurred in forming a corporation or partnership. These expenses may include legal fees, accounting fees, promoter fees, and the cost of filing incorporation documents with the state. Therefore, legal fees and promoter fees are considered organization expenses for a corporation.

Question 12

Cumulative preferred stock carries the right to be paid both current and all prior periods' unpaid dividends before any dividends are paid to common shareholders.

Accepted Answer

Cumulative preferred stock has the right to receive both current and all past unpaid dividends before any dividends are distributed to common stockholders.

Question 13

A proxy is a document that gives a designated agent the right to vote a shareholder's stock.

Accepted Answer

This is true. A proxy is a legal document that allows a designated agent to vote a shareholder's stock on their behalf. This is often used when a shareholder is unable to attend a meeting or vote in person.

Question 14

A registrar keeps stockholder records and prepares official lists of stockholders and dividend payments.

Accepted Answer

A registrar is responsible for maintaining accurate records of stockholder ownership and distributing dividend payments.

Question 15

The price at which a share of stock is bought or sold is known as par value.

Accepted Answer

The price at which a share of stock is bought or sold is known as market value or market price, not par value. Par value is the face value of a share of stock, typically set at a very low amount (e.g. $0.01) and has little relevance to the stock's actual market value.

Question 16

A corporation is a legal entity separate from its owners.

Accepted Answer

A corporation is considered a separate legal entity from its owners, which means it has its own legal rights and liabilities. Owners of a corporation are not personally responsible for its debts, obligations, or legal issues, as these belong solely to the corporation.

Question 17

Common shareholders always share equally with all other shareholders in dividends.

Accepted Answer

Common shareholders do not always share equally in dividends as dividend amounts can be affected by the type of shares owned (e.g., preferred vs. common) and the specific rights attached to different classes of common shares.

Question 18

Corporations avoid many of the state regulations and controls that proprietorships and partnerships are subject to.

Accepted Answer

Corporations are subject to more regulations and controls than proprietorships and partnerships because they are considered separate legal entities, which involves more complex legal and tax requirements.

Question 19

Paid-in capital is the total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock.

Accepted Answer

Paid-in capital is the total amount of cash and other assets a corporation receives from its stockholders in exchange for its stock. This capital is recorded in the balance sheet as a component of the stockholders' equity section.

Question 20

Stated value stock is no-par stock that is assigned a "stated" value per share by the corporation's board of directors.

Accepted Answer

Stated value stock is indeed no-par stock that is assigned a "stated" value per share by the corporation's board of directors.

Quiz 11: Corporate Reporting and Analysis