Question 1

Outstanding common stock is:
A)Stock that is performing well on the New York Stock Exchange.
B)Stock that has been authorized by the state for issue.
C)Stock held in the corporate treasury.
D)Stock in the hands of shareholders.

Accepted Answer

Outstanding common stock refers to the total number of shares of common stock that have been issued and are currently held by shareholders. This excludes any shares that have been repurchased by the company and are held in their treasury.

Question 2

Corporations are formed in accordance with:
A)The Model Business Corporation Act.
B)Federal statutes.
C)The laws of individual states.
D)Federal trade commission regulations.

Accepted Answer

Corporations are formed under state law, so the laws of individual states govern the formation and operation of corporations. Each state has its own set of corporation laws, but many states have adopted similar laws based on the Model Business Corporation Act. Federal statutes and regulations may also apply to corporations, but they do not govern the initial formation of corporations.

Question 3

Mandatorily redeemable preferred stock is reported as a liability.

Accepted Answer

Mandatorily redeemable preferred stock represents a commitment to pay a fixed dividend or redemption amount on a specific date, which is similar to a debt instrument. Therefore, it is reported as a liability on the balance sheet.

Question 4

Details of each class of stock must be reported:
A)On the face of the balance sheet only.
B)In disclosure notes only.
C)On the face of the balance sheet or in disclosure notes.
D)On the face of the balance sheet and in disclosure notes.

Accepted Answer

The answer of Details of each class of stock must...

Question 5

Two of the three primary account classifications within shareholders' equity are:
A)Preferred stock and retained earnings.
B)The par value of common stock and retained earnings.
C)Paid-in capital and retained earnings.
D)Preferred and common stock.

Accepted Answer

The two primary account classifications within shareholders' equity are paid-in capital and retained earnings. Preferred stock and common stock are types of equity securities that are typically included in the paid-in capital category. The par value of common stock is also a component of paid-in capital. Retained earnings represent the portion of a company's profits that have been kept by the company to reinvest in the business rather than distributed to shareholders as dividends.

Question 6

In terms of business volume, the dominant form of business organization is the:
A)Partnership.
B)Corporation.
C)Limited liability company.
D)Proprietorship.

Accepted Answer

Corporations tend to dominate in terms of business volume due to their ability to spread ownership through stocks, access to large amounts of capital, and limited liability for shareholders. Partnerships and proprietorships have more limited growth potential and limited liability companies are a newer form of business organization that has not yet overtaken traditional corporations in terms of business volume.

Question 7

Issued stock refers to the number of shares:
A)Outstanding plus treasury shares.
B)Shares issued for cash.
C)In the hand of shareholders.
D)That may be issued under state law.

Accepted Answer

Issued stock refers to the number of shares that a company has sold and issued to investors, regardless of whether the investors still hold them or have sold them to others. It includes both outstanding shares (shares held by investors) and treasury shares (shares held by the company itself). Therefore, choice A is the correct answer as it encompasses both outstanding and treasury shares. The other choices are not accurate as they do not fully encompass the concept of issued stock.

Question 8

Noncash assets received as consideration for the issue of stock are always valued based on the fair value of the stock.

Accepted Answer

Noncash assets received as consideration for the issue of stock can be valued based on the fair value of either the stock or the noncash asset, whichever is more reliably measurable. This is in accordance with the accounting standard ASC 845-10-25-2.

Question 9

Paid-in capital must consist solely of amounts invested by shareholders.

Accepted Answer

The answer of Paid-in capital must consist solely of amounts...

Question 10

The Model Business Corporation Act:
A)Uses the word "common" and "preferred" in describing distinguishing characteristics of stock.
B)Defines legal capital as the amount of net assets not available for distribution to shareholders.
C)Provides guidance for choosing an appropriate par value for new issues of stock.
D)Has affected the laws of most states.

Accepted Answer

The Model Business Corporation Act has had a significant impact on corporate law in the United States, and it has been adopted in whole or in part by many states. Choices A, B, and C are examples of specific provisions within the Act, but they do not fully capture the Act's overall influence on corporate law.

Question 11

Cash dividends become a binding liability as of the record date.

Accepted Answer

The answer of Cash dividends become a binding liability as...

Question 12

Stock dividends cause a reduction in retained earnings, but they never reduce total shareholders' equity.

Accepted Answer

The answer of Stock dividends cause a reduction in retained...

Question 13

Under GAAP, the declaration of a property dividend may require the recognition of a gain or loss if the fair value of the property is different from its carrying value on the declaration date.

Accepted Answer

This is true. When a property dividend is declared, if the fair value of the property is different than its carrying value on the declaration date, a gain or loss must be recognized. The gain or loss is equal to the difference between the fair value of the property and its carrying value.

Question 14

Restrictions on retained earnings must be disclosed in the body of the balance sheet.

Accepted Answer

The answer of Restrictions on retained earnings must be disclosed...

Question 15

Investors should be wary of buybacks during down times because the resulting decrease in shares and increase in earnings per share can be used to mask a slowdown in earnings growth.

Accepted Answer

Buybacks can artificially inflate earnings per share during a downturn, making it difficult to accurately assess the company's underlying financial health. Therefore, investors should be wary of relying solely on earnings per share and should conduct a thorough analysis of the company's financial statements before making any investment decisions.

Question 16

The net assets of a corporation are equal to:
A)Contributed capital.
B)Retained earnings.
C)Shareholders' equity.
D)None of these.

Accepted Answer

Net assets refer to the total assets of a corporation minus its total liabilities. This is also known as shareholder's equity, which includes both contributed capital and retained earnings. Therefore, the correct choice is C.

Question 17

The corporate charter sometimes is known as (a):
A)Articles of incorporation.
B)Statement of organization.
C)By-laws.
D)Registration statement.

Accepted Answer

The corporate charter is also known as articles of incorporation because it is the legal document that establishes the corporation and outlines its basic structure, purpose, and ownership. The other options listed are separate legal documents that may be associated with a corporation, but they are not synonymous with the corporate charter.

Question 18

Stock designated as preferred usually has preferential rights over other classes of stock relative to dividends and liquidating distributions.

Accepted Answer

Preferred stock typically has preferential rights over common stock in terms of dividends and liquidation distributions.

Question 19

Treasury stock transactions never increase retained earnings or net income.

Accepted Answer

Treasury stock transactions involve the purchase of a company's own stock, which reduces the number of outstanding shares. This will not increase retained earnings or net income as the company is using its own resources to purchase its stock.

Question 20

Dividends in arrears on cumulative preferred stock are reported as current liabilities.

Accepted Answer

Dividends in arrears on cumulative preferred stock are not reported as current liabilities; they are disclosed in the notes to the financial statements as they represent obligations that must be paid before any dividends can be paid to common shareholders.

Quiz 18: Shareholders Equity

Outstanding common stock is:

Corporations are formed in accordance with:

Mandatorily redeemable preferred stock is reported as a liability.

Details of each class of stock must be reported:

Two of the three primary account classifications within shareholders' equity are:

In terms of business volume, the dominant form of business organization is the:

Issued stock refers to the number of shares: