Question 1

Growth stocks generally pay large dividends on a regular basis.

Accepted Answer

Growth stocks typically reinvest their profits back into the company, so they often do not pay large dividends. Instead, investors in growth stocks typically rely on the stock price appreciation as the primary way to earn a return on their investment.

Question 2

The price-earnings ratio reveals information about the stock market's expectations for a company's future earnings growth.

Accepted Answer

The price-earnings ratio (P/E ratio) is a valuation ratio that compares a company's current share price to its earnings per share (EPS). It is an indicator of the market's expectation for a company's future earnings growth, as a high P/E ratio indicates that investors are willing to pay more for each dollar of earnings, signaling expectations for higher future earnings growth. Conversely, a low P/E ratio may show that the market has low expectations for future earnings growth or that the company is currently undervalued.

Question 3

A common statutory restriction is reported on the income statement whereas; a common contractual restriction is reported in the stockholders' equity section of the balance sheet.

Accepted Answer

The answer of A common statutory restriction is reported on...

Question 4

Retained earnings generally consist of a company's cumulative net income less any net losses and dividends declared since its inception.

Accepted Answer

Retained earnings are the cumulative net income (income after expenses and taxes) of a company, less any dividends paid to shareholders and less any losses incurred by the company since its inception. Therefore, the statement is true.

Question 5

Changes in accounting estimates are accounted for in current and future periods.

Accepted Answer

Changes in accounting estimates are accounted for in the period in which the change occurred and in future periods affected by the change, as per accounting principle.

Question 6

A company has earnings per share of $6.50. Its dividend per share is $0.50, and its market price per share is $80. Its price-earnings ratio equals 13.
Price-Earnings Ratio = Market Price per Share/Earnings per Share; $80/$6.50 = 12.3

Accepted Answer

The calculation for the price-earnings ratio should be Market Price per Share/Earnings per Share, not the other way around. Therefore, the correct calculation is: $80/$6.50 = 12.3, not 6.5/80 = 0.08. The given price-earnings ratio of 13 is also incorrect based on the corrected calculation.

Question 7

If the dividends declared are not recorded as a reduction to Retained Earnings on the date of declaration, the Dividends account is closed to Retained Earnings at the end of the accounting period.

Accepted Answer

Dividends declared are initially recorded in a temporary Dividends account, which is closed to Retained Earnings at the end of the accounting period to reflect the reduction in equity.

Question 8

Earnings per share is the amount of income earned per share of a company's outstanding (weighted-average) common stock.

Accepted Answer

Earnings per share (EPS) is calculated by dividing a company's net income by the number of outstanding shares of common stock. EPS represents the amount of profit allocated to each share of stock.

Question 9

Dividing stockholders' equity applicable to common shares by the number of common shares outstanding yields the book value per common share.

Accepted Answer

This is a correct formula for calculating book value per common share.

Question 10

A company made an error in recording the 2016 purchase of computer equipment as an expense. This was discovered in 2017. The item should be reported as a prior period adjustment on the 2017 income statement.

Accepted Answer

Prior period adjustments are reported in the statement of retained earnings, not the income statement.

Question 11

The term "restricted retained earnings" refers to statutory but not contractual restrictions.

Accepted Answer

The answer of The term "restricted retained earnings" refers to...

Question 12

Retained earnings are part of the stockholders' claims on the company's net assets.

Accepted Answer

Retained earnings represent the portion of a company's net income that is not paid out as dividends to its shareholders but is instead reinvested back into the company. As such, it is considered part of the stockholders' claims on the company's net assets.

Question 13

Book value per share reflects the value per share if a company is liquidated at balance sheet amounts.

Accepted Answer

Book value per share is calculated by dividing the total shareholder equity by the number of outstanding shares. It represents the value of a company's assets if they were sold at their carrying amounts and all liabilities were paid off. If a company is liquidated and sells off its assets, book value per share is the amount of money shareholders would receive per share.

Question 14

The price-earnings ratio is computed by dividing earnings per share by the market price per share.

Accepted Answer

The price-earnings ratio is computed by dividing market price per share by earnings per share.

Question 15

Dividend yield is defined as the annual cash dividends per share divided by the market price per share of a company's stock.

Accepted Answer

Dividend yield is calculated by dividing the annual cash dividends per share by the market price per share of a company's stock.

Question 16

The main limitation in using book value per share for stock valuation models is the potential difference between recorded value and market value for both assets and liabilities.

Accepted Answer

Book value per share is calculated by dividing the total book value of assets minus liabilities by the number of outstanding shares. However, this value may not accurately reflect the true market value of the company's assets and liabilities. For example, some assets may be undervalued or overvalued, and liabilities may be underestimated or overestimated in the books. As a result, using book value per share alone may not provide a complete picture of a company's intrinsic value, and investors should consider other factors such as earnings, cash flow, and future growth potential.

Question 17

Dividend yield is computed by dividing earnings per share by the market value per share.

Accepted Answer

Dividend yield is calculated by dividing the annual dividend paid per share by the market value per share, not by earnings per share.

Question 18

Robin Company had net income of $67,000. The company had 9,000 weighted average common shares outstanding. The basic earnings per share equal $7.44 per share.

Accepted Answer

Basic earnings per share is calculated by dividing net income by weighted average number of common shares outstanding. Therefore, $67,000 divided by 9,000 shares equals $7.44 per share.

Question 19

Dividend yield shows the annual amount of cash dividends distributed to common shares relative to the stock's market price.

Accepted Answer

This statement is true. Dividend yield is calculated by dividing the annual dividend per share by the stock's market price per share.

Question 20

Stocks with a price-earnings ratio less than 20 to 25 are likely to be overpriced.

Accepted Answer

A price-earnings ratio of less than 20 to 25 typically indicates that the stock is undervalued rather than overpriced. Therefore, the statement is false.

Quiz 11: Reporting and Analyzing Equity