Question 1

Which of the following is not a characteristic of the corporate form of organization?

Accepted Answer

Stockholders typically do not have the authority to decide the amount of dividends to be paid; this decision is usually made by the corporation's board of directors.

Question 2

A corporation must always have more than one class of stock.

Accepted Answer

A corporation can have only one class of stock. However, a corporation may issue different types of shares within that class, such as voting and non-voting shares or common and preferred shares.

Question 3

Interest rates impact the market value of common stock more than they impact the market value of preferred stock.

Accepted Answer

Preferred stocks often have fixed dividend rates, making their value more sensitive to changes in interest rates compared to common stocks, which do not have fixed dividends and are more influenced by the issuing company's performance and profitability.

Question 4

The relationship between book value and market price of capital stock is a measure of investors' confidence in a company's management.

Accepted Answer

The book value represents the value of the company's assets minus any liabilities, while the market price represents the price at which the company's capital stock is traded in the financial markets. The relationship between these two values indicates the market's perception of the company's current and future performance. If the market price is higher than the book value, investors may be confident in the company's management and growth potential. However, if the market price is lower than the book value, investors may lack confidence in the company's management and future prospects.

Question 5

Treasury stock is stock of a corporation that has been issued and then reacquired and then cancelled.

Accepted Answer

Treasury stock is stock that has been issued and then reacquired by the corporation, but it is not cancelled and can be reissued in the future.

Question 6

Cumulative preferred stock means the stock is entitled to its regular dividend plus an additional share of the total amount of declared dividends.

Accepted Answer

Cumulative preferred stock means that if any dividends are missed, they must be paid out to cumulative preferred stockholders before common shareholders can receive any dividends. It does not entitle the holder to an additional share of the total amount of declared dividends.

Question 7

Treasury stock is stock that is issued and outstanding but not authorized.

Accepted Answer

Treasury stock is actually authorized but has been issued, bought back, and is being held by the issuing company.

Question 8

The advantages of corporations going public include all of the following except:

Accepted Answer

Going public does not provide corporations with the ability to remove assets. The other options listed (professional management, transferability of ownership, and limited shareholder liability) are all advantages of becoming a public company.

Question 9

The purchase of treasury stock creates an asset for the corporation and is recorded at the cost of the shares purchased.

Accepted Answer

The purchase of treasury stock reduces shareholders' equity and is recorded at the cost of the shares purchased, not as an asset.

Question 10

The sale of treasury stock at a price in excess of its cost results in a realized gain that should be presented as a non-operating item in the income statement.

Accepted Answer

The sale of treasury stock at a price in excess of its cost is recorded as an addition to equity, not as a realized gain in the income statement, because treasury stock transactions are considered equity transactions.

Question 11

The purchase of treasury stock for cash causes no change in total assets.

Accepted Answer

The purchase of treasury stock for cash reduces total assets because cash, an asset, is used to buy back shares, decreasing the cash asset without increasing any other asset.

Question 12

In the Stockholders' Equity section of a balance sheet,par value of common stock is presented first,followed by par value of preferred stock,followed by additional paid-in capital on common stock,followed by additional paid-in capital on preferred stock.

Accepted Answer

The typical order in the Stockholders' Equity section starts with the par value of preferred stock (if any), followed by the par value of common stock, then additional paid-in capital on preferred stock (if any), and additional paid-in capital on common stock. This order reflects the priority and typical issuance sequence of these equity components.

Question 13

International accounting standards require mandatory redeemable preferred stock to be classified as a liability on the balance sheet and not as equity.

Accepted Answer

International accounting standards, specifically IAS 32, require mandatory redeemable preferred stock to be classified as a liability on the balance sheet, as it represents an obligation for the issuer to make payments to the shareholders, rather than a true equity investment.

Question 14

Book value per share of preferred stock is computed as total stockholders' equity less the amount assigned to common stock plus any dividends in arrears divided by the number of shares of preferred stock outstanding.

Accepted Answer

Book value per share of preferred stock is typically computed as the liquidation value of the preferred stock plus any dividends in arrears divided by the number of shares of preferred stock outstanding. It does not involve subtracting the amount assigned to common stock from total stockholders' equity.

Question 15

The most important factor affecting the market price of common stock is the stated dividend rate.

Accepted Answer

While dividend rate is one factor that may affect the market price of common stock, it is not necessarily the most important one. Other factors include the overall performance of the company, market trends, economic conditions, and investor sentiment.

Question 16

A stock split will normally increase the market price of the stock and decrease the number of shares on the market.

Accepted Answer

A stock split increases the number of shares on the market and decreases the market price of the stock.

Question 17

To be consistent with international standards,the FASB has changed reporting requirements for redeemable preferred stock to require it to be reported in the equity section.

Accepted Answer

The FASB requires redeemable preferred stock to be reported as a liability, not in the equity section, to reflect the company's obligation to repurchase the stock in the future. This approach may differ from international standards, which can allow for such instruments to be classified as equity under certain conditions.

Question 18

The payment of cash dividends to common stockholders is classified as a financing activity on the statement of cash flows whereas payment of a cash dividend to preferred stockholders is classified as an investing activity.

Accepted Answer

The payment of cash dividends to preferred stockholders is also classified as a financing activity on the statement of cash flows, not an investing activity.

Question 19

A primary disadvantage of the corporate form of organization is:

Accepted Answer

Corporate earnings are subject to double taxation, meaning that the corporation is taxed on its profits and the shareholders are also taxed on the dividends received from those profits. This can result in a significant reduction in the overall amount of profits available to shareholders.

Question 20

A stock split will decrease the par value per share of the stock.

Accepted Answer

A stock split increases the number of shares outstanding, which typically results in a decrease in the par value per share to maintain the overall equity value.

Quiz 11: Stockholders Equity: Paid-In Capital