Accounting Chapter 10: Stockholders' Equity

Albert Inc. has both common and preferred stock outstanding. Which should be listed first in the stockholders' equity section of the balance sheet?

Preferred stock

In a corporation, the stockholders' potential loss is

limited to the amount of the investment.

Retained earnings of $100,000 represent a corporation's cumulative earnings ______ and is shown on the ______.

not paid out by dividends; balance sheet and statement of retained earnings Wrong: declared; statement of retained earnings and income statement - Reason: Dividends, not earnings, are "declared". Retained earnings represents the earnings "kept" by the company and is shown on the balance sheet and the statement of retained earnings.

A corporate charter:

specifies the shares of stock to be issued. describes the business activities. names the board of directors.

The term treasury stock refers to

stock that is repurchased by the issuing corporation.

Shares of stock that are repurchased are referred to as ___ stock.

treasury

Morgan Company issued convertible preferred stock. What additional special feature(s) could also have been granted to preferred stock holders?

The right to convert the shares to common shares The right to redeem the preferred shares for cash

Which financial statement summarizes the changes in the balance of each stockholders' equity account?

Statement of stockholders' equity only

Distributions of stock to current shareholders of a corporation are called what type of distribution? (Select all that apply.)

Stock dividend Stock split

The advantages to the corporate form of business include

ease of raising capital. transferability of ownership. Wrong: double taxation for the corporation. - Reason: Double taxation is a disadvantage.

Preferred stockholders:

have the right to receive dividends only in the years the board of directors declares dividends.

Which of the following is typically presented first in the equity section of the balance sheet?

preferred stock

Special contractually granted features can make preferred stock:

redeemable convertible cumulative

The purpose of the statement of shareholders' equity is to

report the changes and the sources of the changes in shareholder equity accounts.

Shareholders' equity is another common term for ___ equity. (Do not use shareholders)

stockholders', owners', or stockholders

A corporation is owned by its

stockholders, shareholders, investors, or common stockholders

The statement of shareholders' equity reports

the changes in each shareholder equity account.

Preferred stock:

has preference as to dividends. generally does not have voting rights. is useful for raising capital without reducing common stockholders' control. Wrong: must be issued before any common stock is issued. - Reason: Common stock must be issued before any preferred stock can be issued.

Earned capital increases ____.

retained earnings

Limited liability and ease of raising outside capital are advantages of this business form:

Corporation

Match the source of capital with the account in which it is recognized.

Earned capital > Retained earnings Invested capital > Common stock

True or false: A corporation is owned by debt and equity holders.

False - Reason: A corporation is owned by its shareholders, who are equity holders.

___ capital is the amount of money paid into a company by its owners.

Invested, Contributed, or Paid-in

The rights of common stockholders typically include which of the following?

Right to distribution of assets in liquidation. Right to dividends when declared. Right to vote for corporate directors.

Which of the following is included in the rights of common stockholders?

Right to vote Wrong: Right to dividend payment every year. - Reason: Stockholders have a right to dividends when distributed, but not necessarily every year.

The number of shares authorized is set forth in the company's:

articles of incorporation

When a business incorporates, it must file its ______ with the state in which it incorporates.

articles of incorporation

The total number of shares that a company may sell is referred to as ___ shares.

authorized

A frequent reason for a stock split is to

cause the market price per share to decline

Retained earnings are:

decreased by dividends. all of the company's earnings not distributed to stockholders. increased by net income. sometimes called earned capital.

When a corporation distributes assets of the company to its investors, it is referred to as a(n)

dividend

A distribution of a company's accumulated prior earnings is a(n) ______.

dividend Wrong: retained earnings - Reason: Retained earnings is what remains after the company declares dividends which is the distribution of a company's accumulated prior earnings.

Additional shares issued to existing owners without an exchange of cash may be in the form of stock ___ or stock ___

dividends; splits

Positive ___ represent the key to a company's long-run survival. (Enter only one word.)

earnings, income, profit, earning, profits, or incomes

Preferred stock is advantageous in that it:

has priority over common stock when dividends are declared. has priority over common stock at liquidation.

The amount of money paid into a company by its owners is referred to as:

invested capital

Evaluation of the company's profitability requires consideration of the amount of a company's earnings in relation to the size of the

investment.

Preferred stock is "preferred" over common stock by providing preferred stockholders with these rights:

preference in distribution of assets during dissolution of corporation first right to specified amount of dividends

The most important advantage to the corporate form of business is

limited liability. Wrong: regulation. - Reason: Regulation is a disadvantage to the corporate form of business. double taxation. - Reason: Double taxation is a disadvantage for corporations.

Another common term for stockholders' equity is:

shareholders' equity

Corporations will declare a stock split in order to ______.

reduce the market price of a share of stock and make it more attractive to some investors Wrong: increase the market price of a share of stock to help maximize the stockholders' wealth - Reason: A stock dividend increases the number of shares outstanding and is recorded with a debit to Retained Earnings (-SE) and credit to Common Stock (+SE). The increase in shares should cause a decrease, not increase, in the price since there are more shares outstanding and no change in total SE. increase a stockholders' ownership percentage in the corporation - Reason: The stockholders receive the same percentage so their percentage ownership remains the same.