ACCT - SMARTBOOK #11

The journal entry to record the declaration of a dividend includes ______.

Debit to dividends Credit to Dividends Payable

A corporation ______ have a legal obligation to pay dividends.

does not

When a stockholder sells its shares to another person for more than its original cost, the corporation ______.

does not make a journal entry

_____ is an insignificant value per share of capital stock specified in the corporate charter.

par value

The P/E ratio is calculated by ______.

dividing the stock price by EPS

Daffy Duct, Inc. issued 10,000 shares of $1 par value common stock at $5 per share. The effect of this transaction on the accounting equation includes a ______.

$50,000 increase in total assets. $50,000 increase in total stockholders' equity.

Retained Earnings are ______.

- all of the company's earnings kept rather than distributed to stockholders - sometimes called earned capital - increased by net income - decreased by dividends

Ida Hoe, the owner of Ida Hoe's Potatoes, withdrew $5,000 from her sole proprietorship. Match the following account titles with the appropriate dollar amount to reflect this withdrawal. Instructions I. Hoe, Drawings Cash I. Hoe, Capital

Debit $5,000 Credit $5,000 No effect

The entry to record the transaction for a sole proprietorship when the owner invests cash includes a ______.

Debit to Cash Credit to Capital

Which of the following reports net income relative to average common stockholders' equity?

ROE

Ima Rich purchased 100 shares of Stockits, Inc.'s $1 par value common stock from Stockits for $5 per share. Which statements are true regarding the effect of this transaction on Stockits' financial statements?

The financing activities section of the statement of cash flows increases. Stockholders' equity on the balance sheet increases.

Lox, Stock and Bagel, Inc. issued 50,000 shares of the 100,000 authorized. It has since repurchased 5,000 of its shares. The number of shares outstanding equals ______ shares.

45,000 Reason: The 45,000 shares outstanding equals the number issued of 50,000 minus the 5,000 shares bought back by the company.

Why is Additional Paid-in Capital recorded for a small stock dividend?

Because small stock dividends are recorded at market value

The money a corporation receives from investors by issuing stock is called ______.

Contributed Capital

An accumulated deficit means a company has ______.

accumulated more net losses than net income

Dividends Payable is a(n) _________ account with a normal _________ balance and is initially recorded on the __________ date.

an increase in dividends a decrease in Retained Earnings after temporary accounts are closed an increase in liabilities

The maximum number of shares a corporation is allowed to sell in accordance with its corporate charter are called _____ shares.

authorized

Transactions between a company and its stockholders affect the company's _____ accounts only.

balance sheet

Sea the World Cruises issued 400,000, $1 par value shares of the 1,000,000 shares authorized for $1,000,000. The entry to record the issuance of the stock includes ______.

debit Cash $1,000,000 credit Common Stock $400,000 debit Cash $1,000,000 credit Common Stock $400,000

Barry Rich, the owner of Rich's Farm, withdrew $5,000 from the sole proprietorship. The journal entry to record this withdrawal includes a $5,000 ______.

debit to B. Rich, Drawings

When does the company record the dividend?

declaration date

A stock dividend __________

distributes additional shares of stock to existing stockholders on a pro rata basis. causes retained earnings to decrease.

A major advantage of the corporate form of ownership is ___________ legal liability.

limited

Accumulated Deficit ______.

means that Retained earnings has a debit balance indicates accumulated net losses is shown in parentheses on the balance sheet

When a corporate charter does not specify a legal value per share, then the stock issued is referred to as ______.

non-par value stock

Retained Earnings represents cumulative ______ by the business.

profits retained Net income kept

If a business has one capital account and one drawing account, then the business must be a ______.

sole proprietorship

Contributed capital of $1,000,000 represents ______.

the amount stockholders have invested in exchange for stock

True or false: Some states allow corporations to issue no-par value common stock.

true Reason: Since par value is less meaningful today, some states no longer require a specified legal value per share.

Common stock's par value ______.

was introduced to prevent bankrupt companies from unfairly distributing company resources affects how common stock is recorded has become less meaningful because states use other means to prevent stockholders from removing capital from financially distressed companies

Stock options _____.

- are often given to employees as part of their compensation - provide the holder with the option to purchase stock at a specified price during a specified period of time

Advantages of debt financing over equity financing include that ______.

- stockholders' control will not be diluted - interest payments are tax deductible

The entry to record a partner's withdrawal of cash from a partnership for personal use includes ______.

Debit to Drawings Credit to cash

Shares that were previously issued to and owned by stockholders but have been reacquired and now held by the corporation are called __________ stock.

treasury

Stockit, Inc. issued 100,000 shares of the 1,000,000 shares it is allowed to issue. Stockit has repurchased 10,000 of its own shares. The number of shares authorized equals ______ shares.

$1,000,000

Daffy Duct Inc. declared a small stock dividend and issued 1,000 shares of $1 par value common stock when the price of the stock was $4 each. Identify all appropriate account titles that may be used to record this issuance of stock.

Retained Earnings Additional Paid-In Capital Common Stock

When shares of stock that were issued to the public are later bought and sold among investors on the stock exchange, the issuing corporation ______.

does not record any entry because it does not receive or give anything of value

Similar to the Dividends account of a corporation is the ________ account of a sole proprietorship and is used to record amounts paid to the owner.

drawing

Similar to the Dividends account of a corporation is the __________ account of a sole proprietorship and is used to record amounts paid to the owner.

drawing

___________ per share equals Net Income divided by the average shares of common stock ______.

earnings outstanding

An advantage of ________ financing is that dividends are optional.

equity

If you own stock in a corporation that goes bankrupt, you ______.

only stand to lose what you paid to buy the stock

A stock _______, typically given to employees as part of their compensation that gives them the opportunity to buy the company's stock at a predetermined price, is recorded as an expense at the time it is granted

option

Identify what is needed to calculate the P/E ratio.

stock price Earnings per share

The statement of _______ ________ reports the changes in retained earning as well as paid-in capital.

stockholder's equity

Preferred stockholders ______.

received dividends before common stockholders

True or false: When a corporation declares a dividend its Net Income on the income statement is reduced.

False

Which of the following line items would be found on a statement of stockholders' equity that would not be on the statement of retained earnings?

Treasury Stock Common Stock Additional Paid-in Capital

Which of the following accounts is used to record a small stock dividend on common stock but is not used to record a large stock dividend on common stock?

additional Paid-in Capital

During the year, Squid Roe Inc.'s revenues were $200,000 and its net income was $60,000. It had not preferred shares, and its stockholders' equity and total assets were $380,000 and $780,000 at the beginning of the year and $420,000 and $900,000 at year-end, respectively. ROE (rounded to the nearest tenth of a percent) equals ______.

15.0%

AnuU, Inc. sold 100,000 shares of the 1,000,000 shares it is allowed to sell. AnuU repurchased 10,000 of these shares. The number of shares outstanding equals ______ shares.

90,000 Reason: The number of shares authorized equals 1,000,000 which is the maximum shares the company is allowed to issue. Of the 1,000,000 shares, the company has issued 100,000 and bought back 10,000 leaving 90,000 shares outstanding.

The declaration and payment of a cash dividend ultimately causes a(n) ______.

decrease in Cash decrease in stockholders' equity decrease in Retained Earnings

____________ stock carries priority over common stock with regard to dividends.

preferred

Similar to a stock split, a stock ____________ also distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders.

dividend

Advantages of equity financing over debt financing include that ______.

dividends are optional equity financing does not require repayment

Earnings per share (EPS) may be determined by ______.

dividing net income less preferred dividends by the average common shares outstanding dividing the stock price by the P/E ratio

Match the date with the related event. DECLARATION DATE DATE OF RECORD PAYMENT DATE

- The board of directors officially approves a dividend - Stock records are finalized to determine which stockholders are to receive payment - Dividends payable is decreased

A stock dividend ______.

- causes retained earnings to decrease. - distributes additional shares of stock to existing stockholders on a pro rata basis.

Retained Earnings are ______

- decreased by dividends - increased by net income - all of the company's earnings kept rather than distributed to stockholders - sometimes called earned capital

Which of the following statements are true?

An advantage of equity over debt financing is corporations are not required to pay dividends or repay stockholders. Two sources of financing for a corporation are debt and equity.

Which of the following line item amounts would be under the Retained Earnings column of a statement of stockholders' equity?

Dividends: Preferred Dividends: Common Net Income

Identify the equity accounts for a sole proprietorship.

Drawing Capital

Barry Rich invested $5,000 of his personal income into his sole proprietorship, Rich's Farm. The effect of this transaction on Rich's Farm includes a(n) ______.

Increase in owner's equity Increase in assets

Treasury stock represents ______.

the amount paid for stock reacquired and currently held in treasury a contra-equity account