MBA 601 - Exam 2, Week 6

Which sections are required in a 10K Shareholder Letter MD&A Financial Statements and Supplementary Data Risk Factors Pictures of Employees

Shareholder Letter ***MD&A ***Financial Statements and Supplementary Data ***Risk Factors Pictures of Employees

Market Cap

Shares outstanding x price

Public companies file their financial statements with the SEC. TRUE FALSE

TRUE

A general journal entry is not required to recognize a stock split. This statement is True False

TRUE A two for one stock split will double the number of shares of stock outstanding but will have no effect to the total amount of assets, liabilities, or stockholders' equity. Since the account balances do not change there is no need to record a journal entry.

Which of the following is normally included in the description of cumulative preferred stock when shown in the stockholders' equity section of the balance sheet? The par value of the stock The number of shares authorized, issued, and outstanding The amount of the dividend All of the items are included in the description shown on the balance sheet

The par value of the stock The number of shares authorized, issued, and outstanding The amount of the dividend ***All of the items are included in the description shown on the balance sheet

If a corporation sells treasury stock for more than it paid to acquire the stock, it will record a gain that will be shown in the non-operating section of the income statement. This statement is True False

False Treasury stock transactions are transactions that take place between a corporation and its owners (investors). By definition, transactions between a corporation and its owners are financing activities and do not affect the income statement.

A company's annual filing is called a 10K 10Q 8K 13F

***10K 10Q 8K 13F

If I wanted to understand a company's business model which section should I read in the annual report? Business Risk Factors Annual Shareholder Letter Financial Statements

***Business Risk Factors Annual Shareholder Letter Financial Statements

Who has to assess the effectiveness of internal controls over financial reporting? Management Auditor Both Management and the Auditor

***Management Auditor Both Management and the Auditor

A company's quarterly filing is called 10K 10Q 20F 8K

10K ***10Q 20F 8K

Company A has a PE of 20 and forward earnings of 100. What is the share price? 5 2,000 100 20

5 ***2,000 100 20 PE * forward earnings

Forward PE

A PE ratio that is based on estimated future earnings

Forward PE

A PE ratio that is based on estimated future earnings share price / forward EPS

On November 1, Year 1 Dixon Company paid $20 per share to buy back 1,000 shares of its $8 par value common stock. The stock had originally sold for $15. On December 15, Year 1 Dixon sold 400 shares of the treasury stock at $24 per share. Which of the following shows how the sale of the treasury stock will affect Dixon's financial statements on December 15, Year 1?

ASSETS = 9600 treasury stock = (8000) Paid in excess T Stock = 1600 statement cash flow = 9600 Selling treasury stock is an asset source transaction. Assets (cash) increase and treasury stock decreases. Note that treasury stock is a contra equity account. As a result, decreasing the treasury stock account increases total stockholders' equity. Since the treasury stock was sold for $4 ($24 sales price - $20 acquisition price) more than it cost, the company must recognize $1,600 ($4 x 400 shares) of additional paid-in capital from treasury stock transactions. Selling treasury stock does not affect the income statement. Treasury stock transactions are transactions between a corporation and its investors and therefore, are financing activities.

On November 1, Year 1 Dixon Company paid $20 per share to buy back 1,000 shares of its $8 par value common stock. The stock had originally sold for $15. Which of the following shows how the purchase of the treasury stock will affect Dixon's financial statements on November 1, Year 1?

Assets = 20000 Treasury Stock = 20000 Statement of cash flows = (20,000) FA Purchasing treasury stock has the opposite effect on the financial statements as issuing stock. The purchase of treasury stock is an asset use transaction. Assets (cash) decrease and treasury stock increases. Note that treasury stock is a contra equity account. As a result, increasing the treasury stock account decreases total stockholders' equity. Purchasing treasury stock does not affect the income statement. Treasury stock transactions are transactions between a corporation and its investors and therefore, are financing activities.

On January 1, Year 1 Graham Corporation issued 200 shares of $5 stated value preferred stock for $40 per share. Which of the following shows how the stock issue will affect Graham's financial statements on January 1, Year 1?

Assets = 8000 Pref. Stock = 1000 PI Cap in Excess = 7000 Statement of CF = 8000 FA Issuing stated value preferred stock has the same financial statement effects as issuing par value common stock. The only change is in the account titles. Assets (cash) increase and stockholders' equity increases. The increase to stockholders' equity is divided into two components. The $1,000 ($5 per share × 200 shares issued) stated value is shown in the preferred stock account and the $7,000 [($40 - $5) × 200 shares issued] portion is shown in a separate stockholders' equity account titled "paid-in capital in excess of stated value". As with other stock issues, issuing preferred stock in excess of stated value does not affect the income statement. The total cash inflow is a financing activity.

Wallace Corporation issued a 6 percent stock dividend on the 30,000 shares of stock outstanding. The par value of the common stock was $10 per share. At the time of the dividend, the market value of the stock was $40 per share. Which of the following shows how the stock dividend will affect Wallace's financial statements?

Common stock = 18000 Additional Paid in = 54000 R/E = (72000) Number of shares: 30,000 shares × .06 dividend = 1,800 shares Amount to transfer from retained earnings: 1,800 shares × $40 per share = $72,000 Par value of stock issue: 1,800 shares × $10 par value = $18,000 Additional paid-in capital in excess of par: 1,800 shares × ($40 market value - $10 par) = $54,000 A stock dividend is a claims exchange event. The retained earnings account decreases by $72,000, the common stock account increases by $18,000 (1,800 shares × $10 par value) and the additional paid-in capital in excess of par value increases by $54,000 ($72,000 - $18,000). Since dividends do not affect the determination of net income, the income statement is not affected. Since cash was not collected or spent, the statement of cash flows is not affected

On November 1, Year 1 Dixon Company paid $20 per share to buy back 1,000 shares of its $8 par value common stock. The stock had originally sold for $15. Which of the following shows the journal entry necessary to recognize the purchase of the treasury stock on November 1, Year 1?

Debit Credit Cash 15000 Treasury Stock 15000

number of times interest earned ratio

EBIT divided by Interest expense

A two for one stock split will double the amount of total stockholders' equity shown on the balance sheet. This statement is True False

FALSE A stock split affects the par value and the number of shares of stock outstanding. It has no impact on the total amount of assets, liabilities, or stockholders' equity.

Which of the following is a reason a company would acquire treasury stock? Increase the amount of paid-in capital Lower its stock price Reduce the likelihood of a hostile takeover Support the US Treasury Department

Increase the amount of paid-in capital Lower its stock price **Reduce the likelihood of a hostile takeover Support the US Treasury Department Outside investors may try to take control of a company by acquiring its shares in the open market. If the outside investors are able to acquire a sufficient number of shares, they could vote to replace members of the existing board of directors with members that support their agenda and thereby, gain control of the company. If the existing management has the corporation purchase its own shares (treasury stock), the number of shares available to outsiders is diminished. So, even though treasury stock has no voting rights, keeping the shares out of the hands of hostile forces protects the existing management team.

When reading a 10k, what does the word "material" mean? Will have a least a 1 million dollar impact on earnings Will have a least a 100 thousand dollar impact on earnings Will have a least a 10 million dollar impact on earnings Will change an investor's decision on whether or not to invest in the company

Will have a least a 1 million dollar impact on earnings Will have a least a 100 thousand dollar impact on earnings Will have a least a 10 million dollar impact on earnings ***Will change an investor's decision on whether or not to invest in the company

Jake Corporation paid its stockholders a dividend by issuing them additional shares of its stock. This type of event is called a cash dividend. stock split. treasury stock payment. stock dividend.

cash dividend. stock split. treasury stock payment. **stock dividend

outstanding shares

issued shares - treasury shares

Immediately after a two for one common stock split, the per share market price of the issuing corporation's common stock is expected to be less one half of what it was immediately before the split. exactly one half of what it was immediately before the split. slightly higher than one half of what it was immediately before the split. exactly the same as it was immediately before the split.

less one half of what it was immediately before the split. exactly one half of what it was immediately before the split. ***slightly higher than one half of what it was immediately before the split. exactly the same as it was immediately before the split. A two for one stock split will double the number of shares of stock outstanding but will have no effect to the total amount of assets or liabilities. Since twice the number of shares represent the same ownership interest in the assets and liabilities, mathematically the market stock price per share should drop to one half of its before split price. However, the lower market price normally creates greater demand for the stock thereby slightly pushing up its market value.

Price Earnings Ratio

market price per share/earnings per share The higher the PE, the more "expensive" the company is

Company A has a share price of $4,400 and forward EPS of $1,100. Company B has a share price of $20 and a forward EPS of 10. Assuming that everything else about these two companies is identical (i.e. growth rate, risk, capital structure, etc.) which company is more expensive? Company A Company B

***Company A Company B Share Price / forward EPS

The market price per share of stock normally declines when a corporation issues a stock dividend. This statement is True False

***True False A stock dividend increases the number of shares outstanding but does not affect the amount of a company's assets or liabilities. Since more shares represent ownership in the company's assets and liabilities, the value per share normally declines.

On January 1, Year 1 Graham Corporation issued 200 shares of $5 par value common stock for $40 per share. Which of the following shows how the stock issue will affect Graham's financial statements on January 1, Year 1?

Assets = 8000 Common Stock = 1000 Paid-in Capital = 7000 Statement of CF = 8000 FA Issuing par value common stock is an asset source transaction. Assets (cash) increase and stockholders' equity increases. In this case, the increase to stockholders' equity is divided into two components. The $1,000 ($5 par value per share × 200 shares issued) par value (legal capital) is shown in the common stock account; and the $7,000 [($40 - $5) × 200 shares issued] portion is shown in a separate stockholders' equity account titled "additional paid-in capital in excess of par value". As with other stock issues, issuing common stock in excess of par value does not affect the income statement. The total cash inflow is a financing activity.

On January 1, Year 1 Graham Corporation issued 200 shares of no-par common stock for $40 per share. Which of the following shows how the stock issue will affect Graham's financial statements on January 1, Year 1?

Assets = 8000 Common Stock = 8000 Statement of CF = 8000 FA There is no paid-in excess account associated with no-par common stock. Instead, the total amount of the stock issue is placed in the common stock account. In this case, assets (cash) increase and stockholders' equity (common stock) increases by $8,000 ($40 per share × 200 shares). As with other stock issues, issuing no-par common stock does not affect the income statement. The total cash inflow is a financing activity.

On January 1, Year 1 Graham Corporation issued 200 shares of $5 par value common stock for $40 per share. Which of the following journal entries shows how this event would be recorded on January 1, Year 1?

Cash - 8000 debit; Common stock - 1000 credit; additional paid in capital - 7000 ...... Issuing par value common stock is an asset source transaction. Assets (cash) increase and two stockholders' equity accounts increase. Debit entries increase asset accounts and credit entries increase stockholders' equity accounts. In this case the asset account (cash) is debited, the stockholders' equity accounts (common stock and additional paid-in capital in excess of par value) are credited.

Wallace Corporation issued a 6 percent stock dividend on the 30,000 shares of stock outstanding. The par value of the common stock was $10 per share. At the time of the dividend, the market value of the stock was $40 per share. Which of the following shows the journal entry necessary to record the stock dividend?

DEBIT CREDIT R/E 72000 C/S 18000 Addl Paid in Cap excess 54000 Number of shares: 30,000 shares × .06 dividend = 1,800 shares Amount to transfer from retained earnings: 1,800 shares × $40 per share = $72,000 Par value of stock issue: 1,800 shares × $10 par value = $18,000 Additional paid-in capital in excess of par: 1,800 shares × ($40 market value - $10 par) = $54,000 A stock dividend is a claims exchange event. The retained earnings account decreases and the common stock and additional paid-in capital in excess of par value accounts increase. Debit entries decrease stockholders' equity and credit entries increase stockholders' equity. In this case, the stockholders' equity account (retained earnings is debited) and the stockholders' equity accounts (common stock and additional paid-in capital in excess of par) are credited.

On November 1, Year 1 Dixon Company paid $20 per share to buy back 1,000 shares of its $8 par value common stock. The stock had originally sold for $15. On December 15, Year 1 Dixon sold 400 shares of the treasury stock at $24 per share. Which of the following journal entries is necessary to record the sale of the treasury stock on December 15, Year 1?

Debit Credit Cash 9600 Treasury stock 8000 PI cap. T Stock 1600 Selling treasury stock is an asset source transaction. Assets (cash) increase and treasury stock decreases. Note that treasury stock is a contra equity account. As a result, decreasing the treasury stock account increases total stockholders' equity. Since the treasury stock was sold for $4 ($24 sales price - $20 acquisition price) more than it cost, the company must recognize $1,600 ($4 × 400 shares) of additional paid-in capital from treasury stock transactions. Debit entries increase asset accounts and credit entries increase equity accounts. In this case, the asset account (cash) is debited and the stockholders' equity accounts (treasury stock and paid-in capital from treasury stock transactions) are credited.

On the balance sheet, paid-in excess accounts are normally shown after the retained earnings account. This statement is True False

FALSE Normally par value, stated value and no-par value accounts are shown first. Any associated paid-in excess accounts are shown next. The total of all of these accounts is shown under the title "Total Paid-in Capital". The balance in retained earnings is then shown after the Total Paid-in Capital.

Treasury stock is listed as the first account under the stockholders' equity section of the balance sheet. This statement is True False

FALSE Normally, treasury stock is listed as the last account shown under the stockholders' equity section of the balance sheet. The only item shown after the treasury stock account balance is the summary heading "Total Stockholders' Equity".

What is true regarding the difference in the PE ratio and the forward PE ratio? forward PE is always smaller than PE PE is based on future earnings PE is based on GAAP earnings forward PE is based on an estimate of earnings

forward PE is always smaller than PE PE is based on future earnings PE is based on GAAP earnings ***forward PE is based on an estimate of earnings