Chapter 11. Proprietorships, Partnerships, and Corporations

Base Line Incorporated is authorized to issue 50,000 shares of $15 stated value common stock. On January 1, Year 1, Base Line issued 10,000 shares of the stock for $24 per share. Base Line will report ______ of cash inflow from financing activities.

$240,000 Reason: 10,000 × $24 = $240,000. Cash flow is not affected by the stated value of stock.

Fontaine Incorporated issued a 10% stock dividend on its $20 par value common stock when there were 12,000 shares issued and 10,000 shares outstanding. The market value of the stock was $25. As a result of the stock dividend retained earnings decreased ______.

$25,000. Reason: $25 market value x 10,000 shares outstanding × 10% stock dividend = $25,000 decrease in retained earnings.

Thomas Company has $120,000 of assets, $40,000 of liabilities, $50,000 of stock, and $30,000 of retained earnings. Investors own 25,000 shares of Thomas' stock with a current market value of $5.20 per share. Based on this information, the book value per share is ______.

$3.20 Reason: ($50,000 stock + $30,000 retained earnings) ÷ 25,000 shares of stock = $3.20 per share.

Base Line Incorporated is authorized to issue 50,000 shares of $15 par value common stock. On January 1, Year 1, Base Line issued 10,000 shares of the stock for $24 per share. Immediately after the issue, Base Line's balance sheet reported ______ of paid-in capital in excess of par value.

$90,000 Reason: $24 issue price - $15 par value = $9 in excess of par × 10,000 shares = $90,000.

Which of the following statements are true?

-A proprietorship is the simplest form of business organization to organize and operate. -The requirements for establishing a corporation vary from state to state.

Which of the following statements are true of stockholders?

-Common stockholders have a right to vote for the board of directors. -The same company can have more than one type of common stock. -Common stockholders may share in the distributions of profits.

Which of the following statements are true?

-Investors tend to react more to earnings potential than historical earnings reports. -A decrease in earnings can sometimes lead to an increase in stock prices.

Which of the following statements are true of taxes?

-Limited liability companies (LLCs) offer many of the benefits of corporate ownership, yet are, in general, taxed as partnerships. -S Corporations are taxed as proprietorships or partnerships.

Which of the following statements are true of proprietorship?

-Owner withdrawals are shown in the capital statement of a proprietorship. -The balance sheet of a proprietorship contains a single Owner's Capital account.

Which of the following statements are true?

-Preferred stock dividends in arrears must be paid before dividends can be distributed to common stockholders. -If a company skips a dividend on noncumulative preferred stock, the dividend is lost forever.

The issue of no-par common stock affects the ______.

-Statement of Cash Flows -Balance Sheet

Which of the following statements are true?

-The number of shares outstanding may be less than the number of shares issued. -Treasury stock is stock that a company has repurchased from its investors.

Which of the following statements are true?

-To minimize the amount of assets that owners must maintain in the business, many corporations issue stock with very low par values. -Many states allow corporations to issue no-par stock.

Which of the following statements are true of stocks?

-Trading on a stock exchange is limited to the stockbrokers who are members of the exchange. -The stock of closely held companies is not sold on major stock exchanges.

Book value per share is ______.

-calculated by dividing total stockholders' equity by the number of shares of stock owned by investors -measured in historical dollars

When a company issues no-par common stock, the ______.

-cash inflow is classified as a financing activity -entire proceeds are recorded in the Common Stock account Reason: Issuing no-par common stock increases cash and common stock by the same amount. It is also a cash inflow from financing activities.

A stock split will ______.

-decrease the market value per share -increase the number of shares outstanding -not affect cash flow

Declaring a dividend ______.

-does not affect the income statement -decreases retained earnings -increases liabilities

Cumulative dividends ______.

-may also be called dividends in arrears -accumulate for future payment when unpaid

Transferring the ownership of a proprietorship is difficult because ______.

-most proprietorships are owner operated -a buyer must purchase the entire business

Par value ______.

-multiplied by the number of shares of stock issued represents legal capital -represents the maximum liability of the investors

When a corporation buys treasury stock, the number of shares of stock ______.

-outstanding decreases -authorized is not affected

The payment of a previously declared dividend does not affect the ______,

-statement of stockholders' equity -income statement

Base Line Incorporated is authorized to issue 50,000 shares of $15 par value common stock. On January 1, Year 1, Base Line issued 10,000 shares of the stock for $24 per share. As a result of the stock issue, ______.

-the income statement was not affected -total assets increased by $240,000

Base Line Incorporated is authorized to issue 50,000 shares of $15 stated value common stock. On January 1, Year 1, Base Line issued 10,000 shares of the stock for $24 per share. As a result of the stock issue ______.

-total assets increased by $240,000 the income statement was not affected -cash flow from financing activities increased by -$240,000

Common stockholders have the right to ______.

-vote on significant matters that affect the corporate charter -share in the distribution of profits -participate in the election of directors

Match the account title shown in the right column with the order in which they are presented in the stockholders' equity section of a balance sheet. Use the number 1 to represent the account title shown first, the number 2 to represent the second title, and so on.

1.) Par Value Preferred Stock2.) Stated Value Common Stock3.) Class B Common Stock4.) Paid-in Capital in Excess of Par Value Preferred Stock5.) Paid-in Capital in Excess of Stated Value Common Stock6.) Retained Earnings

Given net earnings of $4,500,000; earnings per share of $1.73; sales of $72,000,000; and common stock with a current market price of $24.22 per share, the price-earnings ratio is

14

If a company has net earnings of $6,300,000; earnings per share of $3.71; sales of $108,000,000; dividend per share of $0.48; and common stock with a current market price of $71.37 per share, what is its price-earnings ratio?

19.2 Reason: $71.37 ÷ $3.71 = 19.2

Which of the following is not normally included in the articles of incorporation?

A forecast of projected profitability

Match the terms shown in the left column with the definitions shown in the right column.

Authorized Stock - The maximum number of shares a company can legally issue Issued Stock - The total number of shares the company has sold to investors Outstanding Stock - The number of shares currently owned by investors Treasury Stock - The number of shares of stock that a company has repurchased from its investors

The greatest opportunity to raise capital is available to ______.

Corporations Reason: Because corporations have millions of owners, they have the opportunity to raise large amounts of capital.

True or false: The stated value of a share of stock is established by the federal government.

False

True or false: Partnerships and proprietorships are usually managed by their owners.

True

True or false: Relationships between shareholders are critically important when assessing the capacity to control a corporation through stock ownership.

True

The departure of owner(s) does not terminate ______.

a corporation

A restriction on the amount of retained earnings available to distribute as dividends is often called a(n)

appropriation

If stock ownership is concentrated in the hands of a few persons, a company is ___________ held. The greater its number of stockholders, the more _____________ held a company is. (Enter only one word per blank.)

closely widely

The greatest potential for rewards when a corporation prospers rests with ______ stockholders.

common

The benefit of limited liability is a significant reason for the popularity of the ______ form of business structure.

corporate

It is easiest to transfer ownership in a ______.

corporation

Continuity of existence is an advantage of ______.

corporations

Stock certificates are used as evidence of ownership in ______.

corporations

The ability to generate billions of dollars of capital by pooling the resources of millions of owners through public stock and bond offerings is only available to ______.

corporations

The journal entry to record an appropriation of retained earnings will include a _____________ (debit/credit) to the appropriated retained earnings account, a ____________(debit/credit) to the retained earnings account.

credit debit

Stocks are traded ex-dividend after the ______.

date of record

The journal entry to record the cash payment for a previously declared dividend includes a debit to _________ _________ and a credit to ____________.

dividends payable cash

Issuing a stock dividend is a(n) ______ transaction.

equity exchange

Double taxation refers to the fact that ______.

income is taxed first at the corporate level and a second time when stockholders receive dividends

A chief advantage of the corporate form of business is ______.

limited liability

The price an investor must pay to purchase a share of stock is called the

market value

Companies that had paid dividends in the past are ______ likely to pay dividends in the future.

more

Corporation are ______ required to declare dividends.

not

In the stockholders' equity section of the balance sheet, ___________ stock is normally listed before __________ stock.

preferred common

The party that owns the stock on the date of ______ is legally entitled to a cash dividend.

record

In order to pay dividends, companies must have both sufficient cash and

retained earnings

An arbitrary amount established by the board of directors of a corporation assigned to no-par stock is called

stated value

The highest level of organizational authority in a corporation is represented by ______,

stockholders

A stock split has no affect on ______.

total assets total liabilities stockholders' equity net income

When a corporation purchases its own stock, the stock purchased is called ______ stock.

treasury

True or false: Acme Company reported significant growth in 2020 but it was less growth than analysts expected. Under these conditions, Acme's stock may decline.

true

Distributions to owners of proprietorships are called

withdrawals