Chapter 8 pt 2 Smartbook

Which of the following statements are true?

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

Cumulative dividends ______.

- are dividends that accumulate for future payment when a company fails to pay a periodic dividend - may also be called dividends in arrears

Book value per share is ______.

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

The par value represents the ______.

- minimum amount of assets that must be retained in the company as protection for creditors - maximum liability of the investors

True or false: The financial statement effects of issuing stated value stock are identical to the financial statement effects of issue par value stock.

True

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 legal capital is $ _________.

150,000

Which financial statement is affected on both the date of declaration and the payment date of a dividend?

Balance Sheet

Which of the following statements is true?

Corporations are not legally required to declare cash dividends.

The maximum number of shares of stock corporations are legally permitted to issue is the ______ number of shares.

authorized

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

common

A corporation becomes legally obligated to make a cash dividend on the _______ date.

declaration

Corporations become legally obligated to pay dividends on the ______.

declaration date

When a corporation issues a stock divided, Retained Earnings ______.

decreases and Paid-in Capital increases

Paying a previously declared cash dividend ______.

decreases both liabilities and assets

The issue of no-par common stock does not affect the ______.

income statement

Declaring a cash dividend ______.

increases liabilities and decreases stockholders' equity

Corporations normally list ________ stock before ___________ stock in the stockholders' section of the balance sheet.

preferred, common

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

record

A 2-for-1 stock split is likely to ______.

reduce the stock price to about 1/2 of the pre-split value

A company repurchased 2,000 shares of its $10 par value stock for $15 per share. Under the most common method of accounting for treasury stock, ______.

the entire $30,000 will be recognized in Treasury Stock

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

treasury

Cloud Company has 5,000 shares of 6%, $20 par value noncumulative preferred stock outstanding. The company also has 8,000 shares of $10 par value common stock outstanding. Cloud paid no dividends in Year 1 or Year 2. In Year 3, Cloud paid $30,000 of cash dividends. What was the amount of dividends paid to preferred stockholders?

$6,000 Reason: 5,000 shares × $20 × 6% = $6,000 annual preferred dividend. Since the preferred stock is noncumulative, there are no dividends in arrears.

Which of the following statements are true?

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

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

- entire amount of the proceeds is placed into the Common Stock account. - cash inflow is classified as a financing activity

A stock split ______.

- has no effect on cash flow - increases the number of shares outstanding - decreases the market value per share

Stock dividends ______.

- make stock more affordable - decrease the market value per share

When a corporation buys treasury stock, the ______.

- number of shares of stock outstanding decreases - number of shares of stock authorized is not affected

Treasury stock is ______ on the balance sheet.

contra equity

Stock dividends are based on the number of shares ______.

outstanding

A company's financial statements are not impacted on the date of ______ of a cash dividend.

record

No-par stock may have a(n) _______________ value which is an arbitrary amount established by the board of directors to the stock

stated

Conceptually, the reverse of issuing stock is purchasing _______stock.

treasury

1 Par Value Preferred Stock 2 Stated Value Common Stock 3 Class B Common Stock 4 Paid-in Capital in Excess of Par Value Preferred Stock 5 Paid-in Capital in Excess of Stated Value Common Stock 6 Retained Earnings

...

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

False

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

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

Cloud Company has 5,000 shares of 6%, $20 par value cumulative preferred stock outstanding. The company also has 8,000 shares of $10 par value common stock outstanding. Cloud paid no dividends in Year 1 or Year 2. In Year 3, Cloud paid $30,000 of cash dividends. What was the amount of dividends paid to common stockholders?

$12,000 Reason: 5,000 shares × $20 x 6% = $6,000 annual × 3 years = $18,000 due to preferred stockholders. $30,000 total dividend - $18,000 preferred stock distribution = $12,000 common stock distribution.

Cloud Company has 5,000 shares of 6%, $20 par value cumulative preferred stock outstanding. The company also has 8,000 shares of $10 par value common stock outstanding. Cloud paid no dividends in Year 1 or Year 2. In Year 3, Cloud paid $30,000 of cash dividends. How much of the distributions will go to the preferred stockholders?

$18,000 Reason: 5,000 shares × $20 x 6% = $6,000 annual preferred dividend. The preferred stockholders will receive two years of dividends that are in arrears plus the dividend due for the current year for a total of $18,000 ($6,000 × 3 years).

Which of the following statements are true?

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

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 that has a current market value of $5.20 per share. Based on this The book value per share of the stock is ______.

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

Fontaine Incorporated issued a 10% stock dividend on its $20 par value common stock. On the distribution date, there were there were 12,000 shares of stock issued and 10,000 shares of stock outstanding. The market value of the stock was $25. As a result of the stock dividend, the amount of additional paid-in capital in excess of par value increased by ______.

$5,000. Reason: $25 market value - $20 par value = $5 additional paid-in capital in excess of par value × 1,000 shares = $5,000.

Base Line Incorporated is authorized to issue 50,000 shares of $15 stated value preferred 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 showed ______ of paid-in-capital in excess of stated value.

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

Preferred stock ______.

- has a liquidation value that, in case of bankruptcy, is paid before assets are distributed to common stockholders - dividends are paid before dividends are distributed to common stockholders

Which financial statements are NOT affected by the declaration of a dividend?

- income statement - statement of cash flows

Stock dividends have no effect on ______.

- ownership interest in assets - net income - the statement of cash flows - total assets

Stanley Company paid $25 per share to purchase 200 shares of its $10 par value common stock. If Stanley resells 100 shares of the treasury stock for $30 per share, Stanley will _______

- report the $3,000 as a financing activity - recognize a $500 increase in additional paid-in capital from treasury stock

If a company reissues its Treasury Stock, its ______ increase(s).

- stockholders' equity - total assets

Base Line Incorporated is authorized to issue 50,000 shares of $15 stated value preferred 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 - cash flow from financing activities increased by $240,000 - total assets increase by $240,000

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

Stock splits have no effect on ______.

- total stockholders' equity - total liabilities - total assets

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

Authorized stock- The maximum number of shares a company can legally issue Issued stock- The total number of share 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

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Recognizing the full amount paid in the treasury stock account is called the _____________________________ of accounting for treasury stock.

cost method

The date of record for a cash dividend ______.

has no effect on the financial statements