Financial Accounting Final Exam

Common shareholders cannot receive a dividend unless the current-year preferred dividend has been paid. If a corporation has outstanding cumulative preferred stock, common shareholders cannot receive a dividend until all preferred dividends in arrears have been paid.

True

Corporations are not legally obligated to pay dividends to stockholders - not even preferred stockholders - until the Board of Directors declares a dividend.

True

Discount or premium is not an asset or liability separable from the related note. A discount or premium should therefore be reported in the balance sheet as a direct reduction of or addition to the face amount of the note.

True

If a company uses straight line amortization for bond premiums or discounts, interest expense is the same every year of he term of the bonds.

True

The face value of a bond is not affected by bond premium or discount amortization, nor by interest payments.

True

Treasury stock is not an asset. It is reported as a contra-equity account and decreases the total number of shares outstanding and total stockholders' equity.

True

When a bond is issued for less than its par (face) value, the rate of interest demanded by the market is higher than the rate stated on the bond.

True

When a stock split is effected, no formal journal entry is necessary because no capitalization of retained earnings occurs.

True

Dividends are not always paid in cash. Some companies prefer to issue _________________- wherein they distribute additional shares of stock to the stockholders.

stock dividends

A corporation may also reduce the market price of its stock through a _______________

stock split

The amount of the discount recognized as expense each account period is equal and is referred to as using _____________________ amortization

straight-line

Holder of _________________ have lower priority class the other creditors

subordinated debentures

When a corporation buys back some of its issued stock from the public, it is called

treasury stock

_________________ also called debentures are issued based on the general strength of the borrower's credit

unsecured bonds

Holders of _____________ have equal claims.

unsubordinated debentures.

An interest rate the fluctuates up or down during the loan period

variable interest rate

Liabilities that can be exchanged at the option of the bond holder for common stock or some other specified ownership interest

Convertible bonds

A separate legal entity created by the authority of a state government

Corporation

Which form of business organization is not a legal entity separate from its owners?

Corporation

Which form of business organization is subject to double-taxation?

Corporation

If a corporation is unable to pay the preferred dividend in any year, the dividend begins to accumulate and is not lost.

Cumulative dividends

A stock split does not change the par value of shares.

False

Amortization of bond premiums increase interest expense, and amortization of bond discounts decrease interest expense.

False

Companies that issue bonds are required to pay the face value of the bonds at maturity and to make fluctuating periodic interest payments based on the market interest rate.

False

Dividends in arrears are preferred dividends that were not declared in prior years. Dividends in arrears arise with a non-par stock.

False

If the market rate is more than the stated rate, bonds are issued at premium (in excess of par).

False

Preferred stock carries voting rights that gives the preferred stockholders greater power in the corporation's decision-making process than common stockholders have.

False

The par value of a stock is the price at which the shares are sold to the public

False

Unamortized discount on a bond normally has a credit balance.

False

For a bond issue that sells for less than its par value, the market rate of interest is

Higher than the rate stated on the bond

An appropriation of retained earnings has no effect on total retained earnings.

True

Most bonds also require the issuer to make cash interest payments based on a __________________________ at regular intervals over the life of the bond.

stated interest rate

_________________ is an arbitrary amount assigned by the bond of directors to the stock.

stated value

Ownership interprets in corporations are normally evidenced by ___________________-

stock certificates

Which of the following is considered an advantage of the corporate form of business organization?

Ability to raise capital, continuity of existence, ease of transferability of ownership and limited liability

Where is treasury stock reported on a corporation's balance sheet?

As a deduction from total stockholders' equity, following Retained Earnings

Which of the following statements is a reason why a company would buy their own stock?

Because management believes the market price of stock is undervalued, to have stock available to issue to employees in sock option plans, and to avoid a hostile takeover

Many companies borrow money directly from the public by selling ___________________.

Bond certificates

Some liabilities are short term while others are _________________ liabilities meaning the debt agreements vary with respect to requirements for paying interest changes and reaping principal.

Long-term

The rate from where market conditions that influence the effective interest rate are referred to as

Market interest rate

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

Market value

A common type of secure bond is a _________________.

Mortgage bond

What is the name for the type of secured bond that requires a pledge of a designated piece of property in case of default?

Mortgage bond

Which of the following terms designates the maximum number of shares of stock that a corporation may issued

Number of shares authorized

Total issued stock minus treasury stock is called

Outstanding stock

____________________ allow persons to share their talents and the risks and rewards of a business ownership.

Partnerships

Many corporations issue ____________ in addition to common stock, in which the holders gain certain privileges.

Preferred stock

The _______________ is the most common reported measure of a company's value. It is the company market price per share of stock divided by the company annual earnings per share.

Price-earnings ratio

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

Reduces the amount of interest expense each year

Grant their holders a legal claim on specific identifiable assets should the issuer default.

Secure bonds

What type of bonds in a particular bond issuance will not all mature on the same date?

Serial Bonds

___________________ mature at a specified intervals throughout the life of the total issue

Serial bonds

__________________ mature on a specific date in the future.

Term bonds

The reason bonds are sometimes issued at a premium is:

The stated rate of interest rate is higher than the rate being paid on investments in the securities market with comparable risk.

A high price-earnings ratio generally means that investors are optimistic about a company's future growth.

True

A stock dividend does not change the par value of shares.

True

Repaying a portion of the principal with regular payments that also include interest is often called

amortization

Buying bonds for less than their face value is referred to as a

bond discount

When bonds are sold for more than their face value, the difference between the amount received and the face value is called a

bond premium

The buyer of a bond is referred to as the __________________.

bondholder

The difference between the call price and the face value is commonly called the ____________________.

call premium

To encourage investors to buy callable bonds, the ___________________ normally exceeds the face value of the bonds.

call price

Allow the issuing company to redeem the bond debt before the maturity date.

callable bonds

Also referred to as the book value of a bond

carrying value

Lenders frequently require borrowers to pledge a designated asset as __________________ for loans

collateral

All corporation issue _______________

common stock

Because of ______________ of existence, many corporations formed in the 1800's still thrive today.

continuity

The payment of a previously declared cash dividend will

decrease assets and decrease liabilities

The discount resulting from the determination of a note payable's present value should be reported on the balance sheet as a(n)

direct deduction from the face amount of the note

Cumulative dividends that have not been paid are called

dividends in arrears.

The actual rate of interest that you must pay is called

effective interest rate

A more accurate recognition pattern can be accomplished by using an approach called

effective interest rate method

The amount due at maturity is the _________________ of the bond.

face value

Bonds may provide companies increased earnings through ________________.

financial leverage

An interest rate that remains constant during the term of the loan.

fixed interest rate

Loans that require payments of principal and interest at regular intervals are typically represented by

installment notes

Amortized stock that has been sold to the public is called

issued stock

The seller of a bond is referred to as the _______________.

issuer

The benefit of __________________ is one of the most significant reasons limit liability companies and corporations are so popular.

limited liability

A ________________________ enables a company to buy or repay funds as needed.

line of credit

___________________ multiplied by the number of shares of stock issued represents the minimum amount of assets that must be retained in the company as protection for creditors.

par value

Prudent partners minimize misunderstandings by hiring attorneys to prepare a ___________________- which defines the responsibilities of each partner and describes how income or lowest will be divided.

partnership agreement

Creditors often obtain additional protection by requiring _____________________-in loan agreements.

restrictive covenants

Owned by a single individual who is responsible for making business and profit distribution decisions

sole proprietorship