Accounting 205 Chapter 11 Review

Accumulated Other Comprehensive Income

This account includes the cumulative amount of all previous items reported as other comprehensive income.

Corporation

A company organized as a separate legal entity, with most of the rights and privileges of a person.

Privately held corporation

A corporation that has only a few stockholders and whose stock is not available for sale to the general public.

Publicly held corporation

A corporation that may have thousands of stockholders and whose stock is traded on a national securities market.

Treasury stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use.

Deficit

A debit balance in Retained Earnings.

Dividend

A distribution by a corporation to its stockholders on a pro rata (proportional to ownership) basis.

Charter

A document that describes a corporation's name and purpose, types of stock and number of shares authorized, names of individuals involved in the formation, and number of shares each individual has agreed to purchase.

Cumulative dividend

A feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends.

Return on common stockholders' equity (ROE)

A measure of profitability from the stockholders' point of view; computed by dividing net income minus preferred dividends by average common stockholders' equity.

Payout ratio

A measure of the percentage of earnings a company distributes in the form of cash dividends to common stockholders.

Cash dividend

A pro rata (proportional to ownership) distribution of cash to stockholders.

Stock dividend

A pro rata (proportional to ownership) distribution of the corporation's own stock to stockholders.

Par value stock

Capital stock that has been assigned a value per share in the corporate charter.

Outstanding stock

Capital stock that has been issued and is being held by stockholders.

Preferred stock

Capital stock that has contractual preferences over common stock in certain areas.

No-par value stock

Capital stock that has not been assigned a value in the corporate charter.

Retained earnings restrictions

Circumstances that make a portion of retained earnings currently unavailable for dividends.

Retained earnings

Net income that a company retains in the business.

Dividends in arrears

Preferred dividends that were supposed to be declared but were not declared during a given period.

Legal capital

The amount of capital that must be retained in the business for the protection of corporate creditors.

Authorized stock

The amount of stock that a corporation is authorized to sell as indicated in its charter.

Stated value

The amount per share assigned by the board of directors to no-par stock.

Paid-in capital

The amount stockholders paid in to the corporation in exchange for shares of ownership.

Payment date

The date cash dividend payments are made to stockholders.

Declaration date

The date the board of directors formally authorizes the dividend and announces it to stockholders.

Record date

The date when the company determines ownership of outstanding shares for dividend purposes.

Stock split

The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share.

In the stockholders' equity section, the cost of treasury stock is deducted from: (a) total paid-in capital and retained earnings. (b) retained earnings. (c) total stockholders' equity. (d) common stock in paid-in capital.

a) total paid-in capital and retained earnings The cost of treasury stock is deducted from total paid-in capital and retained earnings. The other choices are therefore incorrect.

Which of these statements about stock dividends is true? (a) Stock dividends reduce a company's cash balance. (b) A stock dividend has no effect on total stockholders' equity. (c) A stock dividend decreases total stockholders' equity. (d) A stock dividend ordinarily will increase total stockholders' equity.

b) a stock dividend has no effect on total stockholders' equity A stock dividend moves amounts from retained earnings to paid-in capital and has no effect on stockholders' equity or cash. The other choices are therefore incorrect.

A major disadvantage of a corporation is: (a) limited liability of stockholders. (b) additional taxes. (c) transferable ownership rights. (d) None of the above.

b) additional taxes Additional taxes are a disadvantage of a corporation. The other choices are advantages of a corporation.

Thomas is nearing retirement and would like to invest in a stock that will provide a good steady income. Thomas should choose a stock with a: (a) high current ratio. (b) high dividend payout. (c) high earnings per share. (d) high price-earnings ratio.

b) high dividend payout

ABC Corp. issues 1,000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, credits are made to: (a) Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $2,000. (b) Common Stock $12,000. (c) Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000. (d) Common Stock $10,000 and Retained Earnings $2,000. 5. Treasury stock may.

c) Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000. Common Stock should be credited for $10,000 and Paid-in Capital in Excess of Par Value should be credited for $2,000. The stock is par value stock, not stated value stock, and this excess is contributed, not earned, capital. The other choices are therefore incorrect.

The return on common stockholders' equity is usually increased by all of the following, except: (a) an increase in the return on assets ratio. (b) an increase in the use of debt financing. (c) an increase in the company's stock price. (d) an increase in the company's net income.

c) an increase in then company's stock price c) an increase in then company's stock price has effect on the return on common stockholders' equity. The other choices are incorrect because (a) an increase in a firm's return on assets, (b) an increase in a firm's use of debt financing, and (c) an increase in a firm's net income will all increase the return on common stockholders' equity.

Which of these is NOT a major advantage of a corporation? a) Separate legal existence b) continuous life c) government regulations d) transferable ownership rights

c) government regulations Government regulations are a disadvantage of a corporation.

In the stockholders' equity section of the balance sheet, common stock: (a) is listed before preferred stock. (b) is added to total capital stock. (c) is part of paid-in capital. (d) is part of additional paid-in capital.

c) is part of paid-in capital Common stock is part of paid-in capital. The other choices are incorrect because common stock (a) is listed after preferred stock, (b) is not added to total capital stock but is part of capital stock, and (d) is part of capital stock, not additional paid-in capital.

U-Bet Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2017. No dividends were declared in 2015 or 2016. If U-Bet wants to pay $375,000 of dividends in 2017, common stockholders will receive: (a) $0. (c) $215,000. (b) $295,000. (d) $135,000.

d) $135,000 The preferred stockholders will receive a total of $240,000 of dividends [dividends in arrears ($80,000 × 2 years) + current-year dividends ($80,000)]. If U-Bet wants to pay a total of $375,000 in 2017, then common stockholders will receive $135,000 ($375,000 − $240,000), not (a) $0, (b) $295,000, or (c) $215,000.

Jackson Inc. reported net income of $186,000 during 2017 and paid dividends of $26,000 on common stock. It also paid dividends on its 10,000 shares of 6%, $100 par value, noncumulative preferred stock. Common stockholders' equity was $1,200,000 on January 1, 2017, and $1,600,000 on December 31, 2017. The company's return on common stockholders' equity for 2017 is: (a) 10.0%. (c) 7.1%. (b) 9.0%. (d) 13.3%.

d) 13.3% Return on common stockholders' equity is net income available to common stockholders divided by average common stockholders' equity. Net income available to common stockholders is net income less preferred dividends = $126,000 [$186,000 − (10,000 × .06 × $100)]. The company's return on common stockholders' equity for the year is therefore 9.0% [$126,000/($1,200,000 + $1,600,000)/2)], not (a) 10.0%, (c) 7.1%, or (d) 13.3%.

Entries for cash dividends are required on the: (a) declaration date and the record date. (b) record date and the payment date. (c) declaration date, record date, and payment date. (d) declaration date and the payment date.

d) declaration date and payment date Entries are required for dividends on the declaration date and the payment date, but not the record date

Which of these statements is false? (a) Ownership of common stock gives the owner a voting right. (b) The stockholders' equity section begins with paid-in capital. (c) The authorization of capital stock does not result in a formal accounting entry. (d) Legal capital is intended to protect stockholders.

d) legal capital Legal capital is intended to protect creditors, not stockholders. The other choices are true statements.

Treasury stock may be repurchased: (a) to reissue the shares to officers and employees under bonus and stock compensation plans. (b) to signal to the stock market that management believes the stock is underpriced. (c) to have additional shares available for use in the acquisition of other companies. (d) More than one of the above.

d) more than one above Treasury stock may be repurchased to reissue the shares as part of bonus and stock compensation plans, to signal to the stock market that the stock is underpriced, and to have additional shares available for use in the acquisition of other companies. Choice (a), (b), (c) are all correct, but (d) is the best answer.

Zealot Inc. has retained earnings of $500,000 and total stockholders' equity of $2,000,000. It has 100,000 shares of $8 par value common stock outstanding, which is currently selling for $30 per share. If Zealot declares a 10% stock dividend on its common stock: (a) net income will decrease by $80,000. (b) retained earnings will decrease by $80,000 and total stockholders' equity will increase by $80,000. (c) retained earnings will decrease by $300,000 and total stockholders' equity will increase by $300,000. (d) retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000.

d) retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000. A 10% stock dividend on the company's common stock will increase the number of shares issued by 10,000 (100,000 × 10%). At a market price of $30 per share, total paid-in capital will increase by $300,000 (10,000 shares × $30/share) and retained earnings will decrease by that same amount. The other choices are therefore incorrect.

If everything else is held constant, earnings per share is increased by: (a) the payment of a cash dividend to common shareholders. (b) the payment of a cash dividend to preferred shareholders. (c) the issuance of new shares of common stock. (d) the purchase of treasury stock.

d) the purchase of treasury stock The purchase of treasury stock reduces the number of shares outstanding, which is the denominator of earnings per share (EPS). With a smaller denominator, EPS is larger. The other choices are incorrect because (a) the payment of a cash dividend to common stockholders does not affect the earnings or the number of outstanding shares, so EPS will stay the same; (b) the payment of a cash dividend to preferred stockholders will reduce the amount of earnings available to the common stockholders, thus reducing EPS; and (c) the issuance of new shares of common stock would not affect earnings but will increase the number of outstanding shares, thereby reducing EPS.

Preferred stock may have priority over common stock except in: (a) dividend preference. (b) preference to assets in the event of liquidation. (c) cumulative dividends. (d) voting.

d) voting Preferred stock usually does not have voting rights and therefore does not have priority over common stock on this issue. The other choices are true statements.