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Ch10

Student: ___________________________________________________________________________

1. Assets plus liabilities equal stockholders' equity.

True False

2. Paid-in Capital is the amount stockholders have invested in the company.

True False

3. Retained Earnings is the amount stockholders have invested in the company.

True False

4. Angel investors are investors that focus on companies at or near bankruptcy.

True False

5. All publicly held corporations are regulated by the Securities and Exchange Commission.

True False

6. Limited liability means that even in the event of bankruptcy, stockholders in a corporation can lose no more
than the amount they invested in the company.

True False
7. Owners in a sole proprietorship or a partnership can be held personally liable for debts the company has
incurred, over and beyond the investment they have made.

True False
8. A corporation has lower taxes and less paperwork relative to sole-proprietorships and partnerships.

True False

9. An S Corporation allows a company to enjoy limited liability as a corporation, but tax treatment as
a partnership.

True False
10. Authorized stock is the number of shares that have been sold to

investors. True False

11. Par value is the legal capital per share of stock that's assigned when the corporation is first

established. True False


12. Par value has a direct relationship to the market value of the common

stock. True False

13. A company credits Additional Paid-in Capital for the portion of the cash proceeds above par value received
for the issuance of stock.

True False
14. In the event a corporation is dissolved, common stockholders receive preference over
preferred stockholders in the distribution of assets.

True False
15. Convertible preferred stock allows the stockholder to exchange shares of preferred stock for common
stock at a specified conversion ratio.

True False
16. Cumulative preferred stock means that dividends accumulate interest during the year.

True False

17. We usually record preferred stock as equity and report it in the stockholders' equity section of the balance
sheet just above common stock.

True False
18. Treasury stock is the repurchase of a company's own issued

stock. True False

19. If a company purchases shares of another company, it records this transaction as treasury stock.

True False

20. Stock repurchases reduce the number of shares outstanding, thereby increasing earnings per

share. True False

21. We record treasury stock at the cost of the shares reacquired.

True False

22. Treasury stock is a contra-equity account since treasury stock increases total stockholders' equity.

True False

23. When we reissue treasury stock, we report the difference between its cost and the cash received as
an increase/decrease in additional paid-in capital.

True False
24. Retained earnings represent the earnings retained in the corporation - earnings not paid out as dividends
to stockholders.

True False
25. The amount of retained earnings equals net income minus dividends for the current year.

True False

26. If a company has expenses that are more than revenues, the net loss decreases retained

earnings. True False

27. Dividends are paid on all shares issued by the company including treasury

stock. True False

28. Total assets, total liabilities, and total stockholders' equity do not change as a result of a stock dividend.

True False

29. Small stock dividends are recorded by debiting Retained Earnings for the par value per share.

True False

30. No journal entry is made to record a stock

split. True False

31. A stock split has no effect on the total of any account in stockholders' equity.

True False

32. Common stock is listed before preferred stock in the balance

sheet. True False

33. The number of shares outstanding is equal to the number of shares issued minus the number of
shares bought back.

True False
34. We can estimate the average purchase cost of treasury stock per share by dividing the treasury stock
balance by the number of shares repurchased.

True False
35. The statement of stockholders' equity shows how each equity account changed during the year.

True False

36. The stockholders' equity section of the balance sheet shows how each equity account changed during
the year.

True False
37. The return on equity measures the ability of company management to generate earnings from the
resources that owners provide.

True False
38. We compute the return on equity ratio by dividing net income by ending stockholders' equity.

True False

39. Earnings per share (EPS) measures the net income earned per share of common stock

outstanding. True False

40. We calculate earnings per share as net income divided by the average shares outstanding during the period.

True False

41. Earnings per share is useful in comparing earnings performance across companies.

True False

42. We calculate the PE ratio as the stock price divided by earnings per share so that both stock price and
earnings are expressed on a per share basis.

True False
43. Which of the following accounts is not reported in the stockholders' equity section of the balance sheet?

A. Treasury Stock.
B. Common Stock.
C. Sales Revenue.
D. Retained Earnings.
44. Which of the following stages of equity financing comes last in the traditional order of progression?

A. Investment by friends and family of the founders.


B. Investment by the founders of the business.
C. Initial public offering (IPO).
D. Outside investment by "angel" investors and venture capital firms.
45. In terms of total sales, assets, and earnings, the dominant form of business organization is the:

A. Sole proprietorship.
B. Partnership.
C. Corporation.
D. Limited liability company (LLC).
46. Common stockholders usually have all of the following rights except:

A. To receive dividends when declared.


B. To share in the distribution of assets.
C. To elect board of directors.
D. To participate in the day-to-day operations.
47. Which of the following is a reason that a corporation would prefer to issue stock instead of bonds?

A. Option a
B. Option b
C. Option c
D. Option d
48. Advantages of the corporate form that have led to the growth of this form of business ownership include all
of the following except:

A. Ease of raising capital.


B. Low government regulation.
C. Limited liability.
D. Lack of mutual agency.
49. Advantages of the corporate form of business include which of the following?
I. Double taxation
II. Ability to raise capital
III. Lack of mutual agency
IV. More paperwork
V. Limited liability

A. Option a
B. Option b
C. Option c
D. Option d
50. Which of the following statements regarding the corporate form of business is correct?

A. Option a
B. Option b
C. Option c
D. Option d
51. The disadvantages of the corporate form of business include:

A. Lack of mutual agency.


B. Additional taxes.
C. Limited liability.
D. Ability to raise capital.
52. The correct order from the smallest number of shares to the largest number of shares is:

A. Authorized, issued, and outstanding.


B. Outstanding, issued, and authorized.
C. Issued, outstanding, and authorized.
D. Issued, authorized, and outstanding.
53. Outstanding common stock refers to the total number of shares:

A. Issued.
B. Issued plus treasury stock.
C. Issued less treasury stock.
D. Authorized.
54. Authorized common stock refers to the total number of shares:

A. Outstanding.
B. Issued.
C. Issued and outstanding.
D. That can be issued.
55. Outstanding common stock is:

A. Stock that is performing well on the New York Stock Exchange.


B. Stock that has been authorized by the state for issue.
C. Stock issued plus treasury stock.
D. Stock in the hands of stockholders.
56. Issued stock refers to the number of shares:

A. Outstanding plus treasury shares.


B. Authorized.
C. In the hand of stockholders.
D. That may be issued under state law.
57. The par value of shares issued is normally recorded in the:

A. Additional Paid-in Capital account.


B. Common Stock account.
C. Retained Earnings account.
D. Treasury Stock account.
58. The par value of common stock represents:

A. The legal capital per share of stock assigned when the corporation was first established.
B. The liquidation value of a share.
C. The market value of a share of stock.
D. The amount received when the stock was issued.
59. If a company issues 1,000 shares of 1 par value common stock for $30 per share, what would be the
effect on the accounting equation?

A. Option a
B. Option b
C. Option c
D. Option d
60. When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal
entry for this issuance would include:

A. Option a
B. Option b
C. Option c
D. Option d
61. Jade Jewelers issued 15,000 shares of $1 par value stock for $20 per share. What is true about the
journal entry to record the issuance?

A. Option a
B. Option b
C. Option c
D. Option d
62. South Beach Apparel issued 10,000 shares of $1 par value stock for $5 per share. What is true about the
journal entry to record the issuance?

A. Option a
B. Option b
C. Option c
D. Option d
63. Hayes Corporation issues 100 shares of its $1 par value common stock for $15 per share. The entry to
record the issuance will not include a:

A. Option a
B. Option b
C. Option c
D. Option d
64. Preferred stock is called preferred because it usually has two preferences over common stock.
These preferences relate to:

A. Dividends and voting rights.


B. Par value and dividends.
C. The preemptive right and voting rights.
D. Dividends and distribution of assets if the corporation is dissolved.
65. Preferred stock:

A. is always recorded as a liability.


B. is always recorded as part of stockholders' equity.
C. can have features of both liabilities and stockholders' equity.
D. is not included in either liabilities or stockholders' equity.
66. Which of the following financing alternatives has the highest preference of payment in a case where
the company liquidates its assets?

A. Common Stock.
B. Preferred Stock.
C. Bonds.
D. They have equal preference.
67. Which of the following is not a potential feature of preferred stock?

A. Convertible.
B. Redeemable.
C. Cumulative.
D. They all are potential features of preferred stock.
68. Which of the following has the highest expected return to the investor?

A. Common Stock.
B. Preferred Stock.
C. Bonds.
D. They all have similar expected returns.
69. A company issued 1,000 shares of $1 par value preferred stock for $5 per share. What is true about the
journal entry to record the issuance?

A. Option a
B. Option b
C. Option c
D. Option d
70. The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2011. All
remaining shares are common stock. The company was not able to pay dividends in 2011, but plans to
pay dividends of $18,000 in 2012. Assuming the preferred stock is cumulative, how much of the $18,000
dividend will be paid to preferred stockholders and how much will be paid to common stockholders in
2012?

A. Option a
B. Option b
C. Option c
D. Option d
71. The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2011. All
remaining shares are common stock. The company was not able to pay dividends in 2011, but plans to pay
dividends of $18,000 in 2012. Assuming the preferred stock is noncumulative, how much of the $18,000
dividend will be paid to preferred stockholders and how much will be paid to common stockholders in
2012?

A. Option a
B. Option b
C. Option c
D. Option d
72. California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2011.
All remaining shares are common stock. The company was not able to pay dividends in 2011, but plans to
pay dividends of $100,000 in 2012. Assuming the preferred stock is cumulative, how much of the $100,000
dividend will be paid to preferred stockholders and how much will be paid to common stockholders in
2012?

A. Option a
B. Option b
C. Option c
D. Option d
73. California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of
2011. All remaining shares are common stock. The company was not able to pay dividends in 2011, but
plans to pay dividends of $100,000 in 2012. Assuming the preferred stock is noncumulative, how much
of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common
stockholders in 2012?

A. Option a
B. Option b
C. Option c
D. Option d
74. Treasury Stock is normally reported as:

A. A reduction of total stockholders' equity.


B. An asset account.
C. A liability account.
D. An expense account.
75. When treasury stock is resold at a price above cost:

A. A gain account is credited.


B. A loss is reported.
C. A revenue account is credited.
D. Additional Paid-in Capital is increased.
76. When treasury stock is resold at a price below cost:

A. Additional Paid-in Capital is decreased.


B. Additional Paid-in Capital is increased.
C. A gain is reported on the income statement.
D. A loss is reported on the income statement.
77. When treasury stock is purchased, what is the effect on assets and stockholders' equity?

A. Assets and stockholders' equity increase.


B. Assets and stockholders' equity decrease.
C. Assets increase and stockholders' equity decrease.
D. Assets decrease and stockholders' equity increase.
78. When treasury stock is purchased, what is the effect on total stockholders' equity?

A. Decrease.
B. Increase.
C. No effect.
D. Cannot tell from the given information.
79. Treasury Stock:

A. has a normal credit balance.


B. decreases stockholders' equity.
C. is recorded as an investment.
D. increases stockholders' equity.
80. Which of the following statements about treasury stock transactions is true?

A. Option a
B. Option b
C. Option c
D. Option d
81. Which of the following is TRUE regarding the accounting for treasury stock?

A. Option a
B. Option b
C. Option c
D. Option d
82. What would be the impact on the accounting equation when a company purchases treasury stock?

A. Option a
B. Option b
C. Option c
D. Option d
83. The corporation's own stock that has been issued and then repurchased by the company is referred to as:

A. Option a
B. Option b
C. Option c
D. Option d

84. When treasury stock is resold at a gain, the difference between its cost and the cash received when resold:

A. Option a
B. Option b
C. Option c
D. Option d
85. Crossroads Mall had 100,000 outstanding shares of common stock. On June 16, 2012, Crossroads
repurchased 20,000 shares of its own stock at $30 per share. On July 23, 2012, Crossroads resold 10,000
shares at $28 per share. What net effect did the repurchase and the resell of common stock have on the
accounting equation?

A. Option a
B. Option b
C. Option c
D. Option d
86. On December 2, Coley Corp. reacquired 1,000 shares of its $2 par value common stock for $27 each.
On December 20, Coley Corp. reissued 400 shares for $15 each. Which of the following is correct
regarding the journal entry for the reissued shares?

A. Option a
B. Option b
C. Option c
D. Option d
87. On November 6, Coleman Corp. reacquired 1,000 shares of its $2 par value common stock for $27
each. On November 20, Coleman Corp. reissued 400 shares for $30 each. Which of the following is
correct regarding the effect of the journal entry for the reissued shares?

A. Option a
B. Option b
C. Option c
D. Option d
88. On February 22, Brett Corporation reacquired 200 shares of its $5 par value common stock for $25 each.
On March 15, the company reissued 70 shares for $30 each. What is true of the journal entry for reissuing
their shares?

A. Option a
B. Option b
C. Option c
D. Option d
89. Retained Earnings represent a company's:

A. Net income less dividends since the company first started.


B. Undistributed net assets.
C. Extra paid-in capital.
D. Undistributed cash.
90. The Retained Earnings balance reported on the balance sheet typically is not affected by:

A. Net income.
B. Net loss.
C. Dividends paid.
D. Stock splits.
91. The balance of Retained Earning at the end of the year represents:

A. Option a
B. Option b
C. Option c
D. Option d
92. Retained Earnings:

A. has a normal debit balance.


B. decreases stockholders' equity.
C. is equal to the balance in cash.
D. increases stockholders' equity.
93. Journal entries to record cash dividends are made on the:

A. declaration date, record date, and payment date.


B. record date and payment date.
C. delaration date and payment date.
D. delaration date and record date.
94. The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par
common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued,
and 5,000 shares held as treasury stock. What is the entry for the dividend declaration?

A. Option a
B. Option b
C. Option c
D. Option d
95. The ending Retained Earnings balance of Lambert Inc. increased by $1.5 million from the beginning of the
year. The company's net income earned during the year is $3.5 million. What is the amount of dividends
Lambert Inc. declared and paid?

A. Option a
B. Option b
C. Option c
D. Option d
96. Over the first four years of the company's life, it earned the following net income (loss): $6,000; $3,000;
$6,000, and ($2,000). If the company's ending retained earnings is $10,000 after year 4, what is the
average amount of dividends paid per year?

A. Option a
B. Option b
C. Option c
D. Option d
97. Rugby Rocks, Inc. had a Retained Earnings balance of $12,000 at December 31, 2012. The company had
an average income of $7,500 over the next 3 years, and an ending Retained Earnings balance of $15,000
at December 31, 2013. What was the total amount of dividends paid over the last three years?

A. Option a
B. Option b
C. Option c
D. Option d
98. Both cash dividends and stock dividends:

A. reduce total assets.


B. reduce total liabilities.
C. reduce total stockholders' equity.
D. reduce retained earnings.
99. The declaration and issuance of a stock dividend:

A. Does not change total assets, liabilities, or total stockholders' equity.


B. Decreases total stockholders' equity and increases common stock.
C. Decreases assets and decreases total stockholders' equity.
D. Does not change retained earnings or paid-in capital.
100.The issuer of a 100% common stock dividend (large stock dividend) to common stockholders should debit
stock dividends for an amount equal to the

A. Option a
B. Option b
C. Option c
D. Option d
101.The issuer of a 5% common stock dividend (small stock dividend) to common stockholders should
debit stock dividends for an amount equal to the

A. Option a
B. Option b
C. Option c
D. Option d
102.A feature common to both stock splits and stock dividends is

A. Option a
B. Option b
C. Option c
D. Option d
103.Large stock dividends and stock splits are issued primarily to:

A. Lower the trading price of the stock per share.


B. Increase the number of authorized shares.
C. Increase legal capital.
D. Increase the number of outstanding shares.
104.The Common Stock account on a company's balance sheet is measured as:

A. The number of common shares outstanding x the stock's par value per share.
B. The number of common shares outstanding x the stock's current market value per share.
C. The number of common shares issued x the stock's par value per share.
D. The number of common shares issued x the stock's current market value per share.
105.The statement of stockholders' equity shows

A. Only the ending balance in each stockholders' equity account.


B. How each equity account changed over time.
C. Only the beginning balance in each stockholders' equity account.
D. Less information than the stockholders' equity section in the balance sheet.
106.How does the stockholders' equity section in the balance sheet differ from the statement of stockholders'
equity?

A. The stockholders' equity section is more detailed than the statement of stockholders' equity.
B The stockholders' equity section shows balances at a point in time, whereas the statement of stockholders'
. equity shows activity over a period of time.
C. The stockholders' equity section shows activity over a period of time, whereas the statement
of stockholders' equity is at a point time.
D. There are no differences between them.
107.Panhandle Corporation was organized on January 3, 2012. The firm was authorized to issue 100,000
shares of $5 par value common stock. During 2012, Panhandle had the following transactions relating
to shareholders' equity:
Issued 30,000 shares of common stock at $7 per
share. Issued 20,000 shares of common stock at $8
per share. Reported a net income of $100,000.
Paid dividends of $50,000.
What is total paid-in capital at the end of 2012?

A. $420,000.
B. $370,000.
C. $470,000.
D. $320,000.
108.Roberto Corporation was organized on January 1, 2012. The firm was authorized to issue 100,000 shares of
$5 par value common stock. During 2012, Roberto had the following transactions relating to stockholders'
equity:
Issued 10,000 shares of common stock at $7 per
share. Issued 20,000 shares of common stock at $8
per share. Reported a net income of $100,000.
Paid dividends of $50,000.
Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8).
What is total stockholders' equity at the end of 2012?

A. $270,000.
B. $300,000.
C. $250,000.
D. $200,000.
109.Return on equity is calculated as:

A. Net income divided by average stockholders' equity.


B. Net income divided by ending stockholders' equity.
C. Net income divided by average market value of equity.
D. Net income divided by ending market value of equity.
110.Why doesn't stockholders' equity equal the market value of equity?

A. Stockholders' equity usually does equal the market value of equity.


B. Investors tend to incorrectly price the market value of equity.
C It's related to the use of historical cost to report many long-term assets and the expensing of
value . generating costs such as research and development and advertising.
D. It's due to incorrect entries prepared by accountants.
111. Earnings per share (EPS)

A. is useful in comparing earnings performance across companies.


B. is useful in comparing earnings performance for the same company over time.
C is useful in both comparing earnings performance across companies and in comparing earnings
. performance for the same company over time.
D is not useful in comparing earnings performance across companies or in comparing earnings performance
. for the same company over time.
112.Which of the following statements is not true regarding earnings per share?

A. Earnings per share is useful in comparing earnings performance across companies at the same point
in time.
B. Earnings per share is useful in comparing earnings performance for the same company over time.
C Earnings per share is calculated as net income minus dividends on preferred stock all divided by the
. average number of common shares outstanding.
D. Earnings per share is forecasted by financial analysts.
113. Financial information for Retro Designs includes the following selected data:

What is the company's earnings per share?

A. $0.60.
B. $0.71.
C. $0.50.
D. $0.05.
114. Financial information for Retro Designs includes the following selected data:

What is the company's price-earnings ratio?

A. 20.0.
B. 15.0.
C. 6.9.
D. 0.05.
115.The PE ratio:

A. tends to be higher for growth stocks.


B. tends to be higher for value stocks.
C. indicates how a stock is trading in relation to cumulative earnings over the life of the company.
D. typically is less than 1.
116. Hamilton International issues 5,000 shares of its $1 par value common stock to provide funds for further
expansion. If the issue price is $15 per share, what is the entry to record the issuance of the stock?
117. Environmental Designs issues 10,000 shares of its $1 par value common stock at $25 per share. (1)
Record the issuance of the stock. (2) Record the issuance of the stock assuming it is no-par value stock.

118. Northwest Clothing Supply has the following transactions during the year related to stockholders'
equity: January 1 Issues 3,000 shares of no-par value common stock for $20 per share.
March 15 Issues 800 shares of $20 par value preferred stock for $22 per share.
December 1 Declares a cash dividend of $1 per share to all stockholders of record (both common
and preferred) on October 15.
December 15 Date of record.
December 31 Pays the cash dividend declared on October
1. Record each of these transactions.

119. Tropical Rainwear issues 1,000 shares of its $20 par value preferred stock for cash at $22 per share.
Record the issuance of the preferred shares.
120.Diane's Designs has two classes of stock authorized: 8%, $10 par preferred and $1 par value common.
The following transactions affect stockholders' equity during 2012, its first year of operations:
January 1 Issue 200,000 shares of common stock for $15 per share.
February 6 Issue 1,000 shares of preferred stock for $11 per share.
October 10 Repurchase 10,000 shares of its own common stock for $18 per
share. November 12 Reissue 5,000 shares of treasury stock at $20 per share.
Record each of these transactions.

121.Oregon Outfitters issues 1,000 shares of $1 par value common stock at $20 per share. Later in the year,
the company decides to repurchase 200 shares at a cost of $22 per share. (1) Record the original issue
of the 1,000 shares, (2) Record the repurchase of 200 shares, and (3) Record the entry if Oregon
Outfitters reissues the 200 shares of treasury stock at $25 per share.

122.Desert Apparel has 5,000 shares of common stock outstanding. On April 1, the company declares a $2
per share dividend to stockholders of record on April 15. The dividend is paid on April 30. Record all
necessary entries on the appropriate dates for cash dividends.

123.On May 15 Canadian Falcon declares a quarterly cash dividend of $0.15 per share payable on June 10 to
all stockholders of record on May 31. Record Canadian Falcon's declaration and payment of cash
dividends for its 200,000 shares of common stock.
124.On March 31, the board of directors of Shoeboxes, Inc. declares a 100% stock dividend on its 100,000,
$0.01 par, common shares. The market price of Shoeboxes common stock is $30 on March 31. Record the
stock dividend.

125.Court Casuals has 100,000 shares of common stock outstanding as of the beginning of 2012 and has
the following transactions affecting stockholders' equity in 2012.
May 18 Issues 25,000 additional shares of $1 par value common stock for $40 per
share. May 31 Repurchases 5,000 shares of treasury stock for $45 per share.
July 1 Declares a cash dividend of $1 per share to all stockholders of record on July 15. Hint: Dividends
are not paid on treasury stock.
July 31 Pays the cash dividend declared on July 1.
August 10 Reissues 2,500 shares of treasury stock purchased on May 31 for $46 per share.
Record each of these transactions.

126.Indicate whether each of the following transactions increases (+), decreases (-), or has no effect (NE) on
total assets, total liabilities, and total stockholders' equity.
127.Indicate whether each of the following transactions increases (+), decreases (-), or has no effect (NE) on
total assets, total liabilities, and total stockholders' equity.

128.Prom Night Formal Wear has the following stockholders' equity accounts at December 31, 2012: Common
Stock, $1 par value, 2,000,000 shares; Additional Paid-in Capital, $22 million; Retained Earnings, $15
million; and Treasury Stock, 50,000 shares, $1.25 million. Prepare the stockholders' equity section of the
balance sheet.

129.Donnie Hilfiger has the following balances in its stockholders' equity accounts on December 31, 2012:
Treasury Stock, $375,000; Common Stock, $350,000; Preferred Stock, $1,200,000; Retained Earnings,
$1,675,000; and Additional Paid-in Capital, $3,150,000. Prepare the stockholders' equity section of the
balance sheet for Donnie Hilfiger as of December 31, 2012.
130.Court Casuals has the following beginning balances in its stockholders' equity accounts on January 1,
2012: Common Stock, $100,000; Additional Paid-in Capital, $4,100,000; and Retained Earnings,
$3,000,000. Net income for the year ended December 31, 2012, is $800,000. Court Casuals has the
following transactions affecting stockholders' equity in 2012:
May 18 Issues 25,000 additional shares of $1 par value common stock for $40 per
share. May 31 Repurchases 5,000 shares of treasury stock for $45 per share.
July 1 Declares a cash dividend of $1 per share to all stockholders of record on July 15. Hint:
Dividends are not paid on treasury stock.
July 31 Pays the cash dividend declared on July 1.
August 10 Reissues 2,500 shares of treasury stock purchased on May 31 for $48 per share.
Taking into consideration all the entries described above, prepare the statement of stockholders' equity for
the year ended December 31, 2012, using the format provided.

131.The financial statements of Heatwave Athletic Wear include the following selected data ($in millions):
Sales, $22,502; Net income $875; Beginning stockholders' equity $3,567; Ending stockholders' equity,
$4,102. Calculate the return on equity.
132.The financial statements of Trail Apparel include the following selected data (in millions):

1. Calculate the return on equity for 2013.


2. Calculate the return on the market value of equity for 2013.
3. Calculate the price-earnings ratio for 2013.

133.Corporations typically do not start raising capital by issuing stock to the general public. What are the
common stages of equity financing leading to an initial public offering (IPO)?

134.Describe the primary advantages and disadvantages of a corporation in comparison to a sole-


proprietorship or partnership.

135.Explain the difference between authorized, issued, and outstanding shares.


136.Explain why preferred stock often is said to have a mixture of attributes somewhere between
common stock and bonds.

137.Contrast the effects of a cash dividend and a stock dividend on total assets, total liabilities, and total
stockholders' equity.
138.Listed below are ten terms followed by a list of phrases that describe or characterize the terms. Match
each phrase with the best term placing the letter designating the term in the space provided.

Provide additional financing, often in the__


1. Dividends millions, for a percentage ownership in the company.__
2. Statement of
stockholders' A mixture of attributes somewhere between common__
equity stock and bonds payable.__
Summarizes the changes in the balance in each__

3. Stock split stockholders' equity account over a period of time.__


4. Preferred __

stock Traces the line of authority for a typical corporation.__


5. Venture __

capital firms The portion of the cash proceeds above par value.__
6. Organization A large stock dividend that includes a reduction in the par__

chart or stated value per share.__


7. Articles of Represents all net income, less all dividends, since the__

incorporation company began.__


8. Retained __

earnings Distributions by a corporation to its stockholders.__


9. Additional Additional shares of the companies' own stock given to__

paid-in capital stockholders.__


Describes the nature of the firm's business activities, the
10. Stock shares to be issued, and the composition of the initial board__
dividends of directors.__
139.Match (by letter) the following terms with their definitions. Each letter is used only once.

1. Like an S corporation, but there are no limitations Mutual__


on the number of owners as in an S corporation. agency__
2. Designed to serve as a guide to states in the development of __

their corporate statutes S Corporation.


3. Describe (a) the nature of the firm's business activities, (b) Limited
the shares to be issued, and (c) the composition of the initial liability__
board of directors company.__
Model
Business
4. Allows for legal treatment as a corporation, but tax Corporation__
treatment as a partnership Act.__
5. Has stock traded on a stock exchange such as the New York Publicly held__

Stock Exchange (NYSE) corporation.__


6. Individual partners in a partnership have the power to bind Double__

the business to a contract. taxation.__


7. Stockholders can lose no more than the amount they invest Articles of__

in the company Incorporation.__


8. Corporate earnings are taxed twice - at the corporate level Limited__

and individual stockholder level liability.__


140.Match (by letter) the following terms with their definitions. Each letter is used only once.

Angel__
1. Shares available to sell investors.__
Paid-in__

2. The corporation's own stock that it reacquired capital.__


3. Shares can be returned to the corporation at a predetermined Issued__

price stock.__
Authoriz__

4. Shares actually sold ed stock.__


5. Wealthy individuals in the business community willing Redee__

to risk investment funds on a promising business venture mable.__


Cumu__

6. The amount invested by stockholders lative.__


7. Shares receive priority for future dividends, if dividends are not Retained__

paid in a given year earnings.__


Limited__

8. Shares held by investors liability.__


9. Shareholders can lose no more than the amount they invested in Treasury__

the company stock.__


Outstand__

10. The earnings not paid out in dividends ing stock.__


141.Match each of the following preferred stock features with its description.
Preferred Stock Features

1. Shares can be exchanged for common stock Convertible. ____


2. Shares can be sold at a predetermined price Redeemable.____
3. Shares receive dividend priority, if dividend not paid Cumulative. ____
142.Match (by letter) the following terms with their definitions. Each letter is used only once.

1. Measures the ability of company management to


generate earnings from the resources that owners Statement of__
provide stockholders' equity.__

__
2. Effectively the same as a 2-for-1 stock split Treasury stock.__

__
3. The earnings not paid out in dividends Value stocks.__

__
4. A debit balance in retained earnings Retained earnings.__

__
5. The stock price divided by earnings per share PE ratio.__
Stockholders' equity
section of the balance__
6. The corporation's own stock that it reacquired sheet.__

__
7. Priced low in relation to current earnings Return on equity.__

8. Summarizes the changes in the balance in each __


stockholders' equity account over a period of time Growth stocks.__

9. Priced high in relation to current earnings as __


investors expect future earnings to be higher 100% stock dividend.__

10. Shows the balance in each equity account at a __


point in time Accumulated deficit.__
Ch10 Key
1. FALSE

2. TRUE

3. FALSE

4. FALSE

5. TRUE

6. TRUE

7. TRUE

8. FALSE

9. TRUE

10. FALSE

11. TRUE

12. FALSE

13. TRUE

14. FALSE

15. TRUE

16. FALSE

17. TRUE

18. TRUE

19. FALSE

20. TRUE

21. TRUE

22. FALSE

23. TRUE

24. TRUE

25. FALSE

26. TRUE

27. FALSE

28. TRUE

29. FALSE

30. TRUE

31. TRUE

32. FALSE
33. TRUE

34. TRUE

35. TRUE

36. FALSE

37. TRUE

38. FALSE

39. TRUE

40. TRUE

41. FALSE

42. TRUE

43. C

44. C

45. C

46. D

47. C

48. B

49. B

50. B

51. B

52. B

53. C

54. D

55. D

56. A

57. B

58. A

59. C

60. D

61. C

62. D

63. D

64. D

65. C

66. C

67. D
68. A

69. D

70. C

71. A

72. B

73. A

74. A

75. D

76. A

77. B

78. A

79. B

80. C

81. D

82. C

83. C

84. B

85. D

86. B

87. D

88. B

89. A

90. D

91. B

92. D

93. C

94. A

95. C

96. D

97. C

98. D

99. A

100. B

101. C

102. A
103. A

104. C

105. B

106. B

107. B

108. C

109. A

110. C

111. B

112. A

113. C

114. A

115. A

116.

117.

118.
119.

120.

121.

122.
123.

124.

125.

126.
127.

128.

129.

130.

131.
132.

133. Most corporations first raise money by selling stock to the founders of the business and their friends and family. As the equity financing needs
of the corporation grow, companies prepare a business plan and seek outside investment from "angel" investors and venture capital firms. Angel
investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture. Venture capital
firms provide additional financing, often in the millions, for a percentage ownership in the company. Many venture capital firms look to invest in
promising companies to which they can add value through business contacts, financial expertise, or marketing channels. Most corporations do not
consider issuing stock to the general public (going public) until their equity financing needs exceed $20 million.

134. A corporation offers three primary advantages over sole-proprietorships and partnerships. These are (1) limited liability, (2) ability to raise
capital, and (3) lack of mutual agency. Because of limited liability, even in the event of bankruptcy, stockholders in a corporation can lose no more
than the amount they invested in the company. Because corporations sell ownership interest in the form of shares of stock, ownership rights are easily
transferred. An investor can sell his or her ownership interest (shares of stock) at any time and without affecting the structure of the corporation or its
operations. Finally, a lack of mutual agency means that individual stockholders cannot legally bind the corporation to a contract.
A corporation has two primary disadvantages relative to sole-proprietorships and partnerships. These are (1) additional taxes and (2) more paperwork.
Corporations have double taxation. Corporate income is taxed once on earnings at the corporate level, and again on dividends at the individual level.
Corporations also have more paperwork as federal and state governments impose extensive reporting requirements on the company.

135. Authorized stock is the total number of shares available to sell, stated in the company's articles of incorporation. Issued stock is the number of
shares that have been sold to investors. A company usually does not issue all its authorized stock. Outstanding stock is the number of shares held by
investors. Issued and outstanding are the same amounts as long as the corporation has not repurchased any of its shares. Repurchased shares, called
treasury stock, are included as part of shares issued, but excluded from shares outstanding.

136. Investors in common stock are the owners of the corporation because they have voting rights. Investors in bonds are creditors who have loaned
money to the corporation. Preferred stock fits somewhere between common stock and bonds. There are other factors where preferred stock falls in
the middle between common stock and bonds. For example, the risk and expected return are greatest for investments in common stock followed by
preferred stock and then bonds. In contrast, preference for payments of interest and dividends are given first to bonds, then preferred stock, and then
common stock.

137. Declaration and payment of a cash dividend reduces total assets and total stockholders' equity. Declaration and payment of a stock dividend has
no effect on total assets, total liabilities, and total stockholders' equity.

138. Venture capital firms :: Provide additional financing, often in the millions, for a percentage ownership in the company. and Preferred stock :: A
mixture of attributes somewhere between common stock and bonds payable. and Statement of stockholders' equity :: Summarizes the changes in
the balance in each stockholders' equity account over a period of time. and Organization chart :: Traces the line of authority for a typical
corporation. and Additional paid-in capital :: The portion of the cash proceeds above par value. and Stock split :: A large stock dividend that
includes a reduction in the par or stated value per share. and Retained earnings :: Represents all net income, less all dividends, since the company
began. and Dividends :: Distributions by a corporation to its stockholders. and Stock dividends :: Additional shares of the companies' own stock
given to stockholders. and Articles of incorporation :: Describes the nature of the firm's business activities, the shares to be issued, and the
composition of the initial board of directors.

139. Individual partners in a partnership have the power to bind the business to a contract. :: Mutual agency and Allows for legal treatment as a
corporation, but tax treatment as a partnership :: S Corporation. and Like an S corporation, but there are no limitations on the number of owners as
in an S corporation. :: Limited liability company. and Designed to serve as a guide to states in the development of their corporate statutes :: Model
Business Corporation Act. and Has stock traded on a stock exchange such as the New York Stock Exchange (NYSE) :: Publicly held corporation.
and Corporate earnings are taxed twice - at the corporate level and individual stockholder level :: Double taxation. and Describe (a) the nature of the
firm's business activities, (b) the shares to be issued, and (c) the composition of the initial board of directors :: Articles of Incorporation. and
Stockholders can lose no more than the amount they invest in the company :: Limited liability.

140. Wealthy individuals in the business community willing to risk investment funds on a promising business venture :: Angel investors. and The
amount invested by stockholders :: Paid-in capital. and Shares actually sold :: Issued stock. and Shares available to sell :: Authorized stock. and
Shares can be returned to the corporation at a predetermined price :: Redeemable. and Shares receive priority for future dividends, if dividends are
not paid in a given year :: Cumulative. and The earnings not paid out in dividends :: Retained earnings. and Shareholders can lose no more than the
amount they invested in the company :: Limited liability. and The corporation's own stock that it reacquired :: Treasury stock. and Shares held by
investors :: Outstanding stock.
141. Shares can be exchanged for common stock :: Convertible. and Shares can be sold at a predetermined price :: Redeemable. and Shares receive
dividend priority, if dividend not paid :: Cumulative.

142. Summarizes the changes in the balance in each stockholders' equity account over a period of time :: Statement of stockholders' equity. and The
corporation's own stock that it reacquired :: Treasury stock. and Priced low in relation to current earnings :: Value stocks. and The earnings not paid out
in dividends :: Retained earnings. and The stock price divided by earnings per share :: PE ratio. and Shows the balance in each equity account at a point
in time :: Stockholders' equity section of the balance sheet. and Measures the ability of company management to generate earnings
from the resources that owners provide :: Return on equity. and Priced high in relation to current earnings as investors expect future earnings to
be higher :: Growth stocks. and Effectively the same as a 2-for-1 stock split :: 100% stock dividend. and A debit balance in retained earnings ::
Accumulated deficit.
Ch10 Summary
Category # of Questions
AACSB: Analytic 39
AACSB: Reflective Thinking 103
AICPA: Critical Thinking 42
AICPA: Decision Making 15
AICPA: Measurement 53
AICPA: Reporting 32
Blooms: Analysis 34
Blooms: Application 23
Blooms: Comprehension 38
Blooms: Knowledge 47
Difficulty: Easy 38
Difficulty: Hard 20
Difficulty: Medium 84
Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. 23
Learning Objective: 10-02 Record the issuance of common stock. 25
Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. 21
Learning Objective: 10-04 Account for treasury stock. 26
Learning Objective: 10-05 Describe retained earnings and record cash dividends. 22
Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. 14
Learning Objective: 10-07 Prepare and analyze the stockholders equity section of a balance sheet and the statement of 18
stockholders equity.
Learning Objective: 10-08 Evaluate company performance using information on stockholders equity. 16
Spiceland - Chapter 10 142