Financial Accounting 10th Edition By Robert Libby – Test Bank

Chapter 11 Reporting and Interpreting Stockholders’ Equity

1) Shares which a corporation has the ability to issue, as documented in its charter in the state where incorporated, are outstanding shares of stock.

Answer: FALSE
Explanation: Authorized shares of stock are those shares which a corporation has the ability to issue as documented in its charter in the state where incorporated.
Difficulty: 1 Easy
Topic: Authorized-Issued-Outstanding shares
Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

2) There would be 100,000 shares of common stock outstanding when the number of shares authorized was 150,000, issued shares totaled 120,000, and 20,000 shares were being held in the treasury.

Answer: TRUE
Explanation: The number of shares outstanding = 100,000 = the number of shares issued minus the number of treasury shares = 120,000 – 20,000.
Difficulty: 2 Medium
Topic: Authorized-Issued-Outstanding shares
Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

3) Treasury stock is a corporation’s own stock that was issued and then repurchased, and is still held by the corporation.

Answer: TRUE
Explanation: Stock bought back and being held by the issuing company is called treasury stock.
Difficulty: 1 Easy
Topic: Common stock – Repurchase stock
Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

4) Common stockholders have voting rights and can declare cash dividends.

Answer: FALSE
Explanation: Common stockholders do have voting rights but do not declare dividends. The board of directors declares dividends.
Difficulty: 1 Easy
Topic: Benefits of stock ownership
Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

5) Earnings per share is calculated by dividing net income by the number of outstanding shares of common stock at year-end.

Answer: FALSE
Explanation: Earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period.
Difficulty: 1 Easy
Topic: Ratio analysis – Earnings per share
Learning Objective: 11-02 Compute and analyze the earnings per share ratio.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

6) Earnings per share increases when a company purchases treasury stock.

Answer: TRUE
Explanation: The earnings per share denominator is the weighted average number of common shares outstanding. Purchasing treasury stock reduces the number of outstanding shares and therefore increases earnings per share.
Difficulty: 2 Medium
Topic: Ratio analysis – Earnings per share
Learning Objective: 11-02 Compute and analyze the earnings per share ratio.
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

7) When a company acquires treasury stock, assets and stockholders’ equity both decrease.

Answer: TRUE
Explanation: The acquisition of treasury stock results in a decrease in cash and an increase in a contra-equity account, which results in a decrease in stockholders’ equity.
Difficulty: 2 Medium
Topic: Common stock – Repurchase stock
Learning Objective: 11-03 Describe the characteristics of common stock and report common stock transactions.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

8) The issue of $5 par value common stock for $18 per share results in an $18 credit to the common stock account for each share issued.

Answer: FALSE
Explanation: The Common stock account is credited for the par value ($5) of the issued shares. The Additional paid-in capital account is credited for the remaining $13.
Difficulty: 1 Easy
Topic: Common stock – Issue stock
Learning Objective: 11-03 Describe the characteristics of common stock and report common stock transactions.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

9) The issue of $1 par value common stock for $10 per share results in a $9 credit to the Additional paid-in capital account for each share issued.

Answer: TRUE
Explanation: The Additional paid-in capital account is credited for $9 for the excess of the selling price ($10) over the par value ($1) of the issued shares. The Common stock account is credited for the $1 par value.
Difficulty: 1 Easy
Topic: Common stock – Issue stock
Learning Objective: 11-03 Describe the characteristics of common stock and report common stock transactions.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

10) Stockholders’ equity decreases when a company purchases treasury stock.

Answer: TRUE
Explanation: Treasury stock is reported on the balance sheet as a contra-equity account and is subtracted from total stockholders’ equity.
Difficulty: 2 Medium
Topic: Common stock – Repurchase stock
Learning Objective: 11-03 Describe the characteristics of common stock and report common stock transactions.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation