Financial Accounting 8th Global Edition By Robert Libby – Test Bank

Chapter 11 Reporting and Interpreting Owners’ Equity Answer Key

True / False Questions

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.

FALSE
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.

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation.
Topic Area: Ownership of a Corporation

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.

TRUE
The number of shares outstanding = 100,000 = the number of shares issued minus the number of treasury shares = 120,000 – 20,000.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation.
Topic Area: Ownership of a Corporation

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

TRUE
Stock bought back and being held by the issuing company is called treasury stock.

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation.
Topic Area: Ownership of a Corporation

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

FALSE
Common stockholders do have voting rights. However, the board of directors declares dividends.

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation.
Topic Area: Ownership of a Corporation

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

FALSE
Earnings per share is calculated by dividing net income by the average number of outstanding shares of common stock during the period.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Analyze the earnings per share ratio.
Topic Area: Key Ratio Analysis: Earnings Per Share

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

TRUE
The earnings per share denominator is the average number of common shares outstanding. Purchasing treasury stock reduces the number of outstanding shares and therefore increases earnings per share.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 11-02 Analyze the earnings per share ratio.
Topic Area: Key Ratio Analysis: Earnings Per Share

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

TRUE
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.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 11-02 Analyze the earnings per share ratio.
Topic Area: Common Stock Transactions: Treasury Stock

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.

FALSE
The common stock account is credited for the par value ($5) of the issued shares.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.
Topic Area: Common Stock Transactions

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

TRUE
The capital in excess of par account is credited for $9; the excess of the selling price ($10) over the par value ($1) of the issued shares.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.
Topic Area: Common Stock Transactions

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

TRUE
Treasury stock is reported on the balance sheet as a contra-equity account and is subtracted from total stockholders’ equity.