Fundamental Financial Accounting Concepts 9th Edition By Thomas – Test Bank

16. Describe the varying degrees to which closely held corporations and publicly traded corporations are regulated.
Answer: Closely held corporations are relatively free from regulation, while public corporations are subject to extensive regulation. This regulation began in the 1930s with the Securities Act of 1933 and then with the Securities Exchange Act of 1934, which established the Securities and Exchange Commission (SEC). As a result, public corporations are subject to SEC filing. The Sarbanes-Oxley Act of 2002 imposed further regulation on public companies, and established the Public Companies Audit Oversight Board.

Learning Objective: 11-01
Topic Area: Business organization ― Corporation
AACSB: Analytical Thinking
AACSB: Communication
AICPA: BB Industry
AICPA: BB Legal
Blooms: Analyze
Level of Difficulty: 3 Hard

17. Discuss some of the information items normally included in a corporation’s articles of incorporation.
Answer:
a. The name of the corporation and the proposed date of incorporation.
b. The purpose of the corporation.
c. The location of the business and its expected life.
d. Provisions for capital stock.
e. Names and addresses of the first board of directors.

Learning Objective: 11-01
Topic Area: Business organization ― Corporation
AACSB: Reflective Thinking
AICPA: BB Legal
Blooms: Understand
Level of Difficulty: 2 Medium

18. Discuss a few of the characteristics of sole proprietorships, partnerships and corporations.
Answer:
a. Sole Proprietorships are owned by one person and usually are fairly small. The owner is personally accountable for actions taken in the name of the business.
b. A partnership has the benefit of two or more people joining together to share their talents, their capital and the risks of business. Like proprietorships, the owners of partnerships are personally accountable for the actions taken in the name of the business. A partner is often responsible for the actions of the other partners as well.
c. Unlike proprietorships and partnerships, a corporation is designated as a separate legal entity by the state in which it is incorporated. The corporate form allows the potential of obtaining larger sums of capital than other forms. Other advantages of the corporate form are limited liability, continuity, transferability of ownership and professional management. Disadvantages include double taxation, excessive governmental regulation, and complexities in formation.

Learning Objective: 11-01
Topic Area: Business organization ― Various forms
AACSB: Reflective Thinking
AACSB: Communication
AICPA: FN Decision Making
AICPA: BB Industry
AICPA: BB Legal
Blooms: Understand
Level of Difficulty: 1 Easy

19. Explain how the equity section of a balance sheet differs among sole proprietorships, partnerships and corporations.
Answer:
a. The equity section of a proprietorship’s balance sheet contains one account entitled “capital.”
b. The equity section of a partnership also contains a “capital” account but for each partner.
c. The capital structure of corporations is more complex than proprietorships and partnerships. The stockholder’s equity section of a balance sheet includes dollar amounts of the total par of the stock accounts as well as disclosure of other pertinent details such as number of shares authorized, issued and outstanding. In addition, the paid-in excess accounts are listed as well as retained earnings. Any appropriations are also listed with retained earnings and treasury stock, if applicable, normally reported last.

Learning Objective: 11-01
Topic Area: Business organization ― Various forms
AACSB: Reflective Thinking
AACSB: Communication
AICPA: FN Decision Making
AICPA: BB Legal
AICPA: BB Industry
Blooms: Understand
Level of Difficulty: 2 Medium

20. Which type of stock, common or preferred, must all corporations have?
Answer: Common stock

Learning Objective: 11-02
Topic Area: Classes of stock
AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA: BB Legal
Blooms: Remember
Level of Difficulty: 1 Easy
Feedback: Only a fraction of corporations choose to issue preferred stock.

21. Describe cumulative preferred stock.
Answer:
Cumulative preferred stock is stock whose dividends accumulate from year to year when dividends are not declared. If dividends are declared, the preferred shareholders must first be paid both current year and any dividends in arrears before the common shareholders can be paid dividends.

Learning Objective: 11-02
Topic Area: Preferred stock
AACSB: Reflective Thinking
AACSB: Communication
AICPA: FN Decision Making
AICPA: BB Critical Thinking
Blooms: Understand
Level of Difficulty: 2 Medium

22. What is the meaning of “par value” of stock?
Answer:
“Par value” is an arbitrary value assigned to stock when it is authorized. Historically, par value represented the maximum liability of the investor and represents the minimum amount of assets that should be maintained as protection for creditors.

Learning Objective: 11-02
Topic Area: Capital stock characteristics
AACSB: Reflective Thinking
AACSB: Communication
AICPA: FN Measurement
AICPA: BB Legal
Blooms: Understand
Level of Difficulty: 1 Easy

23. Explain the differences in recording the initial issue of stock for (a) par-value, (b) stated- value, and (c) no-par stock.
Answer:
a. With par value stock, the par value is recorded as well as the difference between issue price and par. This difference is recorded in a Paid-in Excess account. The total issue price is recorded as an increase to cash.
b. Stated value stock is handled essentially the same way as par value stock.
c. With no-par stock, the entire amount of the proceeds from the stock issue is recorded into the stock account with no Paid-in Excess account required.

Learning Objective: 11-02
Topic Area: Capital stock characteristics
Topic Area: Common stock ― Accounting for issue
AACSB: Reflective Thinking
AACSB: Communication
AICPA: FN Measurement
AICPA: BB Critical Thinking
Blooms: Understand
Level of Difficulty: 2 Medium

24. Will the number of shares of stock issued and the number of shares of stock outstanding always be the same? Why or why not?
Answer:
The number of shares of stock outstanding will be less than the number issued if a corporation has purchased its own stock as treasury stock.

Learning Objective: 11-03
Topic Area: Treasury stock and shares outstanding
AACSB: Reflective Thinking
AICPA: FN Measurement
AICPA: BB Critical Thinking
Blooms: Understand
Level of Difficulty: 2 Medium

25. In which section of the balance sheet would Treasury Stock be reported?
Answer: Stockholder’s Equity

Learning Objective: 11-03
Topic Area: Treasury stock ― Purchase
AACSB: Reflective Thinking
AICPA: FN Measurement
AICPA: BB Critical Thinking
Blooms: Remember
Level of Difficulty: 1 Easy
Feedback: Treasury stock is a contra equity account.

26. What is treasury stock?
Answer: Treasury stock is the company’s own stock that it has purchased.

Learning Objective: 11-03
Topic Area: Treasury stock ― Purchase
AACSB: Reflective Thinking
AICPA: FN Measurement
AICPA: BB Critical Thinking
Blooms: Remember
Level of Difficulty: 1 Easy