$\frac{\text{Net Income}}{\text{Shareholders' Equity}}$

Question 1

Which of the following is NOT an advantage of the corporate form of business?

Accepted Answer

Ownership separated from management

Question 2

A corporation declares a cash dividend. Which account is debited in the journal entry on the declaration date?

Accepted Answer

Retained earnings

Question 3

Which of the following statements about stock splits is TRUE?

Accepted Answer

Stock splits increase the number of shares outstanding but do not affect total shareholders' equity

Question 4

If a corporation issues 10,000 common shares at $5 per share, what is the journal entry?

Accepted Answer

Dr. Cash $50,000; Cr. Common shares $50,000

Question 5

Preferred shares are cumulative. If a corporation misses dividends for 2018 and 2019, and pays dividends in 2020, what happens?

Accepted Answer

Dividends for 2018, 2019, and 2020 are paid to preferred shareholders before common shareholders receive any

Question 6

Which of the following is a disadvantage of the corporate form of business?

Accepted Answer

Double taxation of earnings

Question 7

What is the effect on total assets, liabilities, and shareholders' equity when a corporation repurchases its own shares for cash?

Accepted Answer

Assets decrease, liabilities no effect, equity decreases

Question 8

Which of the following best describes 'authorized shares'?

Accepted Answer

Maximum number of shares a company can legally issue

Question 9

A company declares a stock dividend. Which account is credited in the journal entry for the declaration?

Accepted Answer

Stock dividend distributable

Question 10

Which of the following is TRUE regarding the payment of cash dividends?

Accepted Answer

It decreases assets and decreases liabilities

Question 11

Which of the following is NOT included in shareholders' equity on the balance sheet?

Accepted Answer

Secured creditors

Question 12

A corporation has 5,000 shares authorized, 3,000 shares issued, and 500 shares repurchased. How many shares are outstanding?

Accepted Answer

$3,000 - 500 = 2,500$

Question 13

Which of the following is the correct formula for calculating return on equity (ROE)?

Accepted Answer

$\frac{	ext{Net Income}}{	ext{Shareholders' Equity}}$

Question 14

Which of the following is TRUE about the record date for dividends?

Accepted Answer

Shareholders who own shares on the record date are entitled to receive dividends

Question 15

Which account is NOT a liability when a stock dividend is declared?

Accepted Answer

Stock dividend distributable

Question 16

A company has $100,000 in net income and $400,000 in average shareholders' equity. What is its return on equity (ROE)?

Accepted Answer

$\frac{100,000}{400,000} = 0.25$ or 25%

Question 17

Which of the following is TRUE regarding the effect of a stock split on the balance sheet?

Accepted Answer

Stock splits have no effect on shareholders' equity

Question 18

Which of the following is a reason why a company might repurchase its own shares?

Accepted Answer

To return excess cash to shareholders

Question 19

Which of the following is the correct order of priority in case of corporate liquidation?

Accepted Answer

Secured creditors, unsecured creditors, preferred shareholders, common shareholders

Question 20

Which of the following is NOT a component of shareholders' equity?

Accepted Answer

Accounts receivable

Shareholders' Equity and Corporate Transactions: Study Notes for Financial Accounting

Study Guide - Practice Questions