Chapter F3: Tools of the Trade, Part I...The Balance Sheet: Initial
Financing-Investments by Owners
Multiple Choice
1.
The following statement is true regarding assets:
An example of an asset is the common stock issued by the
corporation.
Assets are the difference between liabilities and equity.
An example of an asset is the amount owed to employees for wages
earned.
Assets are items a company owns such as a building that provide
future economic benefits.
*
Hint for question 1
Assets are items a company owns or controls such as cash, equipment, and
land. Liabilities are debts a company owes such as amounts owed to employees
(wages payable) or to suppliers (accounts payable).
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2.
Equity --
is debt resulting from past transactions that must be paid some time
in the future.
*
is the portion of assets the owner(s) own free and clear.
is referred to as owners' equity in a corporation but as stockholders'
equity in a partnership.
comes from two sources--amounts borrowed and amounts invested
by owners.
Hint for question 2
Assets minus liabilities is equity, the residual ownership interest in a company.
Equity comes from two sources--amounts invested by owners and amounts
earned (profits) by the company.
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3.
*
A company buys a building by paying $100,000 in cash and borrowing
$400,000 from a bank. All of the following statements are true regarding
the purchase of the building except --
the building is reported as a $100,000 asset on the balance sheet.
the $400,000 borrowed is reported as a liability on the balance
sheet.
the company has $100,000 of equity in the building.
the total cost of the building is $500,000--the $100,000 paid in cash
plus the $400,000 borrowed.
Hint for question 3
Assets = liabilities + owners' equity.
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4.
The following statement is true regarding the balance sheet:
The balance sheet reports a financial picture of the company for the
entire year.
The owners' equity portion of the balance sheet is reported the same
for partnerships and corporations.
*
The title of "balance sheet" comes from the accounting equation
which is assets = liabilities + equity.
The balance sheet reports revenues earned, expenses incurred, and
profits of the company.
Hint for question 4
The balance sheet reports the assets of the company and who has claim to
those assets. It reports the financial condition as of a moment in time.
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5.
The following statement is true regarding partnerships:
The only difference between proprietorships and partnerships is that
in partnerships each partner's claim to assets must be kept in a separate
account.
*
Partners must split profits equally.
When Bob and Carol each contribute $5,000 to a partnership, total
equity will increase by $10,000, but assets and liabilities will remain the
same.
A partnership is a separate legal entity.
Hint for question 5
Partnership agreements can contain any method of computing the capital
balance or method of splitting profits, just so these items are agreed on by all of
the partners.
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6.
The following statement is true regarding corporations:
The federal government approves and issues a corporate charter.
*
The Board of Directors declares dividends.
The CEO (chief executive officer) has the authority to remove a
person from the Board of Directors if that person is not fulfilling the
duties of that position.
The controller manages the company cash.
Hint for question 6
Each share of stock owned is worth one vote at shareholder meetings.
Shareholders elect the Board of Directors (BOD). The BOD declares dividends
and has the authority to appoint a president and other officers to manage the
company.
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7.
Shareholders paid in $500,000 in exchange for shares of stock. The first
year of business the company reported $100,000 of net income (profits),
and paid out $20,000 in dividends. All of the following statements are
true regarding the balance sheet at the end of the first year of business
except --
contributed capital will total $500,000.
paid-in capital will total $500,000.
total stockholders' equity will total $580,000.
*
retained earnings will total $100,000.
Hint for question 7
Contributed capital is amounts paid in by shareholders. Retained earnings is the
net income retained in the company and not distributed to shareholders in the
form of a dividend. Total SE = contributed capital + retained earnings - treasury
stock.
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8.
Max Corporation began operations by selling 1,000 shares of its $3 par
common stock for $8 a share. As a result of this stock issuance --
the market value has increased by $5 per share over the year.
the Contributed Capital account would increase by $3,000.
*
the Additional Paid-in Capital account would increase by $5,000.
the common stock account would increase by $8,000.
Hint for question 8
Contributed Capital = common stock account + APIC. Amounts paid in towards
par value are reported in the common stock account. Amounts paid in addition
to the par value are reported in the APIC (Additional Paid-in Capital) account.
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9.
The following statements apply to common and preferred types of stock.
Select the statement that only applies to preferred stock.
Shareholders risk the loss of investment.
Shareholders bear the risk of no dividend.
Shareholders usually have the right to vote.
*
Dividends are usually based on a percentage of the par value.
Hint for question 9
Common shareholders are referred to as residual owners since they get the
residual--what is left after creditors and preferred shareholders get their
allotments. Therefore, common shareholders bear the greatest risk of loss.
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10.
Using the following information, calculate total stockholders equity: cash
$14,000, common stock $22,000, APIC (additional paid-in capital)
$18,000, preferred stock $50,000, retained earnings $60,000, and
treasury stock $10,000.
Total stockholders' equity equals $100,000.
*
Total stockholders' equity equals $140,000.
Total stockholders' equity equals $154,000.
None of the above.
Hint for question 10
Total stockholders' equity equals contributed capital + retained earnings treasury stock.
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11.
The balance sheet of Grant, Inc., reported the following on the year-end
balance sheet: Common stock (600,000 shares authorized, 200,000
shares issued) $200,000. Additional paid-in capital $300,000. Retained
earnings $400,000. Treasury stock (15,000 shares) $ 90,000. All of the
following statements are true regarding Grant, Inc., except --
the balance sheet indicates there are 185,000 shares of common
stock currently outstanding.
the balance sheet indicates there is $400,000 of earned profits that
have not yet been distributed to shareholders in the form of a dividend.
the balance sheet indicates shareholders have contributed $200,000
for issued shares of stock.
*
the balance sheet indicates the average selling price of the originally
issued shares of stock is $2.50 per share.
Hint for question 11
Contributed capital is amounts paid in by shareholders. Retained earnings is the
net income retained in the company and not distributed to shareholders in the
form of a dividend. Total SE = contributed capital + retained earnings - treasury
stock.
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12.
*
In 1990, 10,000 shares were issued for $10 per share. In 1995, an
additional 20,000 shares were issued for $20 per share. In the year
2007, the market value of the stock was $50 per share. The following
statement is true regarding this corporate stock:
30,000 shares were issued in the primary market.
20,000 shares were issued in the secondary market.
Since this company started business, shareholders have paid in a
total of $300,000.
In the year 2006, contributed capital reported on the balance sheet
will total $1,500,000.
Hint for question 12
The primary stock market refers to the initial issuance of stock by the
corporation to investors, while the secondary stock market refers to
shareholders trading stock with other investors.
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Submit for Grade
Chapter F3: Tools of the Trade, Part I...The Balance Sheet: Initial
Financing-Investments by Owners
True or False
1.
*
Assets will always equal liabilities plus owners' equity.
TRUE
FALSE
Hint for question 1
The assets must be owned by someone. The ownership is equal to the claims
on those assets--creditors' claims (liabilities) or owners' claims (equity).
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2.
Creditors have a right to a share of corporate profits in the form of a
dividend.
TRUE
*
FALSE
Hint for question 2
Investors who lend money (creditors) to a corporation have no ownership rights.
Investors who purchase shares of stock have ownership rights that include the
right to a share of the profits and a right to vote at shareholder meetings.
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3.
The corporate officers have the ultimate responsibility for managing the
corporation.
TRUE
*
FALSE
Hint for question 3
The board of directors serves as a link between the shareholders and the
officers of the company. The board of directors can replace the officers if the
officers are not managing the company in the best interests of the shareholders.
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4.
A shareholder may serve as chief executive officer (CEO) of the
corporation and also as chairman of the board of directors.
*
TRUE
FALSE
Hint for question 4
In 1991, nearly 80 percent of the CEOs of U.S. companies also served as
chairman of the board of directors.
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5.
Par value must be separately reported on the balance sheet because it
represents the market value of the stock when it was first issued.
TRUE
*
FALSE
Hint for question 5
Amounts paid in toward the par value of stock must be separately
reported on the balance sheet, however, par value has nothing to do
with the market value of the stock.
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Submit for Grade
Chapter F3: Tools of the Trade, Part I...The Balance Sheet: Initial
Financing-Investments by Owners
Fill In The Blanks
1.
On the balance sheet, __________ are the accounting element that
provides future benefits--the items a company owns or controls.
equity
stock
*
assets
liability
Hint for question 1
Which accounting element does a company own or control?
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2.
The _________ form of ownership is a separate legal entity that
distributes profits to the owners in the form of a dividend.
proprietorship
*
corporate
common
partnership
Hint for question 2
Proprietorships, partnerships, and corporations are the three forms of
ownership.
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3.
__________ stock is no longer in the hands of shareholders.
Preferred
Common
*
Treasury
No-par
Hint for question 3
What type of stock has been repurchased from shareholders?
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4.
Net income (profits) increases retained earnings, and __________
decrease(s) retained earnings.
par
APIC
stock
*
dividends
Hint for question 4
What event results in decreasing the retained earnings account?
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5.
The __________ market is where investors trade shares of stock with
each other.
common
primary
preferred
*
secondary
Hint for question 5
First, stock is issued by a corporation to shareholders. Next,
shareholders can trade with each other.
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Submit for Grade
Chapter F3: Tools of the Trade, Part I...The Balance Sheet: Initial
Financing-Investments by Owners
Essay Questions
1.
List the three accounting elements reported on the balance sheet.
Describe each in your own words. List three examples of account titles for
each. Explain the primary purpose of the balance sheet.
2.
Explain the similarities and differences between common stock and
preferred stock. In your explanation comment on ownership rights, return
on investment, and risk.
3.
Stockholders’ Equity of Casey Corporation December 31, 2006
Common stock, 10,000 shares
issued and outstanding
Additional paid-in capital
Retained earnings
Treasury stock
Total SE
$100,000
$200,000
$500,000
-0$800,000
Stockholders’ Equity of Casey Corporation
December 31, 2007
Common stock
$300,000
Additional paid-in capital
$800,000
Retained earnings
$600,000
Treasury stock
$(75,000)
Total SE
$1,625,000
Comment on the amount of change and the transactions that may have
caused the change in each of the stockholders’ equity accounts between
December 31, 2006, and December 31, 2007.
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