Multiple Choice Questions
1. A company would repurchase its own stock for all of the following reasons except:
a. It believes the stock is overvalued.
b. It wishes to increase the earnings per share.
c. It wishes to prevent unwanted takeover attempts.
d. It needs the stock for employee bonuses.
2. When a company purchases treasury stock, which of the following statements is true?
a. Dividends continue to be paid on the treasury stock.
b. It is no longer considered to be issued.
c. Treasury stock is considered to be an asset because cash is paid for the stock.
d. The cost of the treasury stock reduces stockholders’ equity.
3. If a company purchases treasury stock for $6,000 and then reissues it for $5,000, the difference of $1,000 is:
a. An increase in stockholders’ equity.
b. A decrease in stockholders’ equity.
c. Treated as a gain on the sale.
d. Treated as a loss on the sale.
4. When a company retires its own common stock, the company must:
a. Decrease the common stock account balances by the original issue price.
b. Record a gain or loss depending on the difference between original selling price and repurchase cost.
c. Get the approval of the state to do so.
d. Issue a different class of stock to the former stockholders.
5. Which of the following should be considered when a company decides to declare a cash dividend on common stock?
a. The retained earnings balance only
b. The amount of authorized shares of common stock
c. The book value of the company’s stock
d. The cash available and the retained earnings balance
6. When a company declares a cash dividend, which of the following is true?
a. Assets are decreased.
b. Assets are increased.
c. Liabilities are increased.
d. Stockholders’ equity is increased.
7. What is the effect of a stock dividend on stockholders’ equity?
a. Stockholders’ equity is decreased.
b. Total stockholders’ equity stays the same.
c. Additional paid-in capital is decreased.
d. Retained earnings is increased.