Multiple Choice Questions

1. Which of the following does not affect retained earnings?

a. Net income for the period

b. Dividends declared for common shareholders

c. Repayment of the principal of a loan

d. All of the above affect retained earnings.

2. Preferred stock is stock that is

a. Traded above the price of common stock.

b. Issued and later repurchased.

c. Bought and sold to smooth a company’s earnings.

d. Given priority over common stock for dividends.

3. Treasury stock is

a. A company’s own stock that it has repurchased and added to its short-term trading securities (current assets) as an investment.

b. A company’s own stock that is considered issued but not outstanding.

c. A company’s own stock that may be used to “manage” earnings—it could be sold for a gain when the price of the stock increases to help a company meet its earnings forecast.

d. Booked as an increase to assets and a decrease to shareholders’ equity when it is purchased.

4. The two major components of shareholders’ equity are

a. Preferred stock and common stock.

b. Contributed capital and paid-in capital.

c. Contributed capital and retained earnings.

d. Common stock and treasury stock.

5. The purchase of treasury stock will

a. Increase assets and shareholders’ equity.

b. Decrease assets and shareholders’ equity.

c. Have no effect on assets or shareholders’ equity.

d. Decrease assets but have no effect on shareholders’ equity.

6. If a company purchased 50 shares of its own stock for $10 per share and later sold it for $12 per share, the company would a. record a gain of $2 per share.

b. Record an increase to retained earnings of $100.

c. Show a gain on the sale.

d. Show an increase of $100 of paid-in capital.

7. The number of shares of stock designated as issued on the year-end balance sheet are those shares that

a. Were issued during the year.

b. Have been issued during the firm’s life.

c. Are authorized to be issued.

d. Have been repurchased during the year.

8. When treasury stock is reissued for more than the company paid to buy it, the difference is

a. A gain that will increase the firm’s income.

b. Included in sales revenue for the period.

c. Added to an additional paid-in capital account.

d. Given to the current shareholders as a dividend.

9. The payment of dividends is

a. Required by corporate law.

b. Determined by the firm’s board of directors.

c. Related in amount to the firm’s earnings per share.

d. Determined by the Securities and Exchange Commission.

10. Return on equity measures how well a firm is using

a. Owners’ original contributions to the firm.

b. Creditors’ investment in the firm.

c. Shareholders’ total investment in the firm, both contributed and earned.

d. Its assets.