Accounting Practice Exam (4) - Part III

Preferred stockholders do not have the right to vote in corporate matters. While they have certain privileges such as first claim to dividends, preference to corporate assets in case of liquidation, and receiving dividends in arrears before common stockholders, they do not have voting rights. Voting rights are typically associated with common stockholders, who have a say in the company's decision-making processes.

Stock dividends have the effect of decreasing retained earnings because they involve distributing additional shares of stock to existing shareholders. This decreases the value of each individual share and reduces the company's overall retained earnings. On the other hand, stock splits have no effect on retained earnings as they involve dividing existing shares into multiple shares, without affecting the total value of the company or its retained earnings. Therefore, the correct answer is "No change / Decrease".

When the board of directors declares a cash dividend, it creates a liability for the company. This is because the company now owes the shareholders the amount of the dividend. This liability is recorded on the balance sheet under the "Liabilities" section. At the same time, the declaration of a cash dividend reduces the stockholders' equity. This is because the company is distributing a portion of its earnings to the shareholders, which decreases the amount of retained earnings and therefore decreases the overall stockholders' equity. Therefore, the correct answer is "Liabilities / Stockholders' equity".

Government regulation would not be considered an advantage of the corporate form of organization because it imposes additional requirements and restrictions on the company's operations. While limited liability of owners, separate legal existence, and continuous life are all benefits of the corporate form that protect the interests of shareholders and promote the longevity and stability of the organization, government regulation can be seen as a burden that adds complexity and costs to the business.

The common stock account balance of $30,000 represents the total par value of the shares issued by the corporation. Since the par value is given as $1 per share, the number of shares issued can be calculated by dividing the common stock balance by the par value. Therefore, the number of shares issued is 30,000.

An increase in accounts receivable would be subtracted from net income using the indirect method because it represents a decrease in cash flow. When accounts receivable increases, it means that the company has made sales on credit and has not yet received the cash. Therefore, this increase needs to be subtracted from net income to reflect the decrease in cash flow.

When a corporation acquires treasury stock, it essentially buys back its own shares from the open market. This transaction reduces the amount of outstanding shares, which in turn decreases the total assets and total stockholders' equity of the corporation. The treasury stock is considered a contra-equity account, meaning it is subtracted from the total stockholders' equity. Therefore, the correct answer is that the acquisition of treasury stock by a corporation decreases its total assets and total stockholders' equity.

The net cash provided by operating activities for the year is $30,000. This can be calculated by adjusting the net income for non-cash expenses (depreciation) and changes in working capital. The increase in accounts receivable indicates that cash was received from customers, while the decrease in accounts payable indicates that cash was paid to suppliers. By subtracting the increase in accounts receivable and adding the decrease in accounts payable to the net income, we get the net cash provided by operating activities. In this case, it would be $40,000 - $10,000 + $14,000 - $6,000 = $38,000. However, the correct answer is $30,000, which suggests that there might be additional information or adjustments not provided in the question.

Authorized shares represent the largest number of common shares because these are the maximum number of shares that a company is legally allowed to issue. Issued shares refer to the number of shares that have been actually issued by the company, while outstanding shares are the shares that are currently held by investors. Treasury shares are the shares that a company has bought back from the market. Therefore, authorized shares is the correct answer as it represents the maximum potential number of common shares a company can issue.

The acquisition of land by issuing common stock is considered a noncash transaction because it does not involve the exchange of cash. Instead, common stock is used as a form of payment. Noncash transactions are not reported in the body of a statement of cash flows because they do not impact the cash position of the company. The statement of cash flows only includes transactions that involve the inflow or outflow of cash.

A loss on the sale of equipment will appear as an addition to net income because it is a non-cash expense that reduces the overall profitability of the company. This loss is added back to net income in the operating activities section of the statement of cash flows because it does not represent an actual outflow of cash.

When a company issues common stock for an amount greater than its par value, the excess amount is recorded as "Paid-In Capital in Excess of Par Value." In this case, the company issued 2,000 shares of common stock with a par value of $5 for a total of $160,000. Since the par value of the shares is $5, the total par value of the shares is 2,000 x $5 = $10,000. Therefore, the excess amount is $160,000 - $10,000 = $150,000, which is credited to "Paid-In Capital in Excess of Par Value."

A stock dividend is a distribution of additional shares to existing shareholders, which means that the number of outstanding shares increases. This change in the composition of stockholders' equity occurs because the total value of the company's assets and liabilities remains the same, but the number of shares representing ownership in the company increases. Therefore, the effect of a stock dividend is to change the composition of stockholders' equity rather than decreasing total assets or liabilities or increasing the book value per share of common stock.

Financing activities involve raising funds for a company's operations and growth. Issuing debt refers to the process of borrowing money from external sources, such as issuing bonds or taking out loans. This allows the company to raise capital to finance its activities without diluting ownership. By issuing debt, the company assumes a liability to repay the borrowed amount with interest over a specified period. This activity is an essential part of a company's financial strategy and can provide the necessary funds for expansion, investment, or other financial obligations.

If the law firm received $2,000 cash for legal services to be rendered in the future and credited the full amount to the liability account Unearned Service Revenue, it means that the firm has not yet recognized the revenue for those services. However, if the legal services have already been rendered at the end of the accounting period and no adjusting entry is made, it means that the revenue has not been properly recorded. Therefore, this would cause revenues to be understated in the financial statements.

Investing activities refer to the activities undertaken by a company to acquire or dispose of long-term assets, such as property, plant, and equipment, or investments in other companies. Collecting cash on loans made is a part of investing activities because it involves receiving cash from borrowers who have taken loans from the company. This indicates that the company is earning interest income on its loans and is able to collect the principal amount back, which is a positive indicator of its investment in lending activities.