Multiple-Choice Questions
1. A company would repurchase its own stock for all of the following reasons except:
a. It needs the stock for employee bonuses.
b. It wishes to make an investment in its own stock.
c. It wishes to prevent unwanted takeover attempts.
d. It wishes to improve the company's financial ratios.
2. When a company purchases treasury stock, which of the following statements is true?
a. Treasury stock is considered to be an asset because cash is paid for the stock.
b. The cost of the treasury stock reduces stockholders' equity.
c. Dividends continue to be paid on the treasury stock because it is still issued.
d. Since treasury stock is held by the original issuer, it is no longer considered to be issued.
3. If a company purchases treasury stock for $6,000 and then reissues it for $5,000, the difference of $1,000 is:
a. Treated as a gain on the sale.
b. Treated as a loss on the sale.
c. An increase in stockholders' equity.
d. A decrease in stockholders' equity.
4. When a company wishes to purchase and retire its own stock, the company must:
a. Decrease the 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. Stockholders' equity is increased.
b. Liabilities are increased.
c. Assets are decreased.
d. Assets are increased.
7. What is the effect of a stock dividend on stockholders' equity?
a. Stockholders' equity is decreased.
b. Retained earnings is increased.
c. Additional paid-in capital is decreased.
d. Total stockholders' equity stays the same.