Master Equity Accounting: Enhance Your Financial Reporting Skills

Question 1

Which transaction increases the Retained Earnings account?

Accepted Answer

Net income for the period

Answer

Issuance of common stock

Answer

Declaration of dividends

Answer

Purchase of treasury stock

Question 2

When issuing common stock, which scenario leads to a credit in the Share Premium account?

Accepted Answer

Issuance above par value

Answer

Issuance at par value

Answer

Issuance below par value

Answer

Issuance of preferred stock

Question 3

Which financial statement provides information about comprehensive income, dividends, and retained earnings?

Accepted Answer

Statement of Changes in Equity

Answer

Balance Sheet

Answer

Income Statement

Answer

Statement of Cash Flows

Question 4

Which transaction increases the Additional Paid-In Capital account?

Accepted Answer

Issuing common stock at a premium

Answer

Issuing common stock at par value

Answer

Declaring cash dividends

Answer

Purchasing treasury stock

Question 5

When issuing common stock for cash, which account is credited?

Accepted Answer

Paid-in capital

Answer

Retained earnings

Answer

Share premium

Answer

Treasury stock

Question 6

Which transaction results in a debit to the Share Premium account?

Accepted Answer

Issuing common shares above par value

Answer

Issuing common shares at par value

Answer

Declaring a stock dividend

Answer

Repurchasing treasury shares

Question 7

When a company buys back its own shares from the market, which account increases?

Accepted Answer

Treasury stock

Answer

Share premium

Answer

Retained earnings

Answer

Paid-in capital

Question 8

Which transaction will decrease retained earnings?

Accepted Answer

Declaring cash dividends

Answer

Issuing common stock

Answer

Buying back treasury stock

Answer

Recording net income

Question 9

When a company repurchases its own treasury shares, what is the immediate financial impact on stockholders' equity?

Accepted Answer

Repurchasing treasury shares reduces the number of outstanding shares, decreasing total stockholders' equity.

Answer

Treasury shares are recorded as an asset, decreasing total stockholders' equity.

Answer

Repurchased shares are recorded as an expense, decreasing total stockholders' equity.

Answer

Treasury shares are recorded as a liability, increasing total stockholders' equity.

Question 10

When preferred stock is issued at a price above par, what is the impact on the company's financial statements?

Accepted Answer

Additional paid-in capital increases, and retained earnings decrease

Answer

Retained earnings increase, and additional paid-in capital decreases

Answer

Neither additional paid-in capital nor retained earnings are affected

Answer

Additional paid-in capital decreases, and retained earnings increase

Question 11

When issuing common stock above its par value, which account records the difference between the issuance price and the par value?

Accepted Answer

Paid-in Capital in Excess of Par

Answer

Common Stock

Answer

Retained Earnings

Answer

Share Discount

Question 12

Which transaction would result in an increase in the share premium account?

Accepted Answer

Issuance of common stock above par value

Answer

Issuance of common stock at par value

Answer

Repurchase of common stock

Answer

Declaration of cash dividends

Question 13

Which financing option would NOT result in an increase in a company's total equity?

Accepted Answer

Issuing new bonds

Answer

Issuing new common stock

Answer

Issuing new preferred stock

Answer

Retaining earnings

Question 14

When ABC Company declares a cash dividend of $100,000, what happens to its retained earnings?

Accepted Answer

Retained earnings decrease by $100,000

Answer

Retained earnings increase by $100,000

Answer

Retained earnings remain unchanged

Question 15

Which transaction would increase a company's additional paid-in capital account?

Accepted Answer

Issuing common stock above par value

Answer

Issuing common stock at par value

Answer

Declaring cash dividends

Answer

Repurchasing treasury stock

Question 16

Which of the following transactions would cause a reduction in the total stockholders' equity of a company?

Accepted Answer

Declaration and payment of cash dividends

Accepted Answer

Repurchase of treasury stock

Answer

Issuance of common stock for cash

Answer

Recognition of net income

Question 17

When a company issues common stock, which of the following transactions will increase the additional paid-in capital account?

Accepted Answer

Issuing common stock at a price higher than par value

Answer

Issuing common stock at par value

Answer

Issuing common stock at a price lower than par value

Answer

Repurchasing treasury stock at a price higher than its cost

Question 18

When issuing common stock, which transaction would increase the Share Premium account?

Accepted Answer

Issuing common stock above par value

Answer

Issuing common stock at par value

Answer

Issuing preferred stock at par value

Answer

Issuing common stock below par value

Question 19

Which transaction will **increase** Additional Paid-in Capital?

Accepted Answer

Issuing common stock above par value

Answer

Issuing common stock at par value

Answer

Declaring cash dividends

Answer

Issuing preferred stock

Question 20

When preferred stock is issued above its par value, which account is credited for the excess amount?

Accepted Answer

Share Premium

Answer

Retained Earnings

Answer

Common Stock

Question 21

According to GAAP, how are treasury shares accounted for?

Accepted Answer

Recorded at cost and reported as a reduction in total stockholders' equity

Answer

Recorded at par value and reported as an increase in total stockholders' equity

Answer

Not recorded on the balance sheet

Answer

Reported as an asset on the balance sheet

Question 22

When a company buys back its own previously issued common stock, which accounting method is typically used to record the transaction?

Accepted Answer

The shares are recorded as a reduction of total stockholders' equity and offset by the repurchase cost.

Answer

The shares are recorded as an asset on the balance sheet at their repurchase cost.

Answer

The shares are recorded as an expense on the income statement.

Answer

The shares are not reflected in the financial statements.

Question 23

Which components are included in a statement of changes in equity?

Accepted Answer

Common stock, retained earnings, and other comprehensive income

Answer

Retained earnings, dividends, and treasury stock

Answer

Cash, accounts receivable, and inventory

Question 24

When issuing common stock with a par value at a price above par, which accounting entry reflects the excess amount received?

Accepted Answer

Credit to share premium account

Answer

Debit to retained earnings account

Answer

Reduction in additional paid-in capital

Answer

No impact on shareholders' equity

Question 25

Which transaction increases the balance of the Common Stock account?

Accepted Answer

Issuing shares for cash

Answer

Declaring cash dividends

Answer

Buying back treasury stock

Question 26

According to GAAP, how does a net loss impact a company's retained earnings?

Accepted Answer

Retained earnings decrease.

Answer

Retained earnings remain unchanged.

Answer

Retained earnings increase.

Answer

Retained earnings are unaffected unless dividends are paid.

Question 27

When a company declares a cash dividend on its common stock, which financial statement component decreases on the date of declaration?

Accepted Answer

Retained earnings

Answer

Share capital

Answer

Total assets

Answer

Total liabilities

Question 28

How does declaring and paying a cash dividend affect retained earnings?

Accepted Answer

Decreases retained earnings

Answer

Increases retained earnings

Answer

No impact on retained earnings

Answer

Increases retained earnings by the dividend amount

Question 29

Which transaction results in a **reduction** in retained earnings?

Accepted Answer

Declaring and distributing a cash dividend

Answer

Issuing additional shares of common stock at par value

Question 30

Upon the issuance of preferred stock, which of the following journal entries would be recorded initially?

Accepted Answer

A. Debit Preferred Stock, credit Additional Paid-In Capital

Answer

B. Debit Preferred Stock, credit Common Stock

Answer

C. Debit Retained Earnings, credit Preferred Stock

Answer

D. Debit Additional Paid-In Capital, credit Preferred Stock

Question 31

Which transaction below decreases retained earnings without impacting total equity?

Accepted Answer

Declaring cash dividends

Answer

Issuing common stock

Answer

Recognizing comprehensive income

Question 32

When a company buys back its own issued common stock, which accounting treatment is most commonly used?

Accepted Answer

Decrease Common Stock

Answer

Increase Retained Earnings

Answer

Expense on Income Statement

Answer

Decrease Share Premium

Question 33

How is convertible debt accounted for, and how does it differ from regular debt and equity?

Accepted Answer

Convertible debt is initially recorded as a liability and reclassified as equity upon conversion.

Answer

Issuing convertible debt increases the company's total equity.

Answer

Convertible debt is accounted for as equity from the date of issuance.

Answer

Convertible debt is accounted for the same as regular debt.

Question 34

When common stock is issued for cash, which financial statement element is primarily increased?

Accepted Answer

Equity

Answer

Assets

Answer

Liabilities

Answer

Revenue

Question 35

Which type of dividend is declared as a fixed dollar amount per share?

Accepted Answer

Cash dividend

Answer

Stock dividend

Answer

Property dividend

Answer

Liquidating dividend

Question 36

What is the primary objective of the statement of retained earnings?

Accepted Answer

Present changes in equity over a period

Answer

Disclose dividend distributions

Answer

Highlight the company's financial performance

Answer

Provide information about the company's long-term debt

Question 37

Which of the following is NOT a consequence of declaring a cash dividend?

Accepted Answer

Decrease in total liabilities

Answer

Increase in cash outflow

Answer

Decrease in total equity

Answer

Decrease in retained earnings

Question 38

Describe the accounting treatment for stock dividends, explaining the distinction between small and large stock dividends.

Accepted Answer

Large stock dividends result in a transfer from retained earnings to share capital, while small stock dividends do not.

Answer

Both small and large stock dividends are recorded at the fair value of the shares issued.

Answer

Small stock dividends have a material effect on the financial statements, while large stock dividends do not.

Question 39

Which of the following characteristics is NOT exclusive to equity?

Accepted Answer

Has a fixed maturity date

Answer

Represents ownership interest

Answer

Entitles holders to dividends

Answer

Can be classified as common or preferred

Question 40

What is the primary purpose of a retained earnings statement?

Accepted Answer

Report changes in retained earnings over a period

Answer

Disclose dividend distribution information

Answer

Summarize revenue and expenses for a period

Answer

Calculate net income for a period

Question 41

Which of the following transactions constitutes a stock dividend?

Accepted Answer

Issuance of additional common stock

Answer

Distribution of cash to shareholders

Answer

Reduction in outstanding shares

Answer

Conversion of preferred stock to common stock

Question 42

What is a key implication for a company that issues preferred stock with a cumulative dividend feature?

Accepted Answer

The company must pay dividends on the preferred stock before paying dividends on common stock.

Answer

The company is not obligated to pay dividends on the preferred stock.

Answer

The cumulative dividend feature does not affect the company's obligation to pay dividends.

Question 43

What do retained earnings represent?

Accepted Answer

The cumulative net income of a company

Answer

The amount of dividends declared in a given year

Answer

The portion of equity that can be distributed to shareholders

Answer

The difference between total assets and total liabilities

Question 44

Which of the following transactions would reduce retained earnings?

Accepted Answer

Declaration of cash dividends

Answer

Issuance of common stock

Answer

Repurchase of treasury stock

Answer

Sale of inventory

Question 45

What ethical concern may arise when a company buys back its own shares?

Accepted Answer

Misrepresentation of financial performance

Answer

Dilution of shareholder equity

Answer

Increased liquidity for shareholders

Question 46

How do dilutive convertible securities affect earnings per share?

Accepted Answer

Decrease earnings per share

Answer

Increase earnings per share

Answer

Have no impact on earnings per share

Answer

Always have a positive impact on earnings per share

Question 47

Which of the following is a key feature of preferred stock?

Accepted Answer

Preferred stock receives dividends before common stock

Answer

Preferred stock has voting rights

Answer

Preferred stock can be converted into common stock

Answer

Preferred stock has a lower claim on assets than common stock in the event of liquidation

Question 48

What is the accounting method most commonly used to record the acquisition of treasury stock?

Accepted Answer

Cost method

Answer

Par value method

Answer

Market value method

Question 49

Compare the advantages and disadvantages of the cost method and equity method for accounting for investments in equity securities.

Accepted Answer

Equity method: Enables recognition of the investor's share of the investee's earnings or losses.

Accepted Answer

Cost method: Simpler to implement and requires less ongoing accounting effort.

Answer

Cost method: Provides a more accurate representation of the investment's fair value.

Answer

Equity method: Provides a more conservative estimate of the investment's value.

Question 50

When a company buys back its own shares, what ethical dilemmas and potential conflicts of interest might arise?

Accepted Answer

Conflicts of interest can occur when insiders with access to confidential information participate in share repurchases.

Answer

Companies have no ethical obligation to consider all stakeholders when repurchasing shares.

Answer

Share buybacks always benefit all stakeholders by increasing earnings per share and stock prices.

Question 51

In a 3-for-1 stock split, what occurs to the book value per share and the number of shares outstanding?

Accepted Answer

Book value per share decreases, shares outstanding increase.

Answer

Book value per share increases, shares outstanding decrease.

Answer

Both book value per share and shares outstanding remain unchanged.

Answer

Book value per share increases, shares outstanding increase.

Question 52

Which of the following is a disadvantage of using the equity method for accounting for investments in equity securities?

Accepted Answer

Delayed recognition of changes in the investee's net assets

Answer

Increased control over the investee

Answer

Simplified financial reporting process

Answer

Improved cash flow analysis

Question 53

What is the main purpose of the statement of changes in equity?

Accepted Answer

Disclose comprehensive income and its allocation to equity components

Answer

Summarize changes in liabilities and equity

Answer

Report changes in retained earnings only

Answer

Reconcile net income with ending equity

Question 54

What is the correct accounting treatment for a stock split?

Accepted Answer

Increase in the number of shares with a corresponding decrease in par value per share

Answer

Decrease in the number of shares with a corresponding increase in par value per share

Answer

No change in the number of shares or par value per share

Answer

Increase in both the number of shares and par value per share

Question 55

What is the primary purpose of the statement of retained earnings?

Accepted Answer

Summarize changes in retained earnings over a specific period

Answer

Provide an analysis of dividends paid during a period

Answer

Disclose the amount of earnings available for distribution to shareholders

Answer

Report the company's net income for a period

Question 56

Explain the difference between authorized shares and issued shares.

Accepted Answer

Authorized shares represent the maximum number of shares a company can issue, while issued shares are the actual number of shares outstanding.

Answer

Issued shares represent the maximum number of shares a company can issue, while authorized shares are the actual number of shares outstanding

Answer

Authorized shares and issued shares are the same.

Answer

Issued shares are a subset of authorized shares.

Question 57

Explain the difference between par value and market value of a stock.

Accepted Answer

Par value is the legal minimum value at which a stock can be issued, while market value is the current trading price of the stock.

Answer

Market value is the legal minimum value at which a stock can be issued, while par value is the current trading price of the stock.

Answer

Par value and market value are the same.

Answer

Market value is a subset of par value.

Question 58

Which of the following is NOT a common type of share repurchase?

Accepted Answer

Issuance of new shares

Answer

Open market purchase

Answer

Tender offer

Answer

Fixed-price offer

Question 59

In accordance with GAAP, when should compensation expense be recognized for employee stock options?

Accepted Answer

Over the vesting period

Answer

At the grant date

Answer

At the exercise date

Answer

At the expiration date

Question 60

Which of the following transactions results in an increase in the Retained Earnings balance?

Accepted Answer

Net income reported for the period

Answer

Issuance of additional common stock

Answer

Declaration of cash dividends

Answer

Repurchase of treasury stock

Question 61

Which of the following is NOT a characteristic of preferred stock?

Accepted Answer

Carries voting rights

Answer

Has a fixed dividend rate

Answer

Can be convertible into common stock

Answer

Has priority over common stock in liquidation

Question 62

What is the legal capital assigned to each share of common stock?

Accepted Answer

Par value

Answer

Market value

Answer

Stated value

Question 63

What is the purpose of the treasury stock account?

Accepted Answer

To record the shares of a company's own stock that have been reacquired

Answer

To track the value of stock options granted to employees

Answer

To report the unrealized gains or losses on investments in other companies

Question 64

Which of the following is NOT a component of Shareholders' Equity?

Accepted Answer

Bonds payable

Answer

Retained earnings

Answer

Preferred stock

Answer

Common stock