The following questions dealing with shareholders' equity are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation sponsored by the Institute of Management Accountants (www.imanet.org) provides members with an objective measure of knowledge and competence in the field of management accounting. Determine the response that best completes the statements or questions.
1. The par value of common stock represents
a. the estimated fair value of the stock when it was issued.
b. the liability ceiling of a shareholder when a company undergoes bankruptcy proceedings.
c. the total value of the stock that must be entered in the issuing corporation's records.
d. the amount that must be recorded on the issuing corporation's record as paid-in capital.
2. The equity section of Smith Corporation's statement of financial position is presented below.The common shareholders of Smith Corporation have preemptive rights. If Smith Corporation issues 400,000 additional share of common stock at $6 per share, a current holder of 20,000 shares of Smith Corporation's common stock must be given the option to buy
a. 1,000 additional shares.
b. 3,774 additional shares.
c. 4,000 additional shares.
d. 3,333 additional shares.
3. A stock dividend
a. increases the debt to equity ratio of a firm.
b. decreases future earnings per share.
c. decreases the size of the firm.
d. increases shareholders' wealth.