Statement of Changes in Equity and The Balance Sheet

3/11/23, 12:46 AM Part_1 - Dashboard - Statement of Changes in Equity and the Balance Sheet
Study Guide 29
Statement of Changes in Equity and the Balance Sheet
I. The statement of changes in equity presents the organization's detailed changes in each equity account over the course of the period presented. The accounts
typically presented in the statement of changes in equity include the following:
A. Preferred Stock: Contributed capital for non-voting stock which generally carries a stated dividend rate that will be paid first in the event the organization
declares a dividend.
1. Generally non-voting stock ownership.
2. Generally carries a specified dividend rate stated as a percentage of par value. For example, a $100 par 8% preferred share would be entitled to an
$8 dividend annually if the organization declared dividends. Preferred Stock dividends must be paid before any common shareholders receive
dividends from the organization.
3. May be convertible into common stock at a specified conversion ratio.
4. May be callable at a specified price at the option of the organization.
5. Behind company creditors, but ahead of common shareholders for preference in the case of bankruptcy or other liquidation of the organization.
B. Common Stock
1. Usually carried at par value unless the stock is “no par” stock, in which case the entire amount paid for the stock is classified as common stock.
2. Dividends are not predetermined like preferred stock and are only paid when declared and only then, after the preferred shareholders receive their
stated dividend.
3. Last in line for preference in the case of bankruptcy or other liquidation.
C. Additional Paid-In Capital
1. Amount received by the organization for stock over the par value of the shares.
2. Can be affected by various equity transactions, including stock dividends, resales of treasury stock, and issuance of options and warrants.
D. Treasury Stock
1. Amount paid by the organization to repurchase its own stock
2. Shown as contra equity, or a reduction to the equity section
E. Retained Earnings
1. Net income or loss for the organization is ultimately recorded in retained earnings.
2. Dividends declared are a reduction to retained earnings.
F. Accumulated Other Comprehensive Income
1. Other comprehensive income or loss for the organization is ultimately recorded in Accumulated Other Comprehensive Income.
2. Items accumulated here are not part of the calculation of net income.
G. Non-Controlling Interest
1. When an organization has a controlling interest in another entity, but not complete ownership, 100% of the assets and liabilities of the subsidiary
are included in the balance sheet of the organization and the portion of the subsidiary that is owned by third parties is segregated as a separate
component of equity.
II. Several common transactions affect the equity accounts.
A. Sale of new shares: Generally sold for an amount above par value. Cash received is recorded and the common stock/preferred stock account is increased
for the par value and the additional paid-in capital account is increased for the balance.
B. Issuance of options: Usually issued as a form of compensation and recorded as part of additional paid-in capital as compensation expense is recognized.
1. Total compensation expense is valued at the fair value of the options on the date they are granted.
2. Compensation expense is recognized over the service period required for the employee to become vested in the options.
C. Dividends: Retained earnings is reduced when a cash dividend is declared. If payment of the dividend is delayed, a payable is also recorded and then
reduced when the payment is later made.
D. Net Income/Loss: Increases/Decreases retained earnings each year.
E. Other Comprehensive Income Items: Increase/Decrease accumulated other comprehensive income each year.
F. Repurchase of treasury stock: Treasury stock is increased (which is a reduction to equity) for the cost of the treasury shares.
G. Resale of treasury stock.
1. When sold for an amount in excess of the repurchase price, the cost is taken out of treasury stock and the excess is added to additional paid-in
capital.
2. When sold for an amount below the repurchase price, the cost is taken out of treasury stock and the difference is taken from additional paid-in
capital to the extent it was previously increased for treasury stock transactions. If no additional paid-in capital from treasury stock transactions
exists, the difference is taken from retained earnings.
H. Stock split: Generally has no impact on any of the equity accounts as long as the par value is also changed to reflect the new share size. For example, if
100 shares of $1 par common stock undergo a 2-for-1 stock split, the result would be 200 shares of $0.50 par common stock. Common stock is $100
before the split (100 × $1) and is still $100 after the split (200 × $0.50) so no journal entry is needed.
I. Stock dividends: A stock dividend occurs when an organization distributes additional shares of stock to existing stockholders as a dividend rather than
paying them cash.
1. Small stock dividend: Less than 20–25% of the number of shares outstanding. Retained earnings is reduced for the fair value of the stock being
issued, common stock is increased for the par value of the stock issued, and the difference is included in additional paid-in capital.
2. Large stock dividend: Greater than 20–25% of the number of shares outstanding. Retained earnings is reduced for the par value of the stock being
issued and common stock is increased for the same amount. No impact on additional paid-in capital, similar to a stock split.
Practice Question
Jolley, Inc. has 100,000 common shares outstanding with a $1 par value and a market value of $8. Jolley declares a 22% stock dividend.
What is the impact on the various equity accounts if the transaction is considered a small stock dividend?
What is the impact on the various equity accounts if the transaction is considered a large stock dividend?
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Answer
1. A small stock dividend is recorded at fair value. 22,000 new shares are issued (100,000 × 22%) and the fair value of $176,000 is taken from
retained earnings (22,000 × $8), common stock is increased by $22,000 (22,000 × $1) to reflect the par value of the new shares and the
balance of $154,000 ($176,000 − $22,000) is recorded as an increase to additional paid-in capital.
2. A large stock dividend is recorded at par value. 22,000 new shares are issued (100,000 × 22%) and the par value of $22,000 is taken from
retained earnings (22,000 × $1) and common stock is increased for the same amount.
III. Illustration: The basic format for the statement of changes in equity is illustrated using ABC Co. information for 20X2.
ABC Co.
Statement of Changes in Equity

for the year ended December 31, 20X2
Common Stock APIC Treasury Stock Retained Earnings AOCI Total Equity
December 31, 20X1 $100,000 $220,000 ($10,000) $210,000 $7,000 $527,000

Purchase of Treasury Stock (5,000) (5,000)
Issuance of New Common Shares 10,000 35,000 45,000
Net Income 240,000 240,000
Other Comprehensive Income (5,000) (5,000)
December 31, 20X2 $110,000 $255,000 ($15,000) $450,000 $2,000 $802,000
IV. The balance sheet shows the organization's assets, liabilities, and owners’ equity as of the end of the period presented. The balance sheet is the only one of the
four main financials statements that presents information as of a point in time, rather than over a period of time. The classic accounting equation “assets =
liabilities + equity” is illustrated through the balance sheet.
A. Assets represent the resources available to the organization for carrying out its purpose. Assets are presented in order of liquidity within two general
categories, current or non-current, based upon the period of time the assets are expected to convert to cash.
1. Cash, accounts receivable, inventory, prepaid assets, and other items expected to be realized within one year (or the operating cycle if longer) are
classified as current.
2. Property and equipment, intangible assets, and other assets expected to benefit the company for longer than one year (or the operating cycle if
longer) are classified as non-current.
B. Liabilities represent third party claims to the assets of the organization. Liabilities are the amounts owed by the organization to third parties, such as
debt, accounts payable, or wages payable. Liabilities are presented in the order they come due within two general categories, current or non-current,
based upon the period of time before assets or other resources of the company will be utilized to satisfy the liability.
1. Accounts payable, accrued expenses (wages, utilities, rent, etc.), deferred revenue, principal portions of long-term debt due in the coming year, and
other liabilities expected to be settled with cash or other current assets within one year (or the operating cycle if longer) are classified as current.
2. Liabilities due after one year (or the operating cycle if longer), such as bonds or bank debt, are classified as long-term. In addition, deferred tax
liabilities are considered long-term liabilities by definition.
C. Equities represent owner claims to the assets of the organization. These accounts were explained in part I of this lesson.
1. Equity accounts are generally presented in order of liquidation preference with preferred stock first, followed by common stock and additional
paid-in capital. Retained earnings and accumulated other comprehensive income are generally presented last in the equity section.
D. The balance sheet is incomplete without the additional disclosures in the notes to the financial statements. These disclosures help investors understand
the key assumptions and methods of accounting used so they can more effectively compare prior periods and assist with comparisons with other
companies. Key disclosures include the following items.
1. Significant accounting policies, including the following:
a. Any securities classified as cash equivalents
b. Inventory valuation method and cost flow assumptions
c. Method of depreciation
2. Significant estimates made within the accounts
3. Amounts within major classes of inventory (i.e., raw materials, work in process, finished goods)
4. Gross amounts within major classes of property and equipment (i.e. furniture, equipment, buildings, land) and accumulated depreciation for each
5. Components of deferred tax assets and liabilities
6. Expected annual principal payments on debt for the next five years and all amounts due thereafter
7. Sinking fund provisions for bonds
8. Par values and contractual provisions for preferred stock and common stock
9. Details about employee stock compensation programs
10. Significant commitments or contingencies not recorded in the balance sheet
11. Other information as may be needed for a full understanding of the items reported in the balance sheet
V. Illustration: The basic format for the balance sheet is illustrated using ABC Co. information for 20X2.
ABC Co.
Balance Sheet
as of December 31, 20X1 end 20X2
20X1 20X2
Cash $30,000 $100,000
Accounts Receivable 155,000 225,000
ABC Co.
Balance Sheet
as of December 31, 20X1 end 20X2
20X1 20X2
Inventory 200,000 450,000
AFS Investments 90,000 67,000
Property and Equipment 480,000 450,000
Total Assets $955,000 $1,292,000
Accounts Payable $213.000 $270,000

Accrued Wages 15,000 20,000
Long-Term Debt 200,000 200,000
Total Liabilities 428,000 490,000
Common Stock 100,000 110,000
Additional Paid-In Capital 220,000 255,000
Treasury Stock (10,000) (15,000)
Retained Earnings 210,000 450,000
Accumulated Other
Comprehensive Income 7,000 2,000
Total Equity 527,000 802,000
Total Liabilities and Equity $955,000 $1,292,000
Practice Question
Jolley, Inc. is preparing its 20X1 balance sheet and needs some assistance with properly classifying some of its liabilities. Jolley's operating cycle is approximately
90 to 120 days. Identify whether the following items should be current or non-current on the balance sheet.
1. Debt of $10,000 payable over 5 years at a rate of $2,000 per year plus interest.
2. Bonds of $100,000 due in full in 15 years. Interest of $6,000 is payable on the bonds each year and the full amount of the interest was already recorded and
paid for 20X1. Accordingly, no interest payable was recorded at the end of the year.
3. Deferred Tax Liability of $3,000 expected to reverse entirely within the next year.
4. Accrued Warranty of $12,000 expected to be paid out evenly over the next three years.
5. Accounts Payable of $38,000 generally due between 30 and 90 days.
Answer
1. Because $2,000 is due in the coming year and the remainder is due thereafter, this debt should be classified as current for $2,000 and non-current for $8,000.
2. Because the principal portion of the bonds is not due for 15 years, the entire amount should be classified as non-current. Jolley has fully paid its interest for
the year, so they have no need for a payable associated with the interest. Classification of the interest is not relevant.
3. By definition, Deferred Tax Liabilities are non-current liabilities.
4. The accrued warranty should be split as current and non-current based on the expected payments related to the warranty. $4,000 would be current and
$8,000 would be non-current.
5. Because the amount is expected to be paid within the next year, the entire amount is current.
Summary
The statement of changes in equity presents the organization's detailed changes in each equity account over the course of the period presented. The accounts
typically presented in this financial statement include: preferred stock, common stock, additional paid-in capital, treasury stock, retained earnings, accumulated
other comprehensive income, and non-controlling interest. You should be familiar with the common transactions that affect equity accounts. The balance sheet
shows the organization's assets, liabilities, and owner's equity as of the end of the period presented. Assets represent the resources available for carrying out the
organization's purpose and can be current or non-current. Liabilities represent third-party claims to the organization's assets and are also represented as current
or non-current. Equities represent owner claims to the organization's assets. It is also important to know the key disclosures related to the balance sheet.
Flashcards
1
FC.soc.FC001_1802
Which accounts are typically presented in the statement of changes in Preferred Stock
equity? Common Stock
Additional Paid-in Capital
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income
Non-Controlling Interest
2
FC.soc.FC002_1802
Purchase of Treasury Stock: Treasury stock (a contra equity

account) increases for the cost of the shares, which reduces
Explain the effect on the financial statements of the repurchase of
equity.
treasury stock and the resale of treasury stock.
Resale of Treasury Stock: When stock is resold for greater than
the repurchase price of the stock, the cost is taken from treasury
stock and the excess is added to additional paid-in capital. When
stock is resold for an amount lower than the repurchase price,
the difference is taken from additional paid-in capital and
retained earnings if there is not sufficient additional paid-in
capital from previous resales of treasury stock.
3
FC.soc.FC003_1802
Stock Split: Does not impact the equity accounts as long as the
Explain the events of stock splits and stock dividends. par value is changed to reflect the new share size.
Stock Dividends: A small stock dividend is less than 20–25% of
the number of outstanding shares. Retained earnings is reduced
for the fair value of stock, common stock is increased for the par
value, and the difference is included in additional paid-in capital.
For large stock dividends (greater than 20–25%), retained
earnings is reduced and common stock is increased for the par
value of the stock issued in the dividend.
4
FC.soc.FC004_1802
Assets: The resources available to the organization for carrying

Explain: out its purpose. Divided into a current and non-current portion.
Liabilities: Represent third-party claims to the assets of an
Three major sections included on a balance sheet organization. Divided into a current and non-current portion.
Footnote disclosures Equities: Represent the owner claims to the assets of the
organization.
Footnote Disclosures: The disclosures help investors understand
key assumptions and methods used to better compare financial
statements between organizations.
Notes
1 t Study Guide
par value - means stated value or face value.
2 t Study Guide
Small stock dividends will reduce retained earnings by the FAIR VALUE of the shares being issued.
3 t Study Guide
Large stock dividends will reduce retained earnings by PAR VALUE of the shares being issued
4 t Study Guide
OCI - special items that are not qualified as income items
5 t Study Guide
Preferred Stock dividends must be paid before any common shareholders receive dividends from the organization.
6 t Study Guide
Usually carried at par value unless the stock is “no par” stoc
7 t Study Guide
Dividends are not predetermined
8 t Study Guide
Last in line for preference in the case of bankruptcy or other liquidation.
9 t Study Guide
generally carries a stated dividend rate that will be paid first in the event the organization declares a dividend.
10 t Study Guide
Sale of new shares:
11 t Study Guide
fair value
12 t Study Guide
recognized over the service period required
13 t Study Guide
Small stock dividend:
14 t Study Guide
Large stock dividend:
15 t Study Guide
reduced when a cash dividend is declared
16 t Study Guide
Other Comprehensive Income Items:
17 t Study Guide
reduction to equity
18 t Study Guide
excess
19 t Study Guide
the cost is taken out of treasury stock and the excess is added to additional paid-in capital.
20 t Study Guide
below
21 t Study Guide
the cost is taken out of treasury stock and the difference is taken from additional paid-in capital to the extent it was previously increased for treasury stock
transactions
22 t Study Guide
no additional paid-in capital from treasury stock transactions exists, the difference is taken from retained earnings
23 t Study Guide
no impact on any of the equity accounts as long as the par value is also changed to reflect the new share size
24 t Study Guide
occurs when an organization distributes additional shares of stock to existing stockholders
25 t Study Guide
assets, liabilities, and owners’ equity as of the end of the period presented
26 t Study Guide
presents information as of a point in time, rather than over a period of time
27 t Study Guide
assets = liabilities + equity
28 t Study Guide
resources available to the organization for carrying out its purpose
29 t Study Guide
presents information as of a point in time, rather than over a period of time.
Test Bank Questions
Question 1
1.A.1.d
1A1-W018
McCarthy Corp. is issuing its first financial statements. The CFO of the company is of the view that all assets shall be recorded at historical cost throughout the life of
the organization. Which of the following is the best critique of such a disclosure?
Historical value assumes that the value of an asset is the amount that would have to be paid to replace the asset on the balance sheet date.
Historical value takes into account the effects of inflation on the asset; therefore, the value fluctuates in each period.
Historical value does not take into account the effect of depreciation; therefore, the true value of the asset cannot be determined.
Historical value is less relevant for assessing a company's current financial position.
Question 2
1.A.2.k
1A2-W022
Brendan Bishop Scientific is considering acquiring a new plant and paying for it with common stock at par value. However, the CFO is not in favor of the acquisition.
Which of the following is the most likely reason for the CFO's disagreement?
The company will have fewer long-term assets.
The company's stock is most likely overpriced.
It is difficult to estimate the net realizable value of the plant and, hence, difficult to estimate the annual depreciation expenses.
The true cost of the plant would be much higher than necessary as the stock's trading value should be considered.
Question 3
1.A.1.e
ICMA.1A1.002_2110
A publicly-traded corporation issues 10,000 shares of new common stock for $50 per share. The common stock has a par value of $5 per share. Which one of the
following statements is correct?
*Source: Retired ICMA CMA questions.
Cash increases by $500,000, and common stock increases by $500,000.
Additional paid-in capital increases by $500,000; no other accounts are affected.
Cash increases by $500,000; common stock increases by $50,000; and additional paid-in capital increase by $450,000.
Cash increases by $450,000; common stock increases by $50,000, and additional paid-in capital increases by $500,000.
Question 4
1.A.2.w
ICMA.1A1.005_2110
A corporation’s common stock has a market price that is greater than its par value. The corporation is considering one of the following: a small stock dividend, a large
stock dividend, or a stock split. Which of the following transactions would change additional paid-in-capital on the balance sheet?
The stock split only.
The small stock dividend and the large stock dividend.
The large stock dividend and the stock split only.
The small stock dividend only.
Question 5
1.A.2.w
ICMA.1A1.006_2110
A publicly-traded corporation that prepares financial statements using U.S. GAAP issues a 5% stock dividend on its 100,000 shares outstanding of $10 par value stock.
The current market price is $18 per share. The company has retained earnings of $2,650,000. What is the impact on retained earnings?
Decrease of $40,000.
No impact.
Question 6
1.A.1.g
MQ2915
Mirr, Inc. was incorporated on January 1, year 1, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of
operations, revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, Mirr declared a $3,000
cash dividend, payable to stockholders on January 15, year 2. No additional activities affected owners' equity in year 1. Mirr's liabilities increased to $120,000 by
December 31, year 1. On Mirr's December 31, year 1 balance sheet, total assets should be reported at:
$885,000
$888,000
$878,000
$875,000
Question 7
1.A.1.c
MQ2916
Which of the following should be disclosed in the summary of significant accounting policies?
Composition of plant assets.
Pro forma effect of retroactive application of an accounting change.
Basis of consolidation.
Maturity dates of long-term debt.
Question 8
1.A.2.w
MQ2933
How would the declaration of a 10% stock dividend by a corporation affect each of the following on its books?
Retained earnings (RE) Total stockholders' equity (SE)
Decrease No effect
Decrease Decrease
No effect Decrease
No effect No effect
Question 9
1.A.2.w
MQ2934
Mike's Ice Cream Shop has 500 shares of stock outstanding at $1 par value per share. As a reward for a great year, Mike (the majority owner and CEO) is issuing a stock
dividend of 300 shares to the shareholders. Current market value of the stock is $20/share. What are the appropriate accounting entries to record this stock dividend?
Dr. Retained earnings $6,000, Cr. Par value distributable $300 Cr. Paid-in Capital $5,700
Dr. Retained earnings $6,000, Cr. Paid-in capital $6,000
Dr. Retained earnings $6,000, Cr. Par value distributable $6,000
Dr. Retained earnings $300, Cr. Par value distributable $300
Question 10
1.A.2.v
STK-0005
On February 1, Year 1, Kew Corp., a newly formed company, had the following stock issued and outstanding:
1. Common stock, $1 par value, 10,000 shares originally issued for $15 per share.
2. Preferred stock, $10 par value, 3,000 shares originally issued for $25 per share.
3. Kew’s February 1, Year 1, statement of stockholders’ equity should report.
Common stock Preferred stock Additionalpaid-in capital

$ 150,000 $30,000 $ 45,000
$ 150,000 $75,000 $0
$ 10,000 $75,000 $ 140,000
$ 10,000 $30,000 $ 185,000
Question 11
1.A.2.w
cma11.p1.t1.me.0001_0820
A publicly traded company has 100,000 outstanding shares of common stock, with a par value of $5. The company uses U.S. GAAP to prepare its financial statements.
The company recently declared a 5% stock dividend. On the date the stock dividend was declared, the company's stock was trading at $25 per share. On the date of
declaration, the company's
*Source: Retired ICMA CMA Exam Questions.
additional paid-in capital will increase.
retained earnings will increase.
total shareholders' equity will decrease.
outstanding shares will decrease.
Question 12
1.A.1.c
cma11.p1.t1.me.0007_0820
Blue Fox Industries had the following account balances at year-end.
Sales $452,000
Cash 23,400
Accounts payable 14,300
Rent expense 3,700
Accounts receivable 9,400
Cost of goods sold 214,000
Land 104,000
Unearned revenue 6,800
Gain on sale 17,500
Equipment 28,800
Inventories 2,200
Notes payable 67,000
What is the amount of total current assets reported on the balance sheet?
$35,000
$39,900
$32,800
$63,800
Question 13
1.A.1.d
cma11.p1.t1.me.0009_0820
All of the following are limitations of the balance sheet except that
the balance sheet is prepared using management judgments and estimates.
assets and liabilities are often recorded at historical cost, which might differ significantly from current market value.
the balance sheet provides information on the liquidity and solvency of the company.
the balance sheet omits many items that cannot be recorded objectively but that have financial value to the company.
Question 14
1.A.1.c
tb.soc.001_1805
Jimenez Transportation purchased five new transportation vehicles in 20X6. They plan to pay these vehicles off in even installments over the next 8 years. On the
20X7 year-end financial statements, how would the presentation of the amount Jimenez plans to pay off in 20X8 differ from the presentation of the amount they plan
to pay off in 20X9?
The amount they plan to pay off in 20X8 would be classified as a current liability, and the amount they plan to pay off in 20X9 would be classified as a long-term
liability.
The amount they plan to pay off in 20X8 would be classified as depreciation, and the amount they plan to pay off in 20X9 would be classified as a long-term
liability.
investment.
The amount they plan to pay off in 20X8 would be classified as property, plant, and equipment, and the amount they plan to pay off in 20X9 would be classified
as a long-term investment.
Question 15
1.A.1.c
tb.soc.002_1805
Wilson Industries holds a number of government securities. $10,000 of these securities have a one-year maturity date, while $4,000 have an 18-month maturity date.
Wilson prepares a classified balance sheet using a 2-year operating cycle. How should these securities be classified?
All $14,000 in government securities should be classified as long-term investments.
$10,000 should be classified as current assets and $4,000 should be classified as long-term assets.
All $14,000 in government securities should be classified as current assets.
Question 16
1.A.1.c
tb.soc.003_1805
JT Engineering currently owes two debts: a $9,000 debt due in 9 months and a $7,000 debt due in 14 months. JT prepares a classified balance sheet using an 8-month
operating cycle. How should these debts be classified?
All $16,000 in debt should be classified as current liabilities.
All $16,000 in debt should be classified as long-term liabilities.
The $7,000 should be classified as a current liability, and the $9,000 should be classified as a long-term liability.
Question 17
1.A.1.c
tb.soc.004_1805
Anders Industries currently owes two debts: an $11,000 debt due in 12 months and a $16,000 debt due in 18 months. Anders prepares a classified balance sheet using
an 18-month operating cycle. How should these debts be classified?
$11,000 should be classified as a current liability, and $16,000 should be classified as a long-term liability.
$16,000 should be classified as a current liability, and $11,000 should be classified as a long-term debt.
Question 18
1.A.1.c
tb.soc.005_1805
Griffin Industries owes a debt that is due 16 months from now. Griffin prepares a classified balance sheet using an 18-month operating cycle. How would
classification of this debt be different if Griffin used a one-year operating cycle?
With the 18-month cycle it is classified as a long-term liability, while with a one-year cycle it is classified as a current liability.
With the 18-month cycle it is classified as a current liability, while with a one-year cycle it is classified as a long-term liability.
With the 18-month cycle it is classified as stockholders’ equity, while with a one-year cycle it is classified as a current liability.
With the 18-month cycle it is classified as a current liability, while with a one-year cycle it is classified as stockholders’ equity.
Question 19
1.A.1.c
tb.soc.006_1805
Wells Enterprises owes a debt that is due 20 months from now. Wells prepares a classified balance sheet using a one-year operating cycle. How would classification of
this debt be different if Wells used a two-year operating cycle?
With a one-year cycle it is classified as a current liability and with a two-year cycle it is classified as a long-term liability.
With a one-year cycle it is classified as stockholders’ equity and with a two-year cycle it is classified as a current liability.
With the one-year cycle it is classified as a long-term liability, while with a two-year cycle it is classified as a current liability.
With a one-year cycle it is classified as a current liability and with a two-year cycle it is classified as stockholders’ equity.
Question 20
1.A.1.c
tb.soc.007_1805
How does the classification of a cash equivalent differ from the classification of a current asset?
A cash equivalent is an investment with an original maturity of one month or less, whereas a current asset will be turned into cash within six months or less or
within the length of the operating cycle, whichever is longer.
A cash equivalent is a trading security, whereas a current asset is all other assets except trading securities.
A cash equivalent is an investment with an original maturity of three months or less, whereas a current asset will be turned into cash within one year or within
one operating cycle, whichever is longer.
There is no difference between the two classifications.
Question 21
1.A.1.c
tb.soc.009_1805
How does a corporation recognize a deficit in retained earnings?
As a reduction in paid-in capital
As a reduction in stockholders’ equity on the balance sheet
As a net loss on the income statement
As a decrease in treasury stock
Question 22
1.A.1.c
tb.soc.010_1805
Treasury stock and a retained earnings deficit will have what effect on the balance sheet?
They will increase stockholders’ equity.
They will have no effect on the balance sheet.
They will reduce stockholders’ equity.
They will increase liabilities.
Question 23
1.A.1.c
tb.soc.011_1805
Which of the following would be presented as a reduction in stockholders’ equity on the balance sheet?
A stock split
A stock dividend
Positive net income
A deficit in retained earnings
Question 24
1.A.2.w
tb.soc.013_1805
Candela Company has retained earnings of $500,000, common stock of $400,000, and total common stockholders’ equity of $1,200,000. It has 200,000 shares of $2
par value common stock outstanding, which is currently selling for $5 per share. If Candela Company declares a 2-for-1 stock split on its common stock, which of the
following will occur?
Net income will increase by $1,000,000.
Retained earnings will decrease by $1,000,000.
Total paid-in capital will increase by $1,000,000.
There will be no effect on total common stockholders’ equity.
Question 25
1.A.2.w
tb.soc.014_1805
Which of the following is a likely reason for a stock split?
A company wishes to increase paid-in capital to have resources for more growth.
A company wishes to increase par value of its stock to increase its capital assets.
A company wishes to lower the stockholders’ equity.
A company wishes to lower the market price of its stock to increase marketability.
Question 26
1.A.2.w
tb.soc.015_1805
Both stock splits and stock dividends ________ total stockholders’ equity, while only ________ result in a decrease in the par value of common stock.
increase; stock splits
increase; stock dividends
decrease; stock dividends
maintain; stock splits
Question 27
1.A.2.w
tb.soc.016_1805
Stock dividends ________ retained earnings and ________ total paid-in capital.
increase, decrease
increase, increase
decrease, increase
decrease, decrease
Question 28
1.A.2.w
tb.soc.017_1805
What is the result of stock dividends?
Retained earnings increase while total paid-in capital decreases.
Both retained earnings and total paid-in capital increase.
Both retained earnings and total paid-in capital decrease.
Retained earnings decrease while total paid-in capital increases.
Question 29
1.A.2.w
tb.soc.018_1805
Which accounts are affected by a small stock dividend?
Common stock, retained earnings, and cash
Common stock, paid-in capital in excess of par—common stock, retained earnings, and cash
Retained earnings and cash
Common stock, paid-in capital in excess of par—common stock, and retained earnings
Question 30
1.A.2.w
tb.soc.019_1805
What is one major difference between a stock split and a stock dividend?
The total paid-in capital increases with a stock split but has no change with a stock dividend.
The par value per share decreases with a stock split but has no change with a stock dividend.
The total retained earnings has no change with a stock split but increases with a stock dividend.
The total par value of the stock increases with a stock split but has no change with a stock dividend.
Question 31
1.A.2.w
tb.soc.020_1805
Claire and David hold stock in two different companies, but both recently received additional shares of common stock rather than a cash dividend. After receiving the
additional stock, the par value of Claire's stock decreased by 67%, but the par value of David's stock remained the same. What is the difference between the stock
that Claire and David received?
Claire received a stock split, and David received a stock dividend.
Claire received a stock dividend, and David received a stock split.
Claire received newly issued stock, and David received a stock split.
Claire received a stock dividend, and David received newly issued stock.
Question 32
1.A.2.w
tb.soc.021_1805
With respect to the stock's par value, a large stock dividend is most similar to a ________; but with respect to the stock's market value, a large stock dividend is most
similar to a ________.
small stock dividend; stock split
stock split; small stock dividend
cash dividend; small stock dividend
stock split; cash dividend
Question 33
1.A.2.w
tb.soc.022_1805
Palmer Beauty Products wants to increase their number of shares to decrease the stock's market value, but they do not want to change the par value of the shares.
What would you recommend they do?
Issue a small stock dividend.
Issue a stock split.
Issue a reverse stock split.
Issue a large stock dividend.
Question 34
1.A.2.w
tb.soc.023_1805
Hayes Incorporated reported the following stockholders’ equity on December 31, 20X6:
Common stock, 85,000 shares at $50 par value $4,250,000

Paid-in capital in excess of par $583,000
Retained earnings $716,000
Total stockholders' equity $5,549,000
On June 30, 20X7, Hayes declared a 5-for-1 stock split. At the time of declaration, shares were selling for $300 per share. Through the first two quarters of the fiscal
year, Hayes recorded a net income of $103,000. How will Hayes’ stockholders’ equity section change as a result of this information?
Number of shares will increase to 340,000, par value will remain at $50 per share, and stockholders’ equity will increase to $17,000,000.
Number of shares will increase to 425,000, par value will decrease to $10 per share, and stockholders’ equity will increase to $5,652,000.
Number of shares will increase to 340,000, par value will decrease to $12.50, and stockholders’ equity will increase to $5,652,000.
Question 35
1.A.2.w
tb.soc.024_1805
Washington Rare Coins reported the following stockholders’ equity on December 31, 20X6:
Common stock, 15,000 shares at $25 par value $375,000

Total stockholders' equity $535,000
On August 14, 20X7, Washington declared a 2-for-1 stock split. At the time of declaration, shares were selling for $114 per share. Through the first two quarters of the
fiscal year, Washington recorded a net loss of $6,500. How will Washington's stockholders’ equity section change as a result of this information?
Number of shares will increase to 30,000, par value will remain at $25 per share, and stockholders’ equity will increase to $750,000.
Number of shares will remain at 15,000, par value will increase to $50, and stockholders’ equity will increase to $750,000.
Number of shares will remain at 15,000, par value will decrease to $12.50/share, and stockholders’ equity will decrease to $341,000.
Number of shares will increase to 30,000, par value will decrease to $12.50 per share, and stockholders’ equity will decrease to $528,500.
Question 36
1.A.1.c
tb.soc.027_1805
In the financial statements, the presentation of an accumulated other comprehensive loss is similar to the presentation of what other financial item?
The excess paid-in capital from common stock
A net loss rather than net income in a single accounting period
Retained earnings
The cost of treasury stock
Question 37
1.A.2.j
tb.soc.028_1805
Delgado Corp. purchased some common stock from Keller Enterprises. Delgado plans to hold this stock for a minimum of five years, although they could sell it
sooner if they need to. How do you expect Delgado to classify the stock on their balance sheet?
As a short-term investment
As a long-term liability
As a long-term investment
As owners’ equity
Question 38
1.A.2.n
tb.soc.029_1805
Holden Company purchased 150 acres of land on the outer edge of a growing city. Holden expects the value of this land to appreciate by 500% over the next three
years. How would you expect Holden to report the value of this land on their balance sheet?
At market value
At the net realizable value at the time of sale
At historical cost
At a depreciated cost
Answered Question 1
1.A.1.d
1A1-W018
McCarthy Corp. is issuing its first financial statements. The CFO of the company is of the view that all assets shall be recorded at historical cost throughout the life of
the organization. Which of the following is the best critique of such a disclosure?
Historical value assumes that the value of an asset is the amount that would have to be paid to replace the asset on the balance sheet date.
Historical value takes into account the effects of inflation on the asset; therefore, the value fluctuates in each period.
Historical value does not take into account the effect of depreciation; therefore, the true value of the asset cannot be determined.
Historical value is less relevant for assessing a company's current financial position.
Many asset accounts of a nonfinancial nature are reported at historical cost. While historical cost
measures are considered reliable because the amounts can be verified, they are also considered less
relevant than fair value or current market value measures would be for assessing a firm's current
financial position.
Answered Question 2
1.A.2.k
1A2-W022
Brendan Bishop Scientific is considering acquiring a new plant and paying for it with common stock at par value. However, the CFO is not in favor of the acquisition.
Which of the following is the most likely reason for the CFO's disagreement?
The company will have fewer long-term assets.
The company's stock is most likely overpriced.
It is difficult to estimate the net realizable value of the plant and, hence, difficult to estimate the annual depreciation expenses.
The true cost of the plant would be much higher than necessary as the stock's trading value should be considered.
When property, plant, and equipment assets or businesses are acquired through the issuance of stock or
other securities, the par value of the stock will be inadequate to measure the true cost of the property.
Instead, if the stock is being actively traded, its current market value is used. If the stock value cannot be
determined because the stock is not actively traded, an estimate of the market value of the property
should be made and used as the basis for recording the value of both the asset and the issuance of the
stock.
Answered Question 3
1.A.1.e
ICMA.1A1.002_2110
A publicly-traded corporation issues 10,000 shares of new common stock for $50 per share. The common stock has a par value of $5 per share. Which one of the
following statements is correct?
Cash increases by $500,000, and common stock increases by $500,000.
Additional paid-in capital increases by $500,000; no other accounts are affected.
Cash increases by $500,000; common stock increases by $50,000; and additional paid-in capital increase by $450,000.
Cash increases by $450,000; common stock increases by $50,000, and additional paid-in capital increases by $500,000.
Correct. When common stock is issued for cash, the cash account increases by the net amount received.
In this case, the cash account increases by (is debited for) $500,000 ($50 × 10,000 shares). When common
stock has an assigned par value, the proceeds from stock issuances are divided between the common
stock account and the additional paid in capital account. In this case, the common stock account
increases (is credited for) $5 per share for a total of $50,000) and additional paid in capital increases (is
credited for) the remaining $45 per share for a total of $450,000.
Answered Question 4
1.A.2.w
ICMA.1A1.005_2110
A corporation’s common stock has a market price that is greater than its par value. The corporation is considering one of the following: a small stock dividend, a large
stock dividend, or a stock split. Which of the following transactions would change additional paid-in-capital on the balance sheet?
The stock split only.
The small stock dividend and the large stock dividend.
The large stock dividend and the stock split only.
The small stock dividend only.
Correct. Additional paid-in-capital is one component of stockholders’ equity. When stock is issued for
cash, the cash received is divided between the “common stock” account (for par value) and additional
paid-in-capital (the remainder of the proceeds). When a company issues a small stock dividend, retained
earnings decreases by the fair value of the stock issued while common stock and additional paid-in-
capital increase. With a large stock dividend, retained earnings decreases by only the par value of the
stock issued. This means that only the common stock account increases with a large stock dividend. With
a stock split, no balance sheet accounts are changed. The par value per share decreases and the number
of shares increases, but no accounts are changed.
Answered Question 5
1.A.2.w
ICMA.1A1.006_2110
A publicly-traded corporation that prepares financial statements using U.S. GAAP issues a 5% stock dividend on its 100,000 shares outstanding of $10 par value stock.
The current market price is $18 per share. The company has retained earnings of $2,650,000. What is the impact on retained earnings?
No impact.
Correct. A small stock dividend is defined as a dividend of 20-25 percent or less of a company’s shares of
stock. When a company issues a small stock dividend, retained earnings decreases by the fair value of the
stock issued while common stock and additional paid-in-capital increase. The 5% stock dividend
qualifies as a small stock dividend. Since there are 100,000 shares outstanding, 5,000 additional shares
will be issued (5% × 100,000). At a current market price of $18 per share, retained earnings will decrease
by $90,000 (5,000 × $18).
Answered Question 6
1.A.1.g
MQ2915
Mirr, Inc. was incorporated on January 1, year 1, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of
operations, revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, Mirr declared a $3,000
cash dividend, payable to stockholders on January 15, year 2. No additional activities affected owners' equity in year 1. Mirr's liabilities increased to $120,000 by
December 31, year 1. On Mirr's December 31, year 1 balance sheet, total assets should be reported at:
$885,000
$888,000
$878,000
$875,000
Mirr began operations on 1/1/Y1 with the following balance sheet elements:
Assets = Liabilities + Owners' equity

$860,000 = $110,000 + $750,000
During year 1, liabilities increased to $120,000, and owners' equity increased to $765,000 [$750,000
beginning balance + $18,000 net income ($82,000 revenues − 64,000 expenses) − $3,000 dividends
declared]. Therefore, 12/31/Y1 assets must be $885,000.
Assets = Liabilities + Owners' equity

$885,000 = $120,000 + $765,000
Answered Question 7
1.A.1.c
MQ2916
Which of the following should be disclosed in the summary of significant accounting policies?
Composition of plant assets.
Pro forma effect of retroactive application of an accounting change.
Basis of consolidation.
Maturity dates of long-term debt.
This answer is correct because ASC Topic 235 states that the summary of significant accounting policies
should encompass those accounting principles and methods that involve a selection from existing
acceptable alternatives (or are peculiar to the industry in which the entity operates). Of the answers
listed, only basis of consolidation involves an accounting policy.
Answered Question 8
1.A.2.w
MQ2933
How would the declaration of a 10% stock dividend by a corporation affect each of the following on its books?
Retained earnings (RE) Total stockholders' equity (SE)
Decrease No effect
Decrease Decrease
No effect Decrease
No effect No effect
Regardless of the size of a stock dividend, RE is decreased and other SE accounts are increased. Since the
dividend described in this question is small (< 20%–25% of the outstanding shares), the journal entry
would be:
Retained earnings (FV)

Common stock dividend distributable (par value)
Additional paid-in capital (plug)
Accordingly, RE will decrease and, since all affected accounts are elements of SE, total SE will not change.
Note that the entry for a large stock dividend would be:
Retained earnings (par)

Common stock dividend distributable (par)
Answered Question 9
1.A.2.w
MQ2934
Mike's Ice Cream Shop has 500 shares of stock outstanding at $1 par value per share. As a reward for a great year, Mike (the majority owner and CEO) is issuing a stock
dividend of 300 shares to the shareholders. Current market value of the stock is $20/share. What are the appropriate accounting entries to record this stock dividend?
Dr. Retained earnings $6,000, Cr. Par value distributable $300 Cr. Paid-in Capital $5,700
Dr. Retained earnings $6,000, Cr. Paid-in capital $6,000
Dr. Retained earnings $6,000, Cr. Par value distributable $6,000
Dr. Retained earnings $300, Cr. Par value distributable $300
This is a large stock dividend because the dividend of 300 shares is 60% of the current shares outstanding
of 500. Large stock dividends are recorded at par value. Therefore, Mike's will debit Retained earnings at
par value and credit the par value distributable for par value.
Answered Question 10
1.A.2.v
STK-0005
On February 1, Year 1, Kew Corp., a newly formed company, had the following stock issued and outstanding:
1. Common stock, $1 par value, 10,000 shares originally issued for $15 per share.
2. Preferred stock, $10 par value, 3,000 shares originally issued for $25 per share.
3. Kew’s February 1, Year 1, statement of stockholders’ equity should report.
Common stock Preferred stock Additionalpaid-in capital

$ 150,000 $30,000 $ 45,000
$ 150,000 $75,000 $0
$ 10,000 $75,000 $ 140,000
$ 10,000 $30,000 $ 185,000
This answer is correct. Common stock and preferred stock are reported at par value, and any excess
invested above par value is recorded as additional paid-in capital. In this case, common stock is recorded
at per value (10,000 × $1 = $10,000), and preferred stock is recorded at par value (3,000 × $10 = $30,000).
Additional paid-in capital from common stock is $140,000 [10,000 × ($15 − $1)], and additional paid-in
capital from preferred stock is $45,000 [3,000 × ($25 − $10)], so additional paid-in capital is $185,000
($140,000 + $45,000).
1.A.2.w
cma11.p1.t1.me.0001_0820
A publicly traded company has 100,000 outstanding shares of common stock, with a par value of $5. The company uses U.S. GAAP to prepare its financial statements.
The company recently declared a 5% stock dividend. On the date the stock dividend was declared, the company's stock was trading at $25 per share. On the date of
declaration, the company's
additional paid-in capital will increase.
retained earnings will increase.
total shareholders' equity will decrease.
outstanding shares will decrease.
When a small stock dividend is declared, the company must transfer market value from retained earnings
to common stock and additional paid-in capital, causing retained earnings to decrease and common
stock and additional paid-in capital accounts to increase.
1.A.1.c
cma11.p1.t1.me.0007_0820
Blue Fox Industries had the following account balances at year-end.
Sales $452,000
Cash 23,400
Accounts payable 14,300
Rent expense 3,700
Cost of goods sold 214,000
Land 104,000
Unearned revenue 6,800
Gain on sale 17,500
Equipment 28,800
Inventories 2,200
Notes payable 67,000
What is the amount of total current assets reported on the balance sheet?
$35,000
$39,900
$32,800
$63,800
Total current assets include:

Cash $23,400
Inventories 2,200
Total $35,000
1.A.1.d
cma11.p1.t1.me.0009_0820
All of the following are limitations of the balance sheet except that
the balance sheet is prepared using management judgments and estimates.
assets and liabilities are often recorded at historical cost, which might differ significantly from current market value.
the balance sheet provides information on the liquidity and solvency of the company.
the balance sheet omits many items that cannot be recorded objectively but that have financial value to the company.
The balance sheet does provide information on the liquidity and solvency of a company, and this
information is useful to the user; therefore, it would not be considered a limitation of the balance sheet.
1.A.1.c
tb.soc.001_1805
Jimenez Transportation purchased five new transportation vehicles in 20X6. They plan to pay these vehicles off in even installments over the next 8 years. On the
20X7 year-end financial statements, how would the presentation of the amount Jimenez plans to pay off in 20X8 differ from the presentation of the amount they plan
to pay off in 20X9?
liability.
The amount they plan to pay off in 20X8 would be classified as depreciation, and the amount they plan to pay off in 20X9 would be classified as a long-term
liability.
investment.
The amount they plan to pay off in 20X8 would be classified as property, plant, and equipment, and the amount they plan to pay off in 20X9 would be classified
as a long-term investment.
Liabilities are classified on the balance sheet as either current or long-term depending on when they are
expected to be satisfied. Liabilities expected to be satisfied within 12 months or one operating cycle
(whichever is longer) and satisfied using current assets are classified as current liabilities. All other
liabilities are classified as long-term liabilities. The amount to be paid in 20X8 is a current liability since it
is to be paid within one year of 12/31/X7 and the amount to be paid in 20X9 is a long-term liability since it
is to be paid more than one year after 12/31/X7. Therefore, this is the correct answer.
1.A.1.c
tb.soc.002_1805
Wilson Industries holds a number of government securities. $10,000 of these securities have a one-year maturity date, while $4,000 have an 18-month maturity date.
Wilson prepares a classified balance sheet using a 2-year operating cycle. How should these securities be classified?
All $14,000 in government securities should be classified as long-term investments.
All $14,000 in government securities should be classified as current assets.
Assets are classified on the balance sheet as either current or long-term depending on when they are
expected to be used or converted into cash. Assets expected to be used or converted into cash within 12
months or one operating cycle (whichever is longer) are classified as current assets. All other assets are
classified as long-term assets. Since the operating cycle is 2 years, that is the “dividing line” between
current and long-term. All $14,000 of the securities are classified as current assets since they mature
within the 2-year operating cycle. Therefore, this is the correct answer.
1.A.1.c
tb.soc.003_1805
JT Engineering currently owes two debts: a $9,000 debt due in 9 months and a $7,000 debt due in 14 months. JT prepares a classified balance sheet using an 8-month
operating cycle. How should these debts be classified?
liabilities are classified as long-term liabilities. Since the operating cycle is 8 months, 1 year is the
“dividing line” between current and long-term. The $9,000 is a current liability since it is to be paid in 9
months and the $7,000 is a long-term liability since it is to be paid in 14 months. Therefore, this is the
correct answer.
1.A.1.c
tb.soc.004_1805
Anders Industries currently owes two debts: an $11,000 debt due in 12 months and a $16,000 debt due in 18 months. Anders prepares a classified balance sheet using
an 18-month operating cycle. How should these debts be classified?
$11,000 should be classified as a current liability, and $16,000 should be classified as a long-term liability.
$16,000 should be classified as a current liability, and $11,000 should be classified as a long-term debt.
liabilities are classified as long-term liabilities. Since the operating cycle is 18 months, that is the
“dividing line” between current and long-term. Both liabilities are current liabilities because they will be
satisfied within 18 months. Therefore, this is the correct answer.
1.A.1.c
tb.soc.005_1805
Griffin Industries owes a debt that is due 16 months from now. Griffin prepares a classified balance sheet using an 18-month operating cycle. How would
classification of this debt be different if Griffin used a one-year operating cycle?
With the 18-month cycle it is classified as a long-term liability, while with a one-year cycle it is classified as a current liability.
With the 18-month cycle it is classified as a current liability, while with a one-year cycle it is classified as a long-term liability.
With the 18-month cycle it is classified as stockholders’ equity, while with a one-year cycle it is classified as a current liability.
With the 18-month cycle it is classified as a current liability, while with a one-year cycle it is classified as stockholders’ equity.
liabilities are classified as long-term liabilities. If the operating cycle is 18 months, the liability is classified
as a current liability since it is due in less than 18 months. If the operating cycle is 1 year, the liability is
classified as a long-term liability since it is due in more than 1 year. Therefore, this is the correct answer.
1.A.1.c
tb.soc.006_1805
Wells Enterprises owes a debt that is due 20 months from now. Wells prepares a classified balance sheet using a one-year operating cycle. How would classification of
this debt be different if Wells used a two-year operating cycle?
With a one-year cycle it is classified as a current liability and with a two-year cycle it is classified as a long-term liability.
With a one-year cycle it is classified as stockholders’ equity and with a two-year cycle it is classified as a current liability.
With the one-year cycle it is classified as a long-term liability, while with a two-year cycle it is classified as a current liability.
With a one-year cycle it is classified as a current liability and with a two-year cycle it is classified as stockholders’ equity.
liabilities are classified as long-term liabilities. If the operating cycle is one year, the liability is classified
as a long-term liability since it is due in more than 1 year. If the operating cycle is 2 years, the liability is
classified as a current liability since it is due in less than 2 years. Therefore, this is the correct answer.
1.A.1.c
tb.soc.007_1805
How does the classification of a cash equivalent differ from the classification of a current asset?
A cash equivalent is an investment with an original maturity of one month or less, whereas a current asset will be turned into cash within six months or less or
within the length of the operating cycle, whichever is longer.
A cash equivalent is a trading security, whereas a current asset is all other assets except trading securities.
A cash equivalent is an investment with an original maturity of three months or less, whereas a current asset will be turned into cash within one year or within
one operating cycle, whichever is longer.
There is no difference between the two classifications.
Cash equivalents are investments with original maturities of 3 months or less that are highly liquid and
easy to sell. They will be turned into cash within three months or less. They are a type of current asset.
Current assets are assets that are expected to be used or converted into cash within one year or one
operating cycle, whichever is longer. Therefore, this is the correct answer.
1.A.1.c
tb.soc.009_1805
How does a corporation recognize a deficit in retained earnings?
As a reduction in paid-in capital
As a reduction in stockholders’ equity on the balance sheet
As a net loss on the income statement
As a decrease in treasury stock
A deficit in retained earnings means there is a negative balance in retained earnings. This happens when
net losses and dividend payments over a company's life exceed net income over the company's life. Since
it is negative equity, it is shown on the balance sheet as a reduction in stockholders’ equity on the
balance sheet. Therefore, this is the correct answer.
1.A.1.c
tb.soc.010_1805
Treasury stock and a retained earnings deficit will have what effect on the balance sheet?
They will increase stockholders’ equity.
They will have no effect on the balance sheet.
They will reduce stockholders’ equity.
They will increase liabilities.
Treasury stock arises when a company repurchases its own stock. Since issuing stock increases equity,
buying it back decreases equity. A deficit in retained earnings means there is a negative balance in
retained earnings. This happens when net losses and dividend payments over a company's life exceed
net income over the company's life. Since retained earnings increases equity, a deficit decreases equity.
Therefore, this is the correct answer.
1.A.1.c
tb.soc.011_1805
Which of the following would be presented as a reduction in stockholders’ equity on the balance sheet?
A stock split
A stock dividend
Positive net income
A deficit in retained earnings
A deficit in retained earnings means dividends paid exceeds income earned over the company's life. It is a
form of negative equity, meaning it is presented as a reduction in stockholders’ equity. Therefore, this is
the correct answer.
1.A.2.w
tb.soc.013_1805
Candela Company has retained earnings of $500,000, common stock of $400,000, and total common stockholders’ equity of $1,200,000. It has 200,000 shares of $2
par value common stock outstanding, which is currently selling for $5 per share. If Candela Company declares a 2-for-1 stock split on its common stock, which of the
following will occur?
Net income will increase by $1,000,000.
Retained earnings will decrease by $1,000,000.
Total paid-in capital will increase by $1,000,000.
There will be no effect on total common stockholders’ equity.
A stock split increases the number of shares of stock authorized, issued, and outstanding. However,
because par value is reduced, it has no impact on total paid-in capital, retained earnings, or total
common shareholders’ equity. Therefore, this is the correct answer. The $1,000,000 is calculated as
200,000 shares × $5 (price per share).
1.A.2.w
tb.soc.014_1805
Which of the following is a likely reason for a stock split?
A company wishes to increase paid-in capital to have resources for more growth.
A company wishes to increase par value of its stock to increase its capital assets.
A company wishes to lower the stockholders’ equity.
A company wishes to lower the market price of its stock to increase marketability.
A stock split increases the number of shares of stock that are authorized, issued, and outstanding.
Because the number of shares of stock increases without a corresponding capital infusion, each share is
worth less money. The lower price can improve the stock's marketability as more people are able to
afford it. Therefore, this is the correct answer.
1.A.2.w
tb.soc.015_1805
Both stock splits and stock dividends ________ total stockholders’ equity, while only ________ result in a decrease in the par value of common stock.
increase; stock splits
increase; stock dividends
decrease; stock dividends
maintain; stock splits
Stock splits and stock dividends both increase the number of shares of stock a firm has outstanding.
Neither results in any change in total equity. Under a stock dividend, retained earnings decrease and
paid-in capital increases by the same amount. Neither component changes with a stock split. Stock splits
do result in a decrease in the par value of the stock, while there is no change in par value with stock
dividends. Therefore, this is the correct answer.
1.A.2.w
tb.soc.016_1805
Stock dividends ________ retained earnings and ________ total paid-in capital.
increase, decrease
increase, increase
decrease, increase
decrease, decrease
Under a stock dividend, retained earnings decrease because dividends of any kind result in a decrease in
retained earnings. This is because a dividend returns capital to owners. At the same time, more shares of
stock are issued with a stock dividend. This results in an increase in total paid-in capital. The decrease in
retained earnings is equal to the increase in paid-in capital. Therefore, this is the correct answer.
1.A.2.w
tb.soc.017_1805
What is the result of stock dividends?
Retained earnings increase while total paid-in capital decreases.
Both retained earnings and total paid-in capital increase.
Both retained earnings and total paid-in capital decrease.
Retained earnings decrease while total paid-in capital increases.
Under a stock dividend, retained earnings decrease because dividends of any kind result in a decrease in
retained earnings. This is because a dividend returns capital to owners. At the same time, more shares of
stock are issued with a stock dividend. This results in an increase in total paid-in capital. The decrease in
retained earnings is equal to the increase in paid-in capital. Therefore, this is the correct answer.
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tb.soc.018_1805
Which accounts are affected by a small stock dividend?
Common stock, retained earnings, and cash
Common stock, paid-in capital in excess of par—common stock, retained earnings, and cash
Retained earnings and cash
Common stock, paid-in capital in excess of par—common stock, and retained earnings
A stock dividend occurs when an organization distributes additional shares of stock to existing
stockholders as a dividend rather than paying them cash. For "small" stock dividends (less than 20–25%
of the number of shares outstanding) retained earnings is reduced for the fair value of the stock being
issued, common stock is increased for the par value of the stock issued, and the difference is included in
additional paid-in capital. For "large" stock dividends (greater than 20–25% of the number of shares
outstanding) retained earnings is reduced for the par value of the stock being issued and common stock
is increased for the same amount. There is no impact on additional paid-in capital, similar to a stock split.
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tb.soc.019_1805
What is one major difference between a stock split and a stock dividend?
The total paid-in capital increases with a stock split but has no change with a stock dividend.
The par value per share decreases with a stock split but has no change with a stock dividend.
The total retained earnings has no change with a stock split but increases with a stock dividend.
The total par value of the stock increases with a stock split but has no change with a stock dividend.
Neither results in any change in total equity. One difference is that par value per share decreases with
stock splits while remaining unchanged with stock dividends. Therefore, this is the correct answer.
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tb.soc.020_1805
Claire and David hold stock in two different companies, but both recently received additional shares of common stock rather than a cash dividend. After receiving the
additional stock, the par value of Claire's stock decreased by 67%, but the par value of David's stock remained the same. What is the difference between the stock
that Claire and David received?
Claire received a stock split, and David received a stock dividend.
Claire received a stock dividend, and David received a stock split.
Claire received newly issued stock, and David received a stock split.
Claire received a stock dividend, and David received newly issued stock.
Neither results in any change in total equity. One difference is that par value per share decreases with
stock splits while remaining unchanged with stock dividends. Since the par value per share of Claire's
stock decreased, she must have received a stock split. Since the par value per share of David's stock
remained the same, he must have received a stock dividend. Therefore, this is the correct answer.
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tb.soc.021_1805
With respect to the stock's par value, a large stock dividend is most similar to a ________; but with respect to the stock's market value, a large stock dividend is most
similar to a ________.
small stock dividend; stock split
stock split; small stock dividend
cash dividend; small stock dividend
stock split; cash dividend
Stock dividends are classified based on the amount of new shares issued. Small stock dividends are those
in which the new shares issued are no more than 20–25% of the current shares outstanding, while large
stock dividends are stock dividends larger than that. The reason for the difference in accounting
treatment is that a large stock dividend will likely have a much larger impact on share price than a small
stock dividend. This means share price is not an appropriate way to measure the value of a large stock
dividend. Consequently, par value is used to value large stock dividends. Since the par value per share
does not change with either a large stock dividend or a small stock dividend, a large stock dividend is
most similar to a small stock dividend with respect to par value. Stock price is likely to fall after any stock
dividend since there are a greater number of shares outstanding as a result of stock dividends. The
decrease is larger with large stock dividends. Stock price also drops fairly significantly from stock splits as
the number of shares increases significantly as a result of stock splits. Since the market value per share
drops significantly with either a large stock dividend or a stock split, a large stock dividend is most similar
to a stock split with respect to market value. Therefore, this is the correct answer.
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tb.soc.022_1805
Palmer Beauty Products wants to increase their number of shares to decrease the stock's market value, but they do not want to change the par value of the shares.
What would you recommend they do?
Issue a small stock dividend.
Issue a stock split.
Issue a reverse stock split.
Issue a large stock dividend.
Stock dividends are classified based on the amount of new shares issued. Small stock dividends are those
in which the new shares issued are no more than 20–25% of the current shares outstanding, while large
stock dividends are stock dividends larger than that. This means that the stock price will decrease more
with a large stock dividend than with a small stock dividend because shares increase by a larger amount
with a large stock dividend. Par value per share does not change for any size stock dividend. This means
that a large stock dividend will likely give a larger decrease in market value without changing the par
value per share. Therefore, this is the correct answer.
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tb.soc.023_1805
Hayes Incorporated reported the following stockholders’ equity on December 31, 20X6:
Common stock, 85,000 shares at $50 par value $4,250,000

Total stockholders' equity $5,549,000
On June 30, 20X7, Hayes declared a 5-for-1 stock split. At the time of declaration, shares were selling for $300 per share. Through the first two quarters of the fiscal
year, Hayes recorded a net income of $103,000. How will Hayes’ stockholders’ equity section change as a result of this information?
Number of shares will increase to 425,000, par value will decrease to $10 per share, and stockholders’ equity will increase to $5,652,000.
Number of shares will increase to 340,000, par value will decrease to $12.50, and stockholders’ equity will increase to $5,652,000.
When a company declares a stock split, the number of shares authorized, issued, and outstanding
increases by the factor of the stock split. In addition, the par value per share decreases by the inverse of
the factor of the stock split. The total common stock, paid-in capital, and retained earnings stay the same
as a result of the stock split. Retained earnings increases from net income. In this example, Hayes's
number of shares will increase to 425,000 (85,000 × 5), par value will decrease to $10 per share ($50 ÷ 5),
retained earnings will increase to $819,000 ($716,000 + $103,000), and total stockholders’ equity will
increase to $5,652,000 ($4,250,000 + 583,000 + 819,000). Therefore, this is the correct answer.
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tb.soc.024_1805
Washington Rare Coins reported the following stockholders’ equity on December 31, 20X6:
Common stock, 15,000 shares at $25 par value $375,000

Total stockholders' equity $535,000
On August 14, 20X7, Washington declared a 2-for-1 stock split. At the time of declaration, shares were selling for $114 per share. Through the first two quarters of the
fiscal year, Washington recorded a net loss of $6,500. How will Washington's stockholders’ equity section change as a result of this information?
Number of shares will increase to 30,000, par value will remain at $25 per share, and stockholders’ equity will increase to $750,000.
Number of shares will remain at 15,000, par value will increase to $50, and stockholders’ equity will increase to $750,000.
Number of shares will remain at 15,000, par value will decrease to $12.50/share, and stockholders’ equity will decrease to $341,000.
Number of shares will increase to 30,000, par value will decrease to $12.50 per share, and stockholders’ equity will decrease to $528,500.
When a company declares a stock split, the number of shares authorized, issued, and outstanding
increases by the factor of the stock split. In addition, the par value per share decreases by the inverse of
the factor of the stock split. The total common stock, paid-in capital, and retained earnings stay the same
as a result of the stock split. Retained earnings increases from net income and decreases from net losses.
In this example, Washington's number of shares will increase to 30,000 (15,000 × 2), par value will
decrease to $12.50 per share ($25 ÷ 2), retained earnings will decrease to $61,500 ($68,000 − $6,500), and
total stockholders’ equity will decrease to $528,500 ($375,000 + 92,000 + 61,500). Therefore, this is the
correct answer.
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tb.soc.027_1805
In the financial statements, the presentation of an accumulated other comprehensive loss is similar to the presentation of what other financial item?
The excess paid-in capital from common stock
A net loss rather than net income in a single accounting period
Retained earnings
The cost of treasury stock
Accumulated other comprehensive loss is subtracted from total paid-in capital and retained earnings in
the stockholders’ equity section of the balance sheet. Treasury stock is also subtracted from total paid-in
capital and retained earnings in the stockholders’ equity section of the balance sheet. Therefore, this is
the correct answer.
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tb.soc.028_1805
Delgado Corp. purchased some common stock from Keller Enterprises. Delgado plans to hold this stock for a minimum of five years, although they could sell it
sooner if they need to. How do you expect Delgado to classify the stock on their balance sheet?
As a short-term investment
As a long-term liability
As a long-term investment
As owners’ equity
A long-term investment is a type of asset. Assets arise when a company owns or controls something that
is expected to provide future economic benefit. Purchasing stock results in an asset since the stock could
be sold for cash in the future. Assets are considered long-term when the benefits are expected beyond
one year. Since Delgado is not expecting to sell the stock anytime soon, it is classified as “available for
sale,” not “trading.” Because the expected sale date is beyond one year, it is a long-term investment.
Therefore, this is the correct answer.
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tb.soc.029_1805
Holden Company purchased 150 acres of land on the outer edge of a growing city. Holden expects the value of this land to appreciate by 500% over the next three
years. How would you expect Holden to report the value of this land on their balance sheet?
At market value
At the net realizable value at the time of sale
At historical cost
At a depreciated cost
In general, assets are reported on the balance sheet at historical cost. One exception is when the asset's
value has permanently been reduced (impaired). A second is for trading securities and available-for-sale
securities, which are recorded at market value. A third exception is for fixed assets, which are recorded at
depreciated cost. The land in this question does not fit any of these exceptions. Therefore, this is the
correct answer.

Statement of Changes in Equity and The Balance Sheet

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3/11/23, 12:46 AM Part_1 - Dashboard - Statement of Changes in Equity and the Balance Sheet

Statement of Changes in Equity and the Balance Sheet

Statement of Changes in Equity

December 31, 20X1 $100,000 $220,000 ($10,000) $210,000 $7,000 $527,000

Accounts Payable $213.000 $270,000

Purchase of Treasury Stock: Treasury stock (a contra equity

Assets: The resources available to the organization for carrying

Test Bank Questions

Statement of Changes in Equity and the Balance Sheet

The company's stock is most likely overpriced.

*Source: Retired ICMA CMA questions.

Cash increases by $500,000, and common stock increases by $500,000.

Additional paid-in capital increases by $500,000; no other accounts are affected.

*Source: Retired ICMA CMA questions.

The stock split only.

The small stock dividend and the large stock dividend.

The large stock dividend and the stock split only.

The small stock dividend only.

*Source: Retired ICMA CMA questions.

Pro forma effect of retroactive application of an accounting change.

Maturity dates of long-term debt.

Dr. Retained earnings $6,000, Cr. Paid-in capital $6,000

Dr. Retained earnings $6,000, Cr. Par value distributable $6,000

Dr. Retained earnings $300, Cr. Par value distributable $300

Common stock Preferred stock Additionalpaid-in capital

$ 10,000 $75,000 $ 140,000

$ 10,000 $30,000 $ 185,000

*Source: Retired ICMA CMA Exam Questions.

additional paid-in capital will increase.

retained earnings will increase.

total shareholders' equity will decrease.

outstanding shares will decrease.

Blue Fox Industries had the following account balances at year-end.

*Source: Retired ICMA CMA Exam Questions.

*Source: Retired ICMA CMA Exam Questions.

the balance sheet is prepared using management judgments and estimates.

All $14,000 in government securities should be classified as current assets.

All $16,000 in debt should be classified as long-term liabilities.

All $27,000 in debt should be classified as long-term liabilities.

All $27,000 in debt should be classified as current liabilities.

As a reduction in stockholders’ equity on the balance sheet

As a net loss on the income statement

As a decrease in treasury stock

They will have no effect on the balance sheet.

They will reduce stockholders’ equity.

They will increase liabilities.

Positive net income

A deficit in retained earnings

Retained earnings will decrease by $1,000,000.

Total paid-in capital will increase by $1,000,000.

There will be no effect on total common stockholders’ equity.

A company wishes to lower the stockholders’ equity.

increase; stock dividends

decrease; stock dividends

maintain; stock splits

Both retained earnings and total paid-in capital increase.

Both retained earnings and total paid-in capital decrease.

Retained earnings decrease while total paid-in capital increases.

Retained earnings and cash