Practice Quiz

CLEP Accounting

Category - Accounting

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Cartman’s Cats is organizing a new corporation and they need to issue 5,000 shares of common stock to get the corporation up and running. Next year they will need 5,000 shares of common stock issued to expand their factory. In another 5 years, they will need 10,000 shares of common stock to buy out Big Bertha’s Birds, which they plan to acquire. How many shares of common stock should be authorized on their articles of incorporation?
  1. 5,000
  2. 10,000
  3. 100,000
  4. 20,000
  5. 120,000
Explanation
Answer - D - Cartman’s Cats should authorize 20,000 shares of common stock in their articles of incorporation.

Key Takeaway: Articles of incorporation specify the classes of stock, the par value, and the number of shares authorized to be issued. The authorization is normally requested at a larger number than what is immediately needed to avoid having to revise the articles of incorporation when more shares are needed to raise capital. The corporation will normally estimate the number of shares needed in the upcoming years and use that number as the authorized number of shares.
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