Part 1Which of the statements below is FALSE? Part 1
A. Shareholders elect the board of directors, which ultimately selects the management team that runs the dayminus−tominus−day operations of the company. B. The profits for common stock owners come before payment to employees, suppliers, government, and creditors. C. Common stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim. D. Stock is a major financing source for public companies.

Question

Part 1Which of the statements below is​ FALSE? Part 1
A. Shareholders elect the board of​ directors, which ultimately selects the management team that runs the dayminus−tominus−day operations of the company. B. The profits for common stock owners come before payment to​ employees, suppliers,​ government, and creditors. C. Common​ stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim. D. Stock is a major financing source for public companies.

BlackTom AI · Accepted Answer

The prompt asks us to determine which statement is FALSE, so we will evaluate each option on its own merits before identifying the false one.
Option A: 'Shareholders elect the board of directors, which ultimately selects the management team that runs the day-to-day operations of the company.' This is accurate in corporate governance: shareholders elect the board, and the board appoints the management responsible for daily operations. The flow of authority is consistent with typical corporate structures.
Option B: 'The profits for common stock owners come before payment to employees, suppliers, government, and creditors.' This statement is incorrect. In corporate finance, claims are paid in a hierarchy: creditors (including lenders) have priority over shareholders, and employees, taxes (government), and suppliers are part of operating expenses and obligations that must be settled before any distribution of profits to shareholders. Dividends to common stockholders occur only after these obligations and any preferred stock payments are addressed if applicable. Therefore, this option misstates the order of payments.
Option C: 'Common stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim.' This is a standard description: common stockholders have residual claims to assets and cash flows after creditors and preferred stockholders are paid, which characterizes residual ownership rights.
Option D: 'Stock is a major financing source for public companies.' This is true; issuing stock (equity financing) is a primary method by which public companies raise capital for growth, operations, or acquisitions, alongside other financing sources.
In sum, the statements in A, C, and D align with established corporate finance concepts, while B wrongly asserts an order of profit distribution that prioritizes shareholders over creditors and other claimants. The incorrect reasoning in B stems from overlooking the legal and contractual priorities that protect creditors and other stakeholders before distributions to owners. The remaining statements correctly capture governance structure, residual claim characteristics, and the role of stock as a financing source, respectively.

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