Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

12. Stockholders' Equity

Dividends and Dividend Preferences

Financial Accounting

12. Stockholders' Equity

Dividends and Dividend Preferences

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Multiple Choice

Which of the following statements about cash dividends is true?

Cash dividends are recorded as an expense on the income statement.

Cash dividends reduce a corporation's retained earnings.

Cash dividends are paid only to bondholders.

Cash dividends increase the total stockholders' equity.

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Verified step by step guidance

Understand the concept of cash dividends: Cash dividends are distributions of a corporation's earnings to its shareholders, typically in the form of cash. They are not considered an expense but rather a reduction in retained earnings, which is part of stockholders' equity.

Clarify the role of retained earnings: Retained earnings represent the accumulated profits of a corporation that have not been distributed as dividends or used for other purposes. When cash dividends are declared, they reduce retained earnings because the company is distributing part of its profits to shareholders.

Evaluate the incorrect options: Cash dividends are not recorded as an expense on the income statement because they are a distribution of profits, not a cost of operations. Cash dividends are paid to shareholders, not bondholders, as bondholders receive interest payments instead. Cash dividends do not increase stockholders' equity; they reduce it by decreasing retained earnings.

Identify the correct statement: The correct statement is 'Cash dividends reduce a corporation's retained earnings,' as this reflects the accounting treatment of cash dividends.

Summarize the impact of cash dividends: When cash dividends are declared, they are recorded as a liability (Dividends Payable) until paid. Upon payment, the liability is reduced, and retained earnings decrease, reflecting the distribution of profits to shareholders.