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

What is the net effect of a dividend declaration and payment on a corporation's financial statements?

Total assets decrease, but total equity remains unchanged.

Total assets and total equity both decrease by the amount of the dividend.

Both total assets and total equity increase by the amount of the dividend.

Total equity decreases, but total assets remain unchanged.

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Verified step by step guidance

Understand the concept of dividends: Dividends are distributions of a corporation's earnings to its shareholders. When dividends are declared, they create a liability for the corporation, and when paid, they reduce the corporation's assets.

Analyze the declaration of dividends: When a corporation declares dividends, it records a liability called 'Dividends Payable' on the balance sheet. This reduces retained earnings, which is a component of equity, but does not affect assets at this stage.

Examine the payment of dividends: When the corporation pays the dividends, it reduces its cash (an asset) and eliminates the 'Dividends Payable' liability. This results in a decrease in total assets and total equity.

Summarize the net effect: The declaration and payment of dividends together result in a decrease in both total assets (due to cash payment) and total equity (due to reduction in retained earnings).

Relate to the financial statement equation: The accounting equation (Assets = Liabilities + Equity) remains balanced because the decrease in assets is matched by the decrease in equity, with liabilities being temporarily affected during the declaration phase.