Multiple Choice
Which of the following best describes the next dividend payment by IM Inc. if the company has cumulative preferred stock with unpaid dividends from previous years?
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12. Stockholders' Equity
Dividends and Dividend Preferences
Multiple Choice
Which of the following statements is true regarding both cash dividends and stock dividends?
A
Both decrease retained earnings of a corporation.
B
Both result in an outflow of cash from the company.
C
Both increase the total stockholders' equity.
D
Both require the issuance of new shares to shareholders.
Verified step by step guidance1
Understand the concept of cash dividends: Cash dividends are payments made by a corporation to its shareholders in the form of cash. These reduce retained earnings and result in an outflow of cash from the company.
Understand the concept of stock dividends: Stock dividends are distributions of additional shares to shareholders instead of cash. These also reduce retained earnings but do not result in an outflow of cash. Instead, they increase the number of shares outstanding.
Analyze the impact on retained earnings: Both cash dividends and stock dividends decrease retained earnings because they represent a distribution of the company's profits to shareholders.
Evaluate the impact on stockholders' equity: Cash dividends reduce stockholders' equity because they decrease retained earnings and involve an outflow of cash. Stock dividends do not change the total stockholders' equity; they simply reallocate amounts within equity (from retained earnings to common stock and additional paid-in capital).
Determine whether new shares are issued: Stock dividends require the issuance of new shares to shareholders, while cash dividends do not involve issuing new shares. This distinction is critical in understanding the differences between the two types of dividends.
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