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

Declaring a cash dividend has what effect on total stockholders’ equity?

It decreases total stockholders’ equity.

It only affects total assets, not stockholders’ equity.

It increases total stockholders’ equity.

It has no effect on total stockholders’ equity.

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Verified step by step guidance

Understand the concept of cash dividends: A cash dividend is a distribution of a portion of a company's earnings to its shareholders, typically in the form of cash. Declaring a cash dividend creates a liability for the company until the dividend is paid.

Recognize the impact on stockholders' equity: When a cash dividend is declared, it reduces retained earnings, which is a component of stockholders' equity. This is because retained earnings represent the accumulated profits of the company, and declaring a dividend reduces these profits.

Analyze the accounting entry: The declaration of a cash dividend involves a journal entry where retained earnings are debited (decreased) and dividends payable (a liability) is credited (increased). This does not affect total assets immediately but decreases stockholders' equity.

Clarify the timing of the effect: The decrease in stockholders' equity occurs at the time of declaration, not at the time of payment. When the dividend is paid, assets (cash) decrease, and the liability (dividends payable) is removed, but the reduction in stockholders' equity has already occurred.

Conclude the effect: Declaring a cash dividend decreases total stockholders' equity because it reduces retained earnings, which is a key component of equity. This is the correct answer to the problem.