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

When a company's board of directors votes to declare a dividend, which of the following occurs?

The company immediately pays cash to shareholders.

The company's retained earnings increase.

The company incurs a legal liability to pay the dividend to shareholders.

The market price of the company's stock is guaranteed to rise.

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Verified step by step guidance

Understand the concept of dividends: Dividends are payments made by a corporation to its shareholders, typically as a distribution of profits. Declaring a dividend means the company has decided to distribute a portion of its earnings to shareholders.

Recognize the accounting implications of declaring a dividend: When a dividend is declared, it does not mean the company immediately pays cash to shareholders. Instead, it creates a legal obligation to pay the dividend in the future, which is recorded as a liability on the company's balance sheet.

Analyze the impact on retained earnings: Declaring a dividend reduces retained earnings because the company is distributing part of its profits to shareholders. Retained earnings decrease by the amount of the dividend declared.

Understand the legal liability: Once the board of directors declares a dividend, the company incurs a legal liability to pay the dividend to shareholders. This liability is recorded as 'Dividends Payable' under current liabilities in the balance sheet.

Clarify the market price impact: Declaring a dividend does not guarantee that the market price of the company's stock will rise. Stock prices are influenced by various factors, including market conditions, investor sentiment, and company performance, and may not directly correlate with dividend declarations.