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 Yum Brands distributes dividends to its common stockholders for the first time, which of the following statements is correct?

The dividend is recorded as an expense on the income statement.

The dividend increases the company's total assets.

The dividend increases the balance of common stock.

The dividend is considered a cash outflow and reduces retained earnings.

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Verified step by step guidance

Understand the nature of dividends: Dividends are distributions of a company's earnings to its shareholders. They are not considered expenses and do not appear on the income statement. Instead, they are a reduction of retained earnings in the equity section of the balance sheet.

Recognize the impact on retained earnings: When a dividend is declared, it reduces the retained earnings account. This is because retained earnings represent the accumulated profits of the company, and dividends are paid out of these profits.

Understand the cash flow impact: Dividends are considered a financing activity in the statement of cash flows. When the dividend is paid, it results in a cash outflow, reducing the company's total cash balance.

Clarify the effect on common stock: Dividends do not increase the balance of common stock. Common stock represents the value of shares issued by the company, and dividends are unrelated to this account.

Summarize the correct statement: The correct answer is that the dividend is considered a cash outflow and reduces retained earnings. This aligns with the accounting treatment of dividends as a distribution of profits rather than an expense or an increase in assets or common stock.