/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Problem 5 Which of the following events de... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 11: Problem 5

Which of the following events decreases a corporation's stockholders' equity? a. A payment of a previously declared cash dividend b. A declaration of a six percent stock dividend c. A 2 -for- 1 forward stock split d. A declaration of a \(\$ 1\) cash dividend per share on preferred stock

Short Answer

Expert verified
Options a and d decrease stockholders' equity. Option d affects equity at declaration.

Step by step solution

01

Understanding Stockholders' Equity

Stockholders' equity represents the residual interest in the assets of a corporation after deducting liabilities. It can be affected by various corporate actions, including dividends and stock splits.
02

Assessing Option a

Option a involves the payment of a previously declared cash dividend. Payment of cash dividends reduces the company's retained earnings, which is a component of stockholders' equity. Therefore, this action decreases stockholders' equity.
03

Assessing Option b

Option b involves the declaration of a six percent stock dividend. A stock dividend involves issuing additional shares to shareholders without affecting total equity; it's merely a reclassification within equity, reducing retained earnings but increasing common stock at par value. This option does not decrease overall stockholders' equity but changes its composition.
04

Assessing Option c

Option c involves a 2-for-1 forward stock split. A stock split increases the number of shares while decreasing the par value per share, leaving total equity unchanged. This action does not affect stockholders' equity.
05

Assessing Option d

Option d involves the declaration of a cash dividend per share on preferred stock. Similar to option a, cash dividends reduce retained earnings, thereby decreasing stockholders' equity at the time of declaration, even if not yet paid.
06

Conclusion

Two options potentially decrease equity: both options a and d involve cash dividends which reduce retained earnings upon payment (a) or declaration (d). However, if focused on immediate effect at declaration or payment, any cash dividend declaration, as in option d, directly affects equity.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cash Dividends
Cash dividends are payments made to shareholders as a return on their investment in a company. They are paid out of a company's retained earnings, which is part of stockholders' equity. When a corporation declares a cash dividend, it reduces its retained earnings. If a previously declared cash dividend is paid, this further decreases stockholders' equity. Here's how it works:
  • Declaration of Cash Dividends: At declaration, the company announces its intention to pay a dividend, decreasing retained earnings immediately since the company is committing to a future outflow of cash.
  • Payment of Cash Dividends: When actually paid, the cash leaves the company, decreasing both cash assets and reducing retained earnings.
This action reduces internal funds available for reinvestment or other uses within the company, thereby decreasing stockholders' equity.
Retained Earnings
Retained earnings are a portion of stockholders' equity found on the balance sheet. They represent the cumulative net income of a company, minus any dividends paid out to shareholders. Retained earnings reflect the part of the profits that a company chooses to reinvest in the business or hold as a reserve for future growth. Retention is crucial for a company as it allows for:
  • Expansion: Retained earnings provide internal funding for company growth and development without needing external borrowing.
  • Cushion for Losses: Acts as a buffer against future losses or unforeseen expenses.
When cash dividends are declared or paid, retained earnings are decreased, as the profits are distributed to shareholders instead of reinvested into the company, thus reducing stockholders' equity.
Corporate Actions
Corporate actions, such as dividends, stock splits, or stock dividends, are events initiated by a company that bring a material change to the corporation and its shareholders. They can affect stockholders' equity in various ways. Some common corporate actions include:
  • Cash Dividends: Decrease stockholders' equity when declared or paid, as the company's retained earnings are reduced.
  • Stock Dividends: Involve issuing additional shares to shareholders, leading to a redistribution of existing equity rather than an overall decrease, keeping total equity the same but altering its composition.
  • Stock Splits: Increase the number of outstanding shares while reducing the stock price, which does not affect the overall stockholders' equity, only modifies the number of shares and their nominal value.
Understanding these actions helps comprehend how they influence financial statements and stockholders' equity, impacting shareholder value and corporate flexibility.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Forward Stock Split On September 1, Cambridge Company has 500,000 shares of \(\$ 15\) par value common stock that are issued and outstanding. The general ledger shows the following account balances relating to the common stock: On September 2, Cambridge splits its stock 3-for-2 and reduces the par value to \(\$ 10\) per share. a. How many shares of common stock are issued and outstanding immediately following the stock split? b. What is the balance in the Common Stock account immediately following the stock split? c. What is the likely reason that Cambridge Company split its stock?

Reverse Stock Split The Crystal Company had \(100,000,000\) shares of \(\$ 0.10\) par value common stock outstanding which had been sold for an aggregate amount of \(\$ 500,000,000\). The company's shares are traded on the New York Stock Exchange, which has a minimum listing price of \$1 per share. Recently, the company's common stock has been trading on the exchange below \$1 per share, and the exchange has notified the company that its common stock would be delisted in 30 days if the stock price did not rebound above its minimum listing price. In response to this notification, Crystal authorized a 1 -for- 40 reverse stock split. Following the reverse stock split: a. How many common shares will be outstanding? b. What will be the new par value per share? c. How will the reverse stock split be recorded in the company's accounts?

What is a stock dividend? How does a common stock dividend paid to common stockholders affect their respective ownership interests?

Forward Stock Split On March 1 of the current year, Center Corporation has 500,000 shares of \(\$ 10\) par value common stock that are issued and outstanding. The general ledger shows the following account balances relating to the common stock: a. How many shares of common stock are issued and outstanding immediately following the stock split? b. What is the balance in the Common Stock account immediately following the stock split? c. What is the balance in the Paid-in Capital in Excess of Par Value account immediately following the stock split? d. Is a journal entry required to record the forward stock split? If yes, prepare the entry.

What information is presented in a statement of retained earnings? What information is presented in a statement of stockholders' equity?
See all solutions

Recommended explanations on Math Textbooks

Theoretical and Mathematical Physics

Read Explanation

Discrete Mathematics

Read Explanation

Logic and Functions

Read Explanation

Decision Maths

Read Explanation

Statistics

Read Explanation

Mechanics Maths

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.