ENGL
Chapter 8 Handout.docx

Asset s liabilitie s stockholders equity revenu e

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Asset s = Liabilitie s + Stockholders’ Equity Revenu e - Expense s = Net Income Contributed Capital Retained Earnings = + 0 - = Example 2: A company issued 300 shares of $10 common stock for $12 per share. Asset s = Liabilitie s + Stockholders’ Equity Revenu e - Expense s = Net Income Contributed Capital Retained Earnings = + 0 - = Issuance of Preferred Stock Example 3: A company issued 300 shares of $10 preferred stock for $12 per share. Asset s = Liabilitie s + Stockholders’ Equity Revenu e - Expense s = Net Income Contributed Capital Retained Earnings = + 0 - = Cash Dividends Dividends are the distributions of a corporation’s earnings to shareholders. Board of directors decides if, when, and how much to distribute. There are three important dates related to dividends: a. The _____________________________________________________ - Date on which the board of directors decides a dividend will be paid. Establishes a legal liability called dividends payable. Reduces retained earnings, but is NOT an expense of the corporation. b. ________________________________________________________ - Used to determine exactly who will receive the dividends. Whoever owns the stock on this date will receive the dividend. Chapter 8 Handout, Page 2 of 8
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c. ________________________________________________________ - When cash is actually paid to the stockholders. Assets (cash) and liabilities (dividends payable) are reduced. Declaring Dividends – Common Stock A legal liability must be recorded when a company’s board of directors decides a dividend will be paid and announces it to the shareholders. Example 4: A declares dividends of $1 per share for all 10,000 common stock holders. They don’t have any preferred stock. Asset s = Liabilitie s + Stockholders’ Equity Revenu e - Expense s = Net Income Contributed Capital Retained Earnings = + 0 - = Preferred Shareholders vs. Common Shareholders Preferred stock has preference over common stock for dividends. Preferred stock dividends are paid first , then if there is cash and retained earnings available, common stockholders may receive a dividend. Dividends on preferred stock are usually calculated as a fixed percentage of the par value. For example, dividends on 1,000 shares of $100 par, 8% cumulative preferred stock would be calculated as: 1,000 * $100 * .08 = $8,000 dividends for the year. Cumulative preferred stock - the fixed dividend amount accumulates from year to year if not paid, and the entire amount of all past dividends must be paid before any dividends can be paid to common shareholders. Noncumulative preferred stock - it is up to the board of directors to determine whether or not to make up any missed dividends. Dividends in arrears are dividends owed from past years but undeclared and unpaid. Declaring Dividends – Cumulative Preferred Stock and Common Stock Example 5: A company has 1,000 shares of $100 par, 8% cumulative preferred stock outstanding and NO dividends were paid in 2010. On October 1, 2011, the Board of Directors declares a total of $30,000 in dividends for its preferred and common shareholders.
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