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oRetained earningscan be lowered or debited by:Declaration of dividends (whether cash or stock)Operating losses (opposite of net income)Issuance of Treasury stock at an economic lossRetirement of sharesC:\Users\sfurner\Desktop\Accounting Final Needed Materials\Final Exam Study Guide ACCT 701.docx
Preferred stock conversions to common stock at a lossChanges in accounting principlesChanges in Accounting EstimatesPrior period adjustments (i.e. errors and fraud)Accounting for distributions to stockholders:oCorporations can distribute cash to stockholders in the following ways:The corporations can repurchase the shares from owners. The corporation can pay dividends. oIn the past, dividends were the most common method of distributing cash. But repurchasing shares has become a more frequent method due to its tax advantages. oDividends, however, have the advantage of allowing shareholders to receive assets from the corporation without reducing their ownership share. Dividends:Dividends reduceretained earnings:oCash dividends distribute cash to stockholders oStock dividends distribute additional shares to stockholdersoStock splits transfer additional shares to stockholders without changing equityRecognition and payment of dividends:oDeclaration date- date the corporation’s board of directors formally declares a dividend will be paidoDate of record- date on which stockholders of record are identified as those who will receive a dividendoDate of payment- date when the dividend is actually distributed to stockholdersCash dividends:oThe payment of a cash dividend is preceded by an official announcement or declaration by the board of directors of the company’s intention to pay a dividend.oThe dividend declaration specifies:The declaration date– the date on which a corporation announces its intention to pay a dividend on commonorpreferred stock. The dollar amount of the dividend – usually stated as the number of dollars per share.C:\Users\sfurner\Desktop\Accounting Final Needed Materials\Final Exam Study Guide ACCT 701.docx
The payment date- the date on which the dividend will actually be paid. Cash Dividends:oEntries to record the declaration and payment of a $100,000 cash dividendby a corporation follows:Declaration of dividend:Dividends (or retained earnings)$100,000oDividends payable$100,000Payment of dividend:Dividends payable$100,000oCash$100,000Stock dividends:oA Stock dividendtransfers shares of stock from the corporation to its stockholders – additional shares of the corporations own stock. oFor each share outstanding, a fixed number of new shares is issued, and an amount of retained earnings is transferred to contributed capital accounts in a process known as capitalization of retained earnings.