o Retained earnings can be lowered or debited by Declaration of dividends

O retained earnings can be lowered or debited by

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o Retained earnings can 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 loss Retirement of shares C:\Users\sfurner\Desktop\Accounting Final Needed Materials\Final Exam Study Guide ACCT 701.docx
Preferred stock conversions to common stock at a loss Changes in accounting principles Changes in Accounting Estimates Prior period adjustments (i.e. errors and fraud) Accounting for distributions to stockholders: o Corporations can distribute cash to stockholders in the following ways: The corporations can repurchase the shares from owners. The corporation can pay dividends. o In 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. o Dividends, however, have the advantage of allowing shareholders to receive assets from the corporation without reducing their ownership share. Dividends: Dividends reduce retained earnings: o Cash dividends distribute cash to stockholders o Stock dividends distribute additional shares to stockholders o Stock splits transfer additional shares to stockholders without changing equity Recognition and payment of dividends: o Declaration date - date the corporation’s board of directors formally declares a dividend will be paid o Date of record - date on which stockholders of record are identified as those who will receive a dividend o Date of payment - date when the dividend is actually distributed to stockholders Cash dividends: o The 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. o The dividend declaration specifies: The declaration date – the date on which a corporation announces its intention to pay a dividend on common or preferred 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: o Entries to record the declaration and payment of a $100,000 cash dividend by a corporation follows: Declaration of dividend: Dividends (or retained earnings) $100,000 o Dividends payable $100,000 Payment of dividend: Dividends payable $100,000 o Cash $100,000 Stock dividends: o A Stock dividend transfers shares of stock from the corporation to its stockholders – additional shares of the corporations own stock. o For 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.

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