Retained earnings

Cumulative amount of net income over the life of the corporation minus the cumulative
amount of dividends paid out to shareholders
Deficit
negative retained earnings balance, is the result of a corporation's accumulated prior net
losses or dividends in excess of its earnings
Factors that affect managements consideration of Dividneds
1. impact of a dividend on its cash and working capital
2. ability to finance capital expansion projects
3. ability to meet short-term debt obligations
4. effect on the stock market price per share
5. ability to maintain a liquidity "cushion" against possible future deteriorating economic
conditions should be evaluated.
Four important dates for cash dividends
1. declaration date
2. ex-dividned date
3. date of record
4. date of payment
Declaration date
the board of directors formally declares that a dividend will be paid to shareholders of
record on a specific future date. (record liability)
Ex dividend date
Important to investors because it is the date that the stock stops selling dividends attached.
Date of record
Set date on which to record its registered shareholders. Usually occurs several weeks after
the declaration date, before the ex-dividend date.
Date of Payment
The corporation distributes the dividend payment and makes a journal entry to eliminate
the liability and reduce cash.
Property Dividend
A corporation will declare this that is payable in assets other than cash. Recorded at FV for
land. Avail for sale is FV of securities on declaration date - original cost of securities
Scrip Dividend
A promissory note requiring the corporation to pay dividends at some future date.

Terms in this set (10)

retained earnings
is the net income retained in the corporation.
retained earnings statement
shows the amounts and causes of changes in retained earnings for a specific time period.
The time period is the same as that covered by the income statement. The beginning
retained earnings amount appears on the first line of the statement. Then, the company
adds net income and deducts dividends to determine the retained earnings at the end of
the period. If a company has a net loss, it deducts (rather than adds) that amount in the
retained earnings statement..
balance sheet
reports assets and claims to assets at a specific point in time. (assets= liabilities+ stock
holders equity)
Claims to assets are subdivided into two categories
claims of creditors and claims of owners.
claims of creditors
are called liabilities
The owners' claim to assets
is called stockholders' equity
Stockholders' equity is comprised of two parts:
(1) common stock and (2) retained earnings
remember common stock and retained earnings
common stock results when the company sells new shares of stock; retained earnings is the
net income retained in the corporation.
The primary purpose of a statement of cash flows
is to provide financial information about the cash receipts and cash payments of a business
for a specific period of time. To help investors, creditors, and others in their analysis of a
company's cash position, the statement of cash flows reports the cash effects of a
company's operating, investing, and financing activities. In addition, the statement shows
the net increase or decrease in cash during the period, and the amount of cash at the end of
the period.
relationship between statements
1. The retained earnings statement uses the results of the income statement. Tootsie Roll
reported net income of $43,938,000 for the period. Net income is added to the beginning
amount of retained earnings to determine ending retained earnings.
2. The balance sheet and retained earnings statement are also interrelated. Tootsie Roll
reports the ending amount of $114,269,000 on the retained earnings statement as the
retained earnings amount on the balance sheet.
3. Finally, the statement of cash flows relates to information on the balance sheet. The
statement of cash flows shows how the Cash account changed during the period. It shows
the amount of cash at the beginning of the period, the sources and uses of cash during the
period, and the $78,612,000 of cash at the end of the period. The ending amount of cash
shown on the statement of cash flows must agree with the amount of cash on the balance
sheet.

Definition
net income that a company retains in the business
Retained earnings on a balance sheet
its a deficit under stockholder's equity
Restrictions on retained earnings
Legal, contractual, voluntary
Prior Period adjustments
Correction of an error in previously issued financial statements
What can prior period adjustments result from?
mathematical mistakes, mistakes in application of accounting principles, oversight or
misuse of facts
Where can prior period adjustments be made?
to the beginning balance of retained earnings

__________ dividends are taken from the retained earnings account.

Stock

Cash
Stock splits are often declared in which of the following situations?
A company desires to reduce the market price to more affordable levels.

A stock has risen beyond perceived marketability.

Distributions to stockholders that are taken from the retained earnings account are made
in the form of __________.
stock dividends
Which of the following is an advantage of a stock split?
Increases the number of authorized, issued, and outstanding stocks

Decreases the par value

Corporations will provide stock rather than cash for dividends to do which of the
following?
Preserve cash

Provide stockholders with additional shares of stock

Which of the following best describes retained earnings?
Capital earned by the profitable operations of a corporation that is not distributed to
stockholders

Represent all of the profits that a corporation has not distributed to stockholders
As the year draws to a close, your boss has asked the team to consider possibilities for the
company's retained earnings. Which of the following is the best option for ongoing
operations of the company regarding retained earnings?
Retained earnings can be used to purchase stock or to make strategic acquisitions to
generate future earnings.

Retained earnings can be used to fund the future operations of the company.
Which of the following proportionate parts of a dividend do stakeholders receive?
Declared

Paid
When is a journal entry not required?
Accounts balance out.

The total equity is unchanged

A __________ will close its net income into capital accounts at the end of an accounting cycle.
sole proprietorship

Retained Earnings
begings the retained earnings statement
Prior yr period adjustment
subtracted from retained earnings, MUST USE TAX RATE then calculate
new retained earnings
becomes retained earnings, (date), as restated
what is added to newly restated retained earnings
net income
when newly restated retained earnings and net income are added, what is declared and
deducted?
dividends declared
what is your final number?
retained earnings for the ending period

Terms in this set (17)

Cash dividend
A pro rata (proportional) distribution of cash to stockholders
Cumulative dividend
A feature of preferred stock entitling the stockholder to receive current year and any
unpaid prior-year dividends before common stockholders and paid dividends
Declaration Date
The date the board of directors formally declares (authorizes) a dividend and announces it
to stockholders
Deficit
A debit balance in retained earnings
Dividend
A corporation's distribution of cash or stock to its stockholders on a proportional basis
Earnings per share
The net income earned by each share of outstanding common stock
Liquidating dividend
A dividend declared out of paid in capital
Payment Date
The date dividends are transferred to stockholders
Prior Period Adjustment
The correction of an error in previously issued financial statements
Record Date
The date when ownership of outstanding shares is determined for dividend purposes
A
Non-stock dividends shall be recognized as liabilities on the

A. Date of Declaration
B. Date of record
C. Date of payment
D. Date of issuing check
A
When shareholders may elect to receive receive cash in lieu of stock dividend, the amount
to be charged to retained earnings is equal to

A. Optional cash dividend

B. Fair value of the shares
C. Par value of the shares
D. Book value of the shares
A
Treasury shares may be reissued as dividends in which case what amount should be
charged to retained earnings

A. Cost of the treasury shares

B. Par value of the treasury share
C. Fair value of the treasury shares on the date of declarations
D. Fair value of the treasury shares on the date of issuance
B
If the share dividend is less than 20%, what amount of the retained earnings should be
capitalized?

A. Par value of the shares

B. Fair value of the shares on the date of declaration
C. Fair value of the shares on the date of record
D. Fair value of the shares on the date of issuance
B
An entity issued what is called a "20% share dividend": At what amount per share should
retained earnings be reduced for the transaction?

A. Zero
B. Par value
C. Fair value at the declaration
D. Fair value at the date of issuance
B
The declaration and issuance of a 25% share dividend
A. Increases ordinary shares outstanding and total equity
B. Decreases retained earnings but does not change total equity
C. May increase or decrease share premium but does not change total equity
D. Increases retained earnings and total equity
C
Which of the following statements is incorrect concerning retained earnings?

A. Appropriated retained earnings shall be clearly distinguished from appropriated

retained earnings
B. A deficit is a debit balance in retained earnings
C. A deficit in retained earnings shall be presented as an asset
D. When the deficit exceeds the total of the other capital account balances, the excess is a
capital deficiency
B
Appropriations of retained earnings should be reported as

A. Component of equity as part of share premium

B. Component of equity as part as total retained earnings
C. Component of total liabilities as current liability
D. When the deficit exceeds the total of the other capital account balances, the excess is a
capital deficiency
B
An entity shall measure a liability to distribute non cash asset as dividend to the owners at

A. Carrying amount of the asset distributed

B. Fair value of the asset distributed
C. Either the carrying amount or fair value of the asset
D. Neither the carrying amount nor fair value
A
An entity shall review and adjust the carrying amount of the dividend payable at the end of
each reporting period and at the date of settlement with any changes in the carrying
amount of the dividend payable recognized

A. In equity as adjustment to the amount of distribution

B. In profit or loss
C. As adjustment of share premium
D. As component of other comprehensive income

Terms in this set (14)

What is the second statement to prepare?

Statement of retained earnings
Define Statement of retained earnings
explains the change in retained earnings for the period.
What is the retained earnings calculation?
retained earnings= the accumulated earnings of a corporation - the amount paid in
dividends to the stockholders
Define dividends
are distributions of the net income of a business to its stockholders.
Most companies pay dividends how many times a year?
4
what is the first line of the statement of retained earnings?
the name of the company
what is the second line of the statement of retained earnings?
statement of retained earnings
is the statement of retained earnings for a point in time or a period in time?
period of time
what is the third line of the statement of retained earnings?
for the year ended
after the title what is the first line of the statement of retained earnings?
Retained earnings, beginning of the year
Retained earnings
Cumulative balance of periodic net income or loss, dividend distributions, prior period
errors, changes in accounting policy and other capital adjustments
Accumulated profits
IAS term for retained earnings
Accumulated losses
IAS term for deficit
Unappropriated retained earnings
Portion of RE which is free and and can be declared as dividends
Appropriated retained earnings
Portion of RE which is restricted and not available for dividend declaration
Dividends out of earnings and capital
Two classifications of dividends
False
T/F SEC has ruled out that stock dividends may be declared from premium on par value
per share
Date of declaration
Date on which directors authorize payment of dividends to shareholders
Date of record
Date on which stock and transfer book will be closed for registration
False
T/F A journal entry is made on the date of record

Terms in this set (14)

Common Stock =
Par Value x number of shares
Shares Outstanding
Dollar amount x Par Value
Cash
issued shares x amount per share
Dividend Rate
annual dividend / total cost of preferred stock
Dividends Distributable
Rate x shares outstanding x par value
Preferred stock par value
preferred stock / shares outstanding
Stock dividends
rate x shares outstanding x market price
cash dividend give as amount per share
amount per share x total shares outstanding
Cash dividend given as percentage
percentage x total common stock
Return on common stockholders equity
Net income-preferred stock / average common stockholders equity

Issuance of Common stock:

Prepare the journal entry to record Zende Company's issuance of 75,000 shares of $5
par value common stock assuming the shares sell for:
a. $5 per share
b. $6 per share
a. Debit Cash (# of shares x 1st par value) for $375,000 and Credit Common Stock for
$375,000.
b. Debit Cash for $450,000 (# of shares x 2nd par value), Credit Paid-in capital in
Excess of par for $75,000 ( cash - common stock) and Credit $375,000 Common Stock.
Accounting for cash dividends:
July 15: Declared a cash dividend payable to common stockholders of $165,000.
August 15: Date of record for the cash dividend declared.
August 31: Paid the dividend declared on July 15.
for July 15 Debit Retained Earnings for $165,000 and Credit Dividend Payable for
$165,000.
No Journal entry is required for the Date of record.
For August 31 Debit Dividend Payable for $165,000 and Credit Cash for $165,000
Part 1: Preferred Stock issuance and dividends.
1. Prepare the journal entry to record Tamasin Company's issuance of 50,000 shares of
$100 par value, 7% cumulative preferred stock for $102 cash per share.
1. Debit cash for $510,000 (# of shares x 1st par value), Credit Paid-in capital in excess
of par for 10,000 (cash - common stock), and Credit Common Stock for $500,000
(# of shares x 2nd par value)
Part 2: Preferred stock issuance and dividends.
2. Assuming the facts in part 1, if Tamasin declares a year-end cash dividend, what is
the amount of dividend paid to preferred stocks?
2. Debit Retained Earning for $35,000 ( % x # of shares) and Credit Preferred Dividend
Payable for $35,000
* The percentage amount is not a decimal.