The balance in retained earnings at December 31, 2019 was $1,440,000 and at December 31, 2020 was $1,164,000. Net income for 2020 was $1,000,000. A stock dividend was declared and distributed which increased common stock $500,000 and paid-in capital $220,000. A cash dividend was declared and paid. The stock dividend should be reported on the statement of cash flows (indirect method) as an outflow from financing activities of $500,000. а. b. an outflow from financing activities of $720,000. an outflow from investing activities of $720,000. d. Stock dividends are not shown on a statement of cash flows. С.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
icon
Concept explainers
Topic Video
Question
### Financial Accounting: Reporting Retained Earnings and Dividends in Cash Flow Statements

#### Understanding Retained Earnings and Transactions in Cash Flow Statements

2. The balance in retained earnings at December 31, 2019 was $1,440,000 and at December 31, 2020 was $1,164,000. Net income for 2020 was $1,000,000. A stock dividend was declared and distributed which increased common stock $500,000 and paid-in capital $220,000. A cash dividend was declared and paid. The stock dividend should be reported on the statement of cash flows (indirect method) as:
   a. an outflow from financing activities of $500,000.
   b. an outflow from financing activities of $720,000.
   c. an outflow from investing activities of $720,000.
   d. Stock dividends are not shown on a statement of cash flows.

#### Explanation of Key Concepts:

**Retained Earnings**:
- Retained earnings represent the cumulative amount of net income that a company has retained, rather than paid out as dividends.
- Changes in retained earnings are influenced by net income or loss and dividends paid out to shareholders.

**Net Income**:
- Net income is the profit of the company after all expenses and taxes have been deducted from total revenue.
- In 2020, the company had a net income of $1,000,000.

**Stock Dividends**:
- A stock dividend is a payment made in the form of additional shares rather than a cash payout. It increases common stock and paid-in capital without affecting cash.

**Cash Dividends**:
- Cash dividends are payouts made to shareholders in cash, reducing both cash and retained earnings.
- These are considered financing activities on the cash flow statement.

**Reporting on Cash Flow Statement (Indirect Method)**:
- The statement of cash flows is divided into three sections: operating, investing, and financing activities.
- Financing activities include transactions involving debt, equity, and dividends.

**Correct Option for Reporting**:
- The stock dividend increases common stock and paid-in capital but does not involve cash. Therefore, it is not shown on the statement of cash flows.
- Correct answer: d. Stock dividends are not shown on a statement of cash flows.

By understanding these terms and their impact on financial statements, students can accurately interpret and report financial transactions.
Transcribed Image Text:### Financial Accounting: Reporting Retained Earnings and Dividends in Cash Flow Statements #### Understanding Retained Earnings and Transactions in Cash Flow Statements 2. The balance in retained earnings at December 31, 2019 was $1,440,000 and at December 31, 2020 was $1,164,000. Net income for 2020 was $1,000,000. A stock dividend was declared and distributed which increased common stock $500,000 and paid-in capital $220,000. A cash dividend was declared and paid. The stock dividend should be reported on the statement of cash flows (indirect method) as: a. an outflow from financing activities of $500,000. b. an outflow from financing activities of $720,000. c. an outflow from investing activities of $720,000. d. Stock dividends are not shown on a statement of cash flows. #### Explanation of Key Concepts: **Retained Earnings**: - Retained earnings represent the cumulative amount of net income that a company has retained, rather than paid out as dividends. - Changes in retained earnings are influenced by net income or loss and dividends paid out to shareholders. **Net Income**: - Net income is the profit of the company after all expenses and taxes have been deducted from total revenue. - In 2020, the company had a net income of $1,000,000. **Stock Dividends**: - A stock dividend is a payment made in the form of additional shares rather than a cash payout. It increases common stock and paid-in capital without affecting cash. **Cash Dividends**: - Cash dividends are payouts made to shareholders in cash, reducing both cash and retained earnings. - These are considered financing activities on the cash flow statement. **Reporting on Cash Flow Statement (Indirect Method)**: - The statement of cash flows is divided into three sections: operating, investing, and financing activities. - Financing activities include transactions involving debt, equity, and dividends. **Correct Option for Reporting**: - The stock dividend increases common stock and paid-in capital but does not involve cash. Therefore, it is not shown on the statement of cash flows. - Correct answer: d. Stock dividends are not shown on a statement of cash flows. By understanding these terms and their impact on financial statements, students can accurately interpret and report financial transactions.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Financial Statements
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education