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
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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### 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.
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