Chapter 12 - Additional stockholders equity transactions and income disclosures. This chapter presents the following content: Retained earnings, restrictions on retained earnings, prior period adjustment, dividends, cash dividend, stock dividends, small stock dividend,. | Additional Stockholders’ Equity Transactions and Income Disclosures Retained Earnings Cumulative net income of past years minus net losses and dividends declared during those years Primary factors affecting retained earnings Net income or loss Restrictions of retained earnings Prior period adjustments Dividends Restrictions on Retained Earnings Tells the financial statement reader that company may not pay out this part of retained earnings as dividends Required restrictions To comply with legal or contractual limits on dividend distribution Voluntary To show reasons why management wishes to restrict dividends Prior Period Adjustment An error in preparing financial statements in one accounting period not discovered until a later period Treat correction of error, if material, as adjustment of beginning retained earnings Adjusts affected balance sheet account Adjusts beginning retained earnings Dividends Distribution of cash, stock, or other corporate assets to stockholders Declaration . | Additional Stockholders’ Equity Transactions and Income Disclosures Retained Earnings Cumulative net income of past years minus net losses and dividends declared during those years Primary factors affecting retained earnings Net income or loss Restrictions of retained earnings Prior period adjustments Dividends Restrictions on Retained Earnings Tells the financial statement reader that company may not pay out this part of retained earnings as dividends Required restrictions To comply with legal or contractual limits on dividend distribution Voluntary To show reasons why management wishes to restrict dividends Prior Period Adjustment An error in preparing financial statements in one accounting period not discovered until a later period Treat correction of error, if material, as adjustment of beginning retained earnings Adjusts affected balance sheet account Adjusts beginning retained earnings Dividends Distribution of cash, stock, or other corporate assets to stockholders Declaration decreases retained earnings When board of directors takes formal action, declaration, dividend immediately becomes liability Cash Dividend Date of declaration Increase Dividends - a nominal account closed to Retained Earnings Increase Dividends Payable Date of record No entry Determines persons who will receive dividend Stock sold after is sold ex-dividend Cash Dividend Date of payment Decreases Cash Decreases Dividends Payable Cumulative preferred in arrears First must pay arrearages Then pay current period preferred Then common is entitled to dividends Stock Dividends Issuance of additional shares of authorized stock Reasons Need to conserve cash Give measure of company’s success Increase permanent capitalization Decrease market price Small Stock Dividend Involves less than 20-25% of previously outstanding shares Transfer from retained earnings to paid-in capital an amount equal to market value of shares Reasoning is that small stock dividends do not decrease market value .
