1. Acct 387 - Chapter 161 Dividends Dividends need to be legal and requirements vary by state: Can pay as long as not insolvent Can pay if fair value of net assets exceeds dividends Other states vary Restrictions are designed to protect creditors Payment of dividends is a strategic decision and depends on growth state of company

2. Acct 387 - Chapter 162 Types of dividends: Cash Property Scrip Liquidating Stock Important dates: Declaration date Record date Ex-dividend date Payment date

3. Acct 387 - Chapter 163 Cash dividends become a liability when declared Property dividends require that the property be revalued to fair value and gain/loss recognized before distribution Scrip dividends are when the corporation distributes an “IOU” instead of cash. Liquidating dividends represent a return of capital instead of retained earnings and should be charged to paid in capital

4. Acct 387 - Chapter 164 Stock Splits Stock dividends are a pro rata distribution of shares to owners which change no one’s ownership share. Small stock dividend (less than 20-25%) are accounted for at market; Large stock dividends are accounted for at par. Actual impact of a stock dividend is to reduce retained earnings and future cash dividend potential.

5. Acct 387 - Chapter 165 Stock Splits Stock splits are used to reduce the share price in the market to keep a stock in the trading range. Simply reduce the par value and increase the shares outstanding. No formal journal entry is needed. Unlike a stock dividend, retained earnings is not affected. Like a stock dividend, total stockholders equity is not affected.

6. Acct 387 - Chapter 166 Preferred Dividends Preferred dividends can be cumulative or noncumlative; participating or nonparticipating

7. Acct 387 - Chapter 167 Appropriations of Retained Earnings If management wants to send a message that certain parts of retained earnings are legally or strategically not available for dividends, retained earnings may be appropriated. This is done with a simple journal entry which is reversed when the appropriation is no longer needed. The same thing can be accomplished, many believe with less confusion, through a note disclosure.

8. Acct 387 - Chapter 168 Ratios Return on equity = Net income – preferred div Avg Common SE Payout ratio = Common cash dividend Net income – preferred dividend Price Earnings Ratio = Market price per share EPS