Dividend Distribution

1. Identify the various dates associated with a dividend distribution.

2. Prepare all journal entries to report a cash dividend payment.

3. Define the characteristics of a cumulative dividend.

4. Explain the rationale for a stock dividend or stock split.

5. Record the issuance of a stock dividend.

Question: “Why Is Financial Accounting Important?”, a vast majority of investors

purchase capital stock for only two reasons: price appreciation and dividends. Dividends and long-term capital

gains (gains on the sale of certain investments that have been held for over a year) are especially appealing to

individual investors because they are taxed at a lower rate than most other types of income.

Dividends are usually paid in cash and represent the profits of a business being passed along to the owners.

Because the corporation is effectively giving away its assets, dividends require formal approval by the board of

directors—known as a dividend declaration. The board considers current cash balances as well as the projected

needs of the business before deciding on the amount, if any, of a dividend payment. How does a corporation report

the declaration and distribution of a cash dividend?

Answer: Dividends provide a meaningful signal to investors about the financial health of a business. Some

corporations even boast about having paid a constant or rising annual dividend for many years. Unfortunately, one

result of recent economic times has been that a number of businesses have been forced to reduce or even eliminate

dividend distributions. Such decisions typically lead to a drop in the market price of a corporation’s stock because

of the negative implications.