Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 11 - Reporting and Analyzing Stockholders' Equity - Questions: 14

Answer

Three conditions to be met before a cash dividend is paid: a) Retained earnings b) Adequate Cash c) Declared dividends

Work Step by Step

a) Corporation must ensure the laws of the capital, if there are any restrictions on payment of cash dividend from retained earnings. Though payment of cash dividend from retained earnings is legal in almost all states but still these needs have to be checked before declaration. In some cases loan agreements has a constraint over declaration of cash dividend from retained earnings. b) Corporation has to ensure that it has sufficient surplus cash to distribute as cash dividend. There are two points in this - one is availability of cash and other it should be surplus cash. It means that after payment of this dividend, the working of corporation should not be adversely affected. c) Dividend is not something like interest that is to be paid periodically. It is the decision of Board of Directors, to decide, how much they want to distribute among the stock holders and how much they want to keep in the corporation as additional capital.
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