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20 October, 15:21

A company issued 1,000 shares of $10 par value common stock due to a previously declared stock dividend; the market value at both the date of declaration and distribution was $12 per share. Which of the following correctly describes the reporting of this stock issue within the financing activities section of the cash flow statement?

a) A cash outflow of $10,000

b) A cash outflow of $2,000

c) A cash outflow of $12,000

d) There is no cash flow

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  1. 20 October, 15:57
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    d) There is no cash flow

    Explanation:

    There is no cash flow because a stock dividend refers to a dividend that is paid by issuing additional shares to shareholders of a company instead of paying them a cash dividend.

    Therefore, there is no cash flow since no cash is received nor paid.

    Note: To record stock dividends, the amounts is moved from retained earnings to paid-in capital; and the evidence that no cash is received nor paid is that the journal entries for the issue of stock dividend will be as follows:

    Debit Retained for $12,000 (i. e. 1,000 * $12 = $12,000)

    Credit Common Stock for $10,000 (i. e. 1,000 - $10 = $10,000)

    Credit Additional Paid-In Capital in Excess of Par - Common Stock for $2,000 ($12,000 - $10,000)
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