Question

9.) What are the three important dates for a cash dividend? What is the journal entry required for each date? What is the overall impact of a cash dividend on the accounting equation (assets = liabilities + stockholders' equity)?

10.) Calculate net cash provided by operating activities.

11.) Name the 3 major business activities and be able to identify which activities belong to each category.

12.) Prepare an Income Statement, Statement of Stockholders' Equity, Balance Sheet and Statement of Cash Flows.

There is no data. Just need formulas or simple answers to concept questions. thank you.

Answer 1

9. Three important date for a cash dividend are:

a. Declaration date: This is the date on which the cash dividend are declared by the board of a company. On this date a journal entry for recording the liability for payment of dividend is created. The journal entry to be passed is:

Retained Earnings ................. Dr $xxxx

Dividends Payable ................. Cr $xxxx

b. Record date: This is the date as decided by the board of directors, regarding which shareholders would be entitled to receive the dividends. Only the people who are the shareholders on record date will be eligible to receive the dividend. No journal entry is passed on the record date.

c. Payment date: This is the date on which the company pays out the dividends. The journal entry to be passed is:

Dividends Payable ................. Dr $xxxx

Cash ...................................... Cr $xxxx

When dividend is declared, the provision for dividend payable is made from the retained earnings. As a result of this, the amount of liabilities increase (due to creation of dividends payable) and accordingly the amount of shareholders' equity reduces (due to decrease in retained earnings).

When dividend is paid, the amount of dividend is paid in cash. As a result of this, the amount of liabilities decrease (due to satisfaction of dividends payable) and accordingly the amount of assets reduces (due to decrease in cash).

10. Cash flow from operations means the amount of cash required or generated from operating activities of a company. The formula for determining cash flow from operations is:

Cash flow from operations = Net Income + Non cash items + Increase in working capital

While calculating net income of a company, there are many items which are given effect to, such as depreciation, deferred taxes, etc which do not impact the cash balances. Thus we add back these to get the real impact on cash balances. The other impact on cash balances is due to change in requirement of working capital such as increase/ decrease in debtors, creditors, etc. These effects are not shown in the net income statement, but are related to the operating activities of the company and do affect the cash balances.

11. Three major business activities are:

a. Operating activities: These activities are directly related to the core and main business activities of the company. The activities such as manufacturing, sales, marketing, administration, etc are included here.

b. Investing activities: These activities relate to the use of funds for long term purposes. The idle funds of the company are invested to yield returns, or to buy a new equipment, etc. These are categorized into investing activities.

c. Financing activities: When a company undertakes activities to finance their business activities, they are called as financing activities. Issuing shares for cash, raising bank loans, payment of dividends, etc are included here.

12. Income Statement is the statement where a company records its financial performance. It includes all the activities which has caused an impact on the position of the company financially to calculate the company's net income/ loss. This amount of net income/ loss is then transferred to retained earnings. The amount of net income/ loss is derived by basic formula:

Net income/ loss = (Revenues - Expenses) + (Gains - Losses)

Statement of stockholders' equity is the statement which shows the change in shareholder's funds. It includes the amounts contributed by the common stockholders, treasury stock, retained earnings and the other comprehensive incomes.The balance of stockholders' equity is derived in following way:

Closing balance stockholders' equity =  Opening balance stockholders' equity + New shares issued + Retained earnings + Other comprehensive income - Dividends paid

Balance Sheet is the statement of assets, liabilities and stockholders' equity at a particular date. All the balances of assets (current, non- current) are shown on the assets side of the balance sheet. The liabilities side shows the amounts of the liabilities incurred by the company such as current, non-current. Balance sheet is made with a basic accounting equation of:

Assets = Liabilities + Stockholders' Equity

Statement of Cash Flows shows the movements in the cash balances of a company. The statement categorizes the business into three activities: operating, investing and financing. The cash flow statement is made with the basic formula of:

Cash balance at end = Opening cash balances + Cash flow from operating activities + Cash flow from investing activities + Cash flow from financing activities