CFA Practice Question

CFA Practice Question

Excerpts from the balance sheet of Milton Corporation as of April 30, 2007 are presented as follows:

Cash: $725,000
Accounts receivable (net): $1,640,000
Inventories: $2,945,000
Total current assets: $5,310,000

Accounts payable: $1,236,000
Accrued liabilities: $831,000
Total current liabilities: $2,067,000
The board of directors of Milton met on May 5, 2007 and declared a quarterly cash dividend in the amount of $200,000 ($0.50 per share). The dividend was paid on May 28, 2007 to shareholders of record as of May 15, 2007.

Assume that the only transactions that affected Milton during May 2007 were the dividend transactions. If the dividend declared by Milton had been a 10% stock dividend instead of a cash dividend, Milton's total shareholders' equity would have been
A. unchanged by either the dividend declaration or the dividend distribution.
B. increased by the dividend declaration and unchanged by the dividend distribution.
C. unchanged by the dividend declaration and decreased by the dividend distribution.
Explanation: The declaration and distribution of a stock dividend involves transferring an amount from retained earnings to common stock. However, the total shareholders' equity remains the same.

User Contributed Comments 4

User Comment
armanaziz Aren't we supposed to compare the cash dividend with the stock dividend?
jayjunk armanaziz, I was confused too. Seems like you are to compare "stock dividend declaration" to "stock dividend distribution". I thought we were to compare "stock dividend" to "cash dividend".
mishis A cash dividend decreases shareholder's equity (Retained Earnings is decreased) while a stock dividend does not change shareholder's equity (transfer from Retained Earnings to Common stock)?
mpapwa22 Ì got this one wrong coz of not reading carefully.
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