Question

I. ABC Inc paid $1000 of cash dividends. These dividends reduced assets and reduced retained earnings....

I. ABC Inc paid $1000 of cash dividends. These dividends reduced assets and reduced retained earnings. II. XYZ Inc. has 30,000 shares authorized, 25,000 shares issued, and 15,000 shares outstanding. Thus, if no other transaction took place, then XYZ bought back (treasury stock) 10,000 shares. III. Retained earnings may or may not be cash. Similarly, net income may or may not be cash.

Is this all True or False?

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Answer #1

True.

I. Dividends are paid out of retained earnings. Thus, when ABC Inc. paid $1000 of cash dividends, the retained earnings were reduced and also since cash was paid out, assets were reduced. Hence this is true.

II. The difference between the issued stock and outstanding stock represents the stock reacquired. Since XYZ Inc. has 25000 shares issued but only 15000 shares outstanding, it means that XYZ Inc. reacquired or bought back 10000 shares of its own stock. Hence this is true.

III. Under the accrual method of accounting, revenues are recorded when earned irrespective of collection against the same and similarly expenses are accrued when incurred irrespective of payment for the same. Hence, the net income and retained earnings may or not be cash. Hence this is true.

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