Question

The 2017 balance sheet of Kerber's Tennis Shop, Incorporated, showed $770,000 in the common stock account and $6.15 million in the additional paid-in surplus account. The 2018 balance sheet showed $865,000 and $8.65 million in the same two accounts, respectively. If the company paid out $660,000 in cash dividends during 2018, what was the cash flow to stockholders for the year?

Multiple Choice
a. $1,935,000
b. $110,000
c. $205,000
d. $-1,935,000
e. $8,855,000

Answer 1

The cash flow to stockholders for the year is -$1.935 million, which means that more money was raised through issuing stock than was paid out in dividends.

Step-by-step explanation:

To calculate the cash flow to stockholders, we need to consider both the dividends paid and the net new equity raised. The cash dividends paid to stockholders are given as $660,000. To find the net new equity raised, we look at the change in the common stock and additional paid-in surplus accounts. The common stock increased by $865,000 - $770,000 = $95,000, and the additional paid-in surplus increased by $8.65 million - $6.15 million = $2.5 million. The total net new equity raised is $95,000 + $2.5 million = $2.595 million. The cash flow to stockholders is the cash dividends paid minus the net new equity raised, which is $660,000 - $2.595 million = -$1.935 million.