Question

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

Answer 1

d) There is no cash flow

Step-by-step 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)