Equity

Question 1

True or false?
Because treasury stocks are shown within equity, share repurchase programs do not affect the asset side.

Answer 1

False. In share repurchase programs, a company buys back shares from
shareholders paying the share price. This means, cash (assets) flow out of the company.

Question 2

A company announces a final dividend at the end of the financial year. The
dividend payable should be recognized when…
a)
..the dividend is declared
b)
..the dividend is appropriately authorized.
c)
..the dividend is paid to shareholders.

Answer 2

B. A dividend payable should be recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity. In Switzerland, for example, payment of dividends require the approval of shareholders at a forthcoming AGM. In the USA, however, decision regarding the amount and frequency of dividends is solely at the discretion of the board of directors.

Question 3

Recognition of dividends payable leads to which of the following accounting records?
a) Dividends / Cash
b) Equity / Dividends
c) Equity / Cash

Answer 3

B. Recognition of “dividends payable” means that the entity recognizes a liability in the amount of the dividends payable and reducing equity by the same amount. At a later point in time, the entity pays the dividends, which leads to accounting record “Dividends/Cash”.