Multiple Choice
Which of the following types of financial losses can typically be insured against?
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1. Introduction to Accounting
Types of Accounting
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What is the effect of a stock dividend on total stockholders' equity?
A
Total stockholders' equity remains unchanged.
B
Total stockholders' equity is eliminated.
C
Total stockholders' equity increases.
D
Total stockholders' equity decreases.
Verified step by step guidance1
Understand the concept of a stock dividend: A stock dividend is a distribution of additional shares to existing shareholders, proportional to their current holdings, without any cash exchange.
Recognize the accounting impact: A stock dividend transfers an amount from retained earnings to paid-in capital within stockholders' equity. This does not involve cash or external transactions.
Analyze the effect on total stockholders' equity: Since the transfer occurs within stockholders' equity (from retained earnings to paid-in capital), the total stockholders' equity remains unchanged.
Compare with other scenarios: Unlike cash dividends, which reduce retained earnings and total stockholders' equity, stock dividends only reallocate equity components without altering the total.
Conclude: The correct answer is that total stockholders' equity remains unchanged because the stock dividend does not affect the overall equity balance, only its composition.
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