Page 525 - Accounting Principles (A Business Perspective)

13. Corporations: Paid-in capital, retained earnings, dividends, and treasury stock

An accounting perspective:

Business insight

Fleetwood Enterprises, Inc., is the nation's leading producer of manufactured housing and
recreational vehicles. Often investors believe a company that pays dividends is doing well.
Therefore, companies try to maintain a record of paying dividends, as Fleetwood noted in a 2001
press release.
RIVERSIDE, Calif., Sept. 12 /PRNewswire/—The directors of Fleetwood Enterprises, Inc. (NYSE:
FLE) have declared the company's regular quarterly cash dividend of 19 cents per share of
Common stock, payable 2000 November 8, to shareholders of record 2000 October 6.

A company that lacks sufficient cash for a cash dividend may declare a stock dividend to satisfy its
shareholders. Note that in the long run it may be more beneficial to the company and the
shareholders to reinvest the capital in the business rather than paying a cash dividend. If so, the
company would be more profitable and the shareholders would be rewarded with a higher stock
price in the future.

Stock dividends are payable in additional shares of the declaring corporation's capital stock. When declaring
stock dividends, companies issue additional shares of the same class of stock as that held by the stockholders.
Corporations usually account for stock dividends by transferring a sum from retained earnings to permanent

paid-in capital. The amount transferred for stock dividends depends on the size of the stock dividend. For stock
dividends, most states permit corporations to debit Retained Earnings or any paid-in capital accounts other than
those representing legal capital. In most circumstances, however, they debit Retained Earnings when a stock
dividend is declared.
Stock dividends have no effect on the total amount of stockholders' equity or on net assets. They merely decrease
retained earnings and increase paid-in capital by an equal amount. Immediately after the distribution of a stock
dividend, each share of similar stock has a lower book value per share. This decrease occurs because more shares
are outstanding with no increase in total stockholders' equity.
Stock dividends do not affect the individual stockholder's percentage of ownership in the corporation. For

example, a stockholder who owns 1,000 shares in a corporation having 100,000 shares of stock outstanding, owns 1
per cent of the outstanding shares. After a 10 per cent stock dividend, the stockholder still owns 1 per cent of the
outstanding shares—1,100 of the 110,000 outstanding shares.
A corporation might declare a stock dividend for several reasons:
• Retained earnings may have become large relative to total stockholders' equity, so the corporation may
desire a larger permanent capitalization.
• The market price of the stock may have risen above a desirable trading range. A stock dividend generally

reduces the per share market value of the company's stock.

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