A:

Cash or stock dividends distributed to shareholders are not considered an expense on a company's income statement. Stock and cash dividends do not affect a company's net income, and they represent part of a company's retained earnings returned to a company's shareholders. While cash dividends reduce the overall shareholders' equity balance, stock dividends represent a reallocation of part of a company's retained earnings to the common stock and additional paid-in capital accounts.

What Are Dividends?

Because they do not represent a company's cash outflow necessary to conduct its business operations to sell goods and services, dividends are not part of the income statement and are not considered an expense. A company may have a dividend policy, which can be canceled at any time and not show up on a company's financial statements.

Dividends Accounting

Cash dividends represent a company's cash outflow that goes to its existing shareholders, and they are recorded through reduction of cash and retained earnings accounts. Because cash dividends are not a company's expense, they show up as a reduction of equity on the company's statement of changes in shareholders' equity. Cash dividends reduce the size of a company's balance sheet and its value since the company no longer owns part of its liquid assets.

Stock dividends do not represent a cash flow transaction and are not considered an expense either. Companies distribute stock dividends to their shareholders in certain proportion to common shares outstanding. Stock dividends reallocate part of a company's retained earnings to the common stock and additional paid-in capital accounts, and they do not affect the overall size of a company's balance sheet.

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