Question

SAP Analytics Cloud Hic X WP Resource Player - Wiley X Ch 2: Adaptive Practice с adaptive.wileyplus.com/secure/adaptiveLearning Dashboard?chid=OTA3OTk2Nj, S M Gmail YouTube Maps Course Home Homepage - Dalh... NelsonBraf WileyPLUS = Adaptive Practice Financial Accounting, Eighth Cana Practice - 2.1: Identify the sections of a classified statement Q 2.22: Which of the following statements is correct? A Issuing additional common shares will increase retained earnings. B Issuing additional preferred shares will decrease share capital. с Issuing additional common shares will decrease retained earnings. D Issuing additional common shares will increase share capital. Mark for Review Confidence 18 D D A 16

Answer 1

Hi There,

Here is my answer to the given question.

Option D is the correct statement i.e, Issuing additional common shares will increase share capital

Common stock :

   It is a security that represents ownership in a company. They make money by collecting dividends which are a portion of companies earnings and common stock holder can have voting rights in a company. In a liquidation, common stockholders receive whatever assets remain after creditors, bondholders, and preferred stockholders are paid.

Prefered stock :

It is a form of stock which may have any combination of features not possessed by common stock including properties of both an equity and a debt instrument and is generally considered a hybrid instrument. It is also called as preferred shares or preference shares. Preference share holders earns more than the amount earned by the common stock holders. Preference shareholders will not have voting rights.

Retained earnings :

It  represent the portion of a company's net income during a given accounting period that isn't paid out to stockholders as dividends, but rather, is retained to reinvest in the business. A business generates earnings that can be positive (Means Profit) or negative (Means losses).

Positive profits give a lot of room to the business owner(s) or the company management to utilize the surplus money earned. Often this profit is paid out to shareholders, but it can also be re-invested back into the company for growth purposes. The money not paid to shareholders counts as retained earnings.

Growing companies often choose to avoid dividend payments and instead retain as much of their earnings as possible to help fuel their development. R

Explanation :
When a company issues common stock to raise capital, the proceeds from the sale of that stock become part of its total shareholders' equity but do not affect retained earnings and Retained earning will be be affected by common stock only when they pay dividends to the common stock holders i.e retained earnings will decrease

so option A & C are incorrect

When a company is issuing any additional shares it will only increase the share capital ( within authorized capital ) whether it is common shares or preference shares it wont decrease the share capital.

so option B issuing addition preferred shares will decrease share capital is incorrect

So we can say from above explanation option D is the correct statement i.e issuing addition common shares will increase the share capital.