Entries for Dividend Declarations and Retained Earnings Appropriations Are Traced

question 73

Multiple Choice

Entries for dividend declarations and retained earnings appropriations are traced to the minutes book. In determining the propriety of the distribution, the auditor should:

• A) establish that preferential or other rights of stockholders and any restrictions on dividend distributions have been recognized.
• B) establish the number of shares outstanding on the date of record and verify the accuracy of the total dividend declaration by recalculation.
• C) ascertain the propriety of the entry to record the declaration.
• D) review the minutes to provide evidence of stockholders' equity transactions authorized during the year.
• E) trace dividend payments to canceled checks and other documentation.

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Definitions:

Depreciation

The systematic allocation of the cost of a tangible asset over its useful life, reflecting its consumption, wear and tear, or obsolescence.

Equity Method

An accounting technique used to record investments in other companies, recognizing income based on the investor's share of the investee's profits.

Subsidiary Earnings

Profits generated by a company that is majority-owned or fully owned by another company (the parent company).

Income Statement

An income statement is a financial document that shows a company's revenues, expenses, and net income over a specific period.