Stock Dividends

Explanation

Stock dividends increase the number of shares outstanding of the issuing company and do not reduce cash.

The correct answer is D. Stock dividends increase the number of shares outstanding.

A stock dividend is a distribution of additional shares of stock to existing shareholders of a company. It is typically expressed as a percentage of existing shares. For example, a company may declare a 10% stock dividend, which means that for every 10 shares owned, an investor would receive an additional share.

Now let's break down the explanations for the other answer choices:

A. Stock dividends are dividends given in the form of stock from another company. This statement is incorrect. Stock dividends are not dividends given in the form of stock from another company. They are distributions of additional shares of the same company to existing shareholders.

B. Stock dividends are more valuable than stock splits. This statement is incorrect. Stock dividends and stock splits are two different concepts. While stock dividends increase the number of shares outstanding, stock splits increase the number of shares outstanding and decrease the share price proportionally. Stock splits are typically done to make the shares more affordable to smaller investors and do not inherently increase or decrease the value of the shares.

C. Stock dividends are recorded as a reduction in cash. This statement is incorrect. When a company declares a stock dividend, it does not involve a reduction in cash. Instead, the company transfers a portion of its retained earnings or additional paid-in capital to the common stock account. The transfer does not involve an outflow of cash but rather a reallocation of equity within the company.

In summary, stock dividends are distributions of additional shares of the same company to existing shareholders. They increase the number of shares outstanding without any cash outflow and do not inherently change the value of the shares.