Question

The effect of the declaration of a cash dividend on a company's financial statements is to

a.increase total expenses and total liabilities.

b.increase total assets and stockholders' equity.

c.decrease stockholders' equity and to increase total liabilities.

d.decrease total assets and stockholders' equity.

Answer 1

Answer:

The effect of the declaration of a cash dividend on a company's financial statements is to

d. Decrease in total asset and stockholders equity.

Cash dividends affect two areas on the balance sheet: the cash and shareholders' equity accounts. Investors will not find a separate balance sheet account for dividends that have been paid. However, after the dividend declaration and before the actual payment, the company records a liability to its shareholders in the dividend payable account.

After the dividends are paid, the dividend payable is reversed and is no longer present on the liability side of the balance sheet. When the dividends are paid, the effect on the balance sheet is a decrease in the company's retained earnings and its cash balance. In other words, retained earnings and cash are reduced by the total value of the dividend.

Retained earnings are actually reported in the equity section of the balance sheet. Although you can invest retained earnings into assets, they themselves are not assets.