XYZ Co.paid $1,000 in dividends to stockholders.How does this transaction affect the accounts of XYZ?
A) Cash will decrease by $1,000 and retained earnings will decrease by $1,000.
B) Cash will decrease by $1,000 and expenses will increase $1,000.
C) Cash will decrease by $1,000 and revenues will decrease $1,000.
D) Net income will decrease by $1,000.

Question

Quizplus · Accepted Answer

Payment of dividends involves giving away a portion of the company's profits or retained earnings to the stockholders. This is a cash outflow and will reduce the company's cash balance. At the same time, since dividends are paid from retained earnings, this will reduce the amount of profits that have been accumulated by the company over time, hence decreasing the retained earnings account. Therefore, Choice A is the correct answer.

XYZ CoPaid $1,000 in Dividends to Stockholders