Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 22

For the following questions, circle the best response.

Which of the following would not affect total retained earnings? Assume that it is the end of the fiscal year and that the books have been closed.

a. Cash dividends.

b. Net income.

c. Stock dividends.

d. Stock splits.

e. All of the above would affect total retained earnings.

Step 1 of 6

(a)

A payment of cash dividends does affect total retained earnings. This is because the retained earnings account is considered a corporation’s accumulated earnings, and a stock dividend represents a return of those earnings to shareholders. Therefore, retained earnings will decrease when a cash dividend is paid.