If a corporation distributes cash to its shareholders, then
A) there has been a violation of accounting principles.
B) equity will increase.
C) equity will decrease.
D) there will be a new liability showing the shareholders owe money to the business.

Question

Quizplus · Accepted Answer

When a corporation distributes cash to its shareholders, it reduces the amount of cash it has on hand, which decreases its assets. Since equity is equal to assets minus liabilities, decreasing assets without changing liabilities will decrease equity. Therefore, the correct answer is C.

If a Corporation Distributes Cash to Its Shareholders, Then