The combined effect of the declaration and payment of a cash dividend on a company's financial statements is to:
A) decrease total liabilities and decrease stockholders' equity.
B) increase total expenses and increase total liabilities.
C) increase total assets and increase stockholders' equity.
D) decrease total assets and decrease stockholders' equity.

Question

Quizplus · Accepted Answer

Payment of cash dividends reduces a company's cash balance and therefore, decreases total assets. Additionally, because dividends are a distribution of a company's earnings to its shareholders, it decreases retained earnings, which is a part of stockholders' equity. Therefore, the combined effect of declaration and payment of cash dividends is to decrease total assets and decrease stockholders' equity.

The Combined Effect of the Declaration and Payment of a Cash