Multiple Choice
Which of the following dividend policies will cause dividends per share to fluctuate the most?
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12. Stockholders' Equity
Dividends and Dividend Preferences
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Dividends paid by the firm ________.
A
have no impact on shareholders' equity
B
are recorded as an expense on the income statement
C
reduce retained earnings on the balance sheet
D
increase the company's net income
Verified step by step guidance1
Understand the concept of dividends: Dividends are payments made by a company to its shareholders, typically as a distribution of profits. They are not considered an expense but rather a distribution of retained earnings.
Recognize the impact of dividends on financial statements: Dividends reduce retained earnings, which is a component of shareholders' equity on the balance sheet. They do not affect net income or appear as an expense on the income statement.
Clarify why dividends are not an expense: Expenses are costs incurred to generate revenue, while dividends are a return of profits to shareholders. Therefore, dividends are not recorded on the income statement.
Identify the correct accounting treatment: When dividends are declared, they are recorded as a liability (Dividends Payable) until paid. Once paid, the liability is reduced, and retained earnings are decreased by the dividend amount.
Summarize the correct answer: Dividends paid by the firm reduce retained earnings on the balance sheet, which is part of shareholders' equity.
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