Multiple Choice
Which of the following is the appropriate journal entry for the declaration of cash dividends?
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12. Stockholders' Equity
Dividends and Dividend Preferences
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If a company pays a cash dividend, which of the following is the immediate effect on its financial statements?
A
Total assets remain unchanged and total equity decreases.
B
Total assets decrease and total liabilities increase.
C
Total assets decrease and total equity decreases.
D
Total assets increase and total equity increases.
Verified step by step guidance1
Understand the concept of a cash dividend: A cash dividend is a payment made by a company to its shareholders from its retained earnings. It reduces the company's cash (an asset) and retained earnings (a component of equity).
Identify the immediate effect of paying a cash dividend: When a company pays a cash dividend, it uses cash, which decreases total assets. Simultaneously, retained earnings (part of equity) decrease because the dividend is distributed from this account.
Analyze the options provided: Evaluate each option based on the impact of paying a cash dividend. For example, 'Total assets remain unchanged and total equity decreases' is incorrect because assets decrease when cash is paid out.
Focus on the correct answer: The correct answer is 'Total assets decrease and total equity decreases,' as both cash (asset) and retained earnings (equity) are reduced.
Summarize the reasoning: Paying a cash dividend reduces the company's resources (cash) and its retained earnings, leading to a decrease in both total assets and total equity.
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