Dividends paid: a. decrease revenues. b. decrease equity. c. increase liability. d. increase expenses.
Question
Dividends paid:
a. decrease revenues.
b. decrease equity.
c. increase liability.
d. increase expenses.
Solution
b. decrease equity.
When a company pays dividends, it reduces the amount of retained earnings, a component of shareholders' equity, on its balance sheet. This is because retained earnings are part of the profits that the company has chosen to reinvest in the business, rather than distribute to shareholders. When these profits are distributed as dividends, the retained earnings and therefore the shareholders' equity decrease.
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