Final answer:
Retained earnings decrease when a company issues dividends, as these earnings represent profits reinvested in the business and reduce when a portion is returned to shareholders.
Step-by-step explanation:
Whenever a company issues dividends, its retained earnings decrease accordingly. Retained earnings represent the cumulative total of earnings that have been reinvested in the business, rather than distributed to shareholders as dividends. As dividends are paid out to shareholders, the funds are drawn from these retained earnings, reducing the amount available for future reinvestment in the company or for reserve purposes.
It can be visualized as a portion of the company’s profits being returned back to the shareholders. The process of declaring and paying dividends is typically decided by the company's board of directors and reflects a company's profitability and its board's belief in the company's future capital requirements. Therefore, when dividends are released, they effectively transfer value from the company back to the shareholders.