Final answer:
When a company declares a cash dividend, it will decrease the Retained Earnings by the amount of the dividend as this represents a distribution of profits to shareholders. In the example with Babble, Inc., each dividend payout would reduce the company's Retained Earnings.
Step-by-step explanation:
When a company pays a dividend, it is distributing a portion of its profits to shareholders. In the case of a cash dividend declared in December 2007 and payable in January 2008, this would result in a decrease in the company's Retained Earnings. Retained Earnings is an equity account on the balance sheet that represents the accumulated net income of a company that has not been distributed to shareholders as dividends.
The payment of dividends reduces Retained Earnings because it is a distribution of the company's profits, which have previously contributed to the accumulated earnings. For instance, with profits expected to be distributed as dividends as in the case of Babble, Inc., for every dividend payout, there would be a corresponding reduction in Retained Earnings.