Final answer:
The declaration of a cash dividend decreases retained earnings and increases current liabilities; it does not immediately affect net income or cash balance.
Step-by-step explanation:
The declaration of a cash dividend by the directors results in a decrease in retained earnings and an increase in current liabilities. When a company declares a dividend, it is committing to making a future cash payment to its shareholders.
As per accounting principles, this declaration creates a liability for the company because it is now obligated to pay this amount in the future. At the same time, the retained earnings account is reduced because dividends are paid out of profits that were previously retained within the company, thereby reducing the equity of the company.
On the actual payment date, cash will decrease as the payment is made to shareholders. However, declaration alone does not reduce the net income nor the cash balance immediately; those effects occur when the dividend is actually paid out.