Question

Your friend has questions about retained earnings and dividends. How do you explain to him that dividends are paid out of retained earnings?

a) Dividends are paid from profits, which are part of retained earnings.
b) Dividends are paid from common stock, which is part of retained earnings.
c) Dividends are paid from additional paid-in capital, which is part of retained earnings.
d) Dividends are paid independently of retained earnings.

Answer 1

Dividends are paid out of retained earnings, which represent the accumulated profits of a company that have not been distributed to shareholders.

Step-by-step explanation:

Dividends are paid out of retained earnings. Retained earnings represent the accumulated profits of a company that have not been distributed to shareholders in the form of dividends. When a company pays dividends, it is using a portion of its retained earnings to distribute profits directly to the stock owners.

For example, if a company has $1,000 in retained earnings and decides to pay a dividend of $200, the dividend payment is made using the retained earnings. The remaining retained earnings after the dividend payment would be $800.

Therefore, option a) Dividends are paid from profits, which are part of retained earnings accurately explains that dividends are paid out of retained earnings.