Question

Which of the following statements is true regarding the cumulative effect of the declaration and payment of a cash dividend on a company's financial statements?

A. The cumulative effect is to increase total expenses and increase total assets.

B. The cumulative effect is to increase total assets and increase stockholders' equity.

C. The cumulative effect is to decrease total assets and decrease stockholders' equity.

D. The cumulative effect is to decrease total liabilities and increase stockholders' equity.

Answer 1

The cumulative effect of the payment of cash dividends is to decrease both total assets and stockholders' equity. This reflects the reduction of cash and the distribution of earnings to shareholders.

Step-by-step explanation:

The correct statement regarding the cumulative effect of the declaration and payment of a cash dividend on a company's financial statements is: C. The cumulative effect is to decrease total assets and decrease stockholders' equity. When a company declares and pays a dividend, it is distributing a portion of its earnings to shareholders. This distribution results in a decrease in the company's retained earnings, which is part of stockholders' equity. At the same time, the payment of the dividend reduces the company's cash and cash equivalents, which are part of its total assets. Thus, the payment of a dividend has the effect of reducing both total assets and stockholders' equity.