The declaration of cash dividends reduces retained earnings.Group startsTrue or False
Question
The declaration of cash dividends reduces retained earnings.
Group starts True or False
Solution
Answer
The statement "The declaration of cash dividends reduces retained earnings" is True.
Explanation
When a company declares cash dividends, it allocates a portion of its retained earnings to pay shareholders. This declaration signifies a choice to distribute profits rather than reinvest them back into the company. As such, the total amount of retained earnings on the balance sheet decreases by the total declared dividends.
This process reflects a redistribution of wealth within the company, impacting the equity section of the balance sheet. Retained earnings are essentially the accumulated profits that have not been distributed to shareholders as dividends, so declaring dividends directly reduces this account.
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