Answer to Question #33227 in Economics of Enterprise for thk thomas

Question

Which of the following statements is CORRECT?
a. Dividends paid reduce the net income that is reported on a company’s income statement.
b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.
c. If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year.
d. Accounts receivable are reported as a current liability on the balance sheet.
E(correct) If a company pays more in dividends than it generates in net income, its retained. earnings as reported on the balance sheet will decline from the previous year's balance.

Answer 1

Correct answer is E.
If company pays more in dividends than it generates in net income, it needs more than gained during current year. Company should use earnings from previous year as it was reported on the balance sheet. So it pays more than it gets and needs additional money that lead to decrease of its retained earnings in comparison with previous year's balance.