The declaration of a dividend by a company . . . ?
Select ONE answer:
- reduces the company‘s bank balance.
- increases the company‘s liabilities.
- increases the shareholders’ funds in the company.
- does not affect the shareholders’ funds in the company.
Show your workings to arrive at your answer, and explain and justify your reasons:
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This multiple-choice question is suitable for Accounting KS5 classes.
The answer is 2
- Not correct – The company’s bank balance will not be reduced until the dividend is actually paid.
- Correct – The declaration of a dividend means the announcement by the company of its intention to pay the dividend at some future date. Therefore, dividends are not paid for some time after they are declared. Consequently, at the time a dividend is declared it becomes an obligation to pay an amount of money at some future date ie. a liability. It is also shown as an appropriation of profit.
- Not correct – One of the effects of a company declaring a dividend is to reduce its retained profit (the second is the creation of a current liability). As the balance on the profit and loss account is part of the company’s shareholders’ funds, a reduction in this balance will reduce the company’s shareholders’ funds.
- Not correct – As for answer C above.
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