Question

What are the two basic requirements to support the declaration of a cash dividend? What are the effects of a cash dividend on assets and stockholders' equity?

Answer 1

Two basic requirements to support the declaration of a cash dividend are:-

1) Retained earning accounts should have a positive balance greater than dividends, as dividend can be issued only from free reserves.

2) the cash account has a balance greater than the amount of dividend declared, as we have to pay cash for dividend in the near future

Cash dividends affect cash and equity on the balance sheet. Retained earnings and cash are deducted by the sum of dividends. Equity dividends do not affect a company's liquidity, only the equities section of the balance sheet.

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