How will a company's working capital and net income be affected by the recording of a cash dividend on the declaration date? (Assume the dividend is paid on a later date.) $\begin{array}{lll}& \text {Working Capital}& \text {Net Income}\\ \text { I. } & \text { decrease } & \text { decrease } \\\text { II. } & \text { decrease } & \text { no effect }\\\text { III. } & \text { no effect } & \text { no effect }\\ \text { IV. }& \text { no effect } & \text { decrease }\end{array}$

A) I
B) II
C) III
D) IV

Question

How will a company's working capital and net income be affected by the recording of a cash dividend on the declaration date? (Assume the dividend is paid on a later date.)

\begin{array}{lll}& \text {Working Capital}& \text {Net Income}\\ \text { I. } & \text { decrease } & \text { decrease } \\\text { II. } & \text { decrease } & \text { no effect }\\\text { III. } & \text { no effect } & \text { no effect }\\ \text { IV. }& \text { no effect } & \text { decrease }\end{array}

A) I
B) II
C) III
D) IV

Sydney Chapman · Accepted Answer

Final Answer : B, Explanation :  The declaration of a cash dividend has no effect on the working capital and net income of a company. However, when the dividend is actually paid on a later date, the company's working capital and net income will both decrease. The decrease in working capital is due to the outflow of cash to pay the dividend, while the decrease in net income is due to the reduction in retained earnings, which represents the portion of profits that are not paid out as dividends. Therefore, option II is the correct choice.

Definitions

Learning Objectives

Learning Objectives

Related questions