Dividends paid:
A) Must be equal to or less than the net income earned each year.
B) Equal the cash flow to stockholders in any given year.
C) Reduce the taxable income of a firm.
D) Are considered a noncash expense.
E) Are equal to net income less the change in retained earnings.

Question

Quizplus · Accepted Answer

Dividends are paid out of the net income after accounting for any change in retained earnings. This means that the dividends are what's left of the net income after the company has decided how much to retain for future investments or to keep as a reserve. Choices A, B, C, and D are incorrect because dividends can be more than the net income if the company decides to distribute reserves, they do not always equal cash flow to stockholders due to share repurchases or other transactions, they do not reduce taxable income as they are paid from after-tax income, and they are not a noncash expense but an actual cash outflow.

Dividends Paid