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How do cash dividends affect the financial statements?

When a corporation declares a cash dividend on its stock, its retained earnings are decreased and its current liabilities (Dividends Payable) are increased. When the cash dividend is paid, the Dividends Payable account is decreased and the corporation's Cash account is decreased.

The net result of the declaration and payment of the dividend is that the corporation's assets and stockholders' equity have decreased. Specifically, the balance sheet accounts Cash and Retained Earnings were decreased.

The income statement is not affected by the declaration and payment of cash dividends on common stock. (The cash dividends on preferred stock are deducted from net income to arrive at net income available for common stock.)

The cash dividends will be reported as a use of cash in the financing activities section of the statement of cash flows.