Series 7 Exam Question 112: Answer and Explanation

Question: 112

AylDec Corp. paid a cash dividend to its common stockholders. How would it affect AylDec's balance sheet?

I. The assets would decrease

II. The liabilities would decrease

III. The net worth would decrease

IV. The net worth would remain the same

• A. I and III
• B. II and III
• C. I, II, and III
• D. I, II, and IV

Correct Answer: D

Explanation:

D. The formula for net worth is as follows:

Net worth = assets - liabilities

So, certainly the assets of AylDec had to decrease because they are using cash to pay the dividend. But also remember that AylDec had to announce the dividend to shareholders before paying it, so at that point, it became a current liability on AylDec's balance sheet. So, this means that the assets and liabilities reduced by the same amount because once the dividend was paid, that liability went away. Therefore, the net worth remained the same. That was definitely a tough one.