Series 7 Exam Question 389: Answer and Explanation

Question: 389

If a corporation pays a cash dividend, how does it affect its balance sheet?

I. Assets decrease

II. Liabilities decrease

III. Net worth decreases

IV. Net worth remains 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. You can use logic to answer this question. When the company pays a cash dividend, it pays off some of its liabilities because the dividend was declared previously. The net worth does not change because assets (cash) and liabilities decrease by the same amount.