If a company just initiated a new dividend plan to common shareholders, which of the following would NOT be an example of one of the impacts on the financial statements?

• A. The dividend payout reduces cash in financing activities
• B. Retained earnings are decreased by the dividend
• C. Dividend payable increases liabilities when declared
• D. The dividend payout would appear as an outflow in the non-operating expenses section of the income statement

Answer: (D)

Dividends are distributions of profits to shareholders, not business expenses, so they don’t appear on the income statement as any kind of expense, including non-operating expenses. When a dividend is declared, it reduces retained earnings on the balance sheet and creates a dividend payable liability. When the dividend is paid, cash decreases and the liability is settled. On the cash flow statement, the actual dividend payment shows up as a financing activity outflow. Because dividends are not recorded as expenses, displaying the dividend payout as an outflow in the non-operating expenses section of the income statement would be incorrect. That’s why this option does not reflect an impact on the financial statements.