Declaration and Payment of Cash Dividends

Du Pont paid dividends of $1,401 million to its shareholders in 1997. On the date of declaration, the dividend became a liability because Du Pont obligated itself to make the dividend payment. On that date, retained earnings were decreased and liabilities were increased by $1,401 million:

ASSETS

_

LIABILITIES +

SHAREHOLDERS' EQUITY

Dividends payable

Retained earnings

+ $1,401 million

— $1,401 million

Management also specified a date of record, and the dividend was paid to investors who owned the shares on that specific date. Subsequently, the stock was considered ex dividend, which means that subsequent purchasers were not entitled to receive the previously declared dividend. On the date of payment, Du Pont's cash and dividends payable (liability) were reduced by $1,401 million:

ASSETS _

LIABILITIES + SHAREHOLDERS' EQUITY

Cash

Dividends payable

— $1,401 million

— $1,401 million

Observe that the change in retained earnings over a period is due primarily to the difference between a firm's net income and dividends during the period. The ending balance in retained earnings reflects the total net income of the firm in all past periods, less the total amount of dividends to shareholders, plus or minus the effects of any other adjustments.

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