Kieso, Weygandt, Warfield, Young, Wiecek Intermediate Accounting, Eighth Canadian Edition 15-7 22. While the unencumbered credit balance in retained earnings is normally considered to provide the basis for dividend distributions, very few companies pay dividends in amounts equal to this legally available amount. The major reasons may include a) agreements with creditors, b) the need to finance growth and expansion, c) the need to provide for continuous dividends in good or bad years, and d) the need to build a cushion. If funds are unavailable for the payment of dividends, the extent of the credit balance in retained earnings is of little significance. Thus, management must ask two questions before declaring a dividend: Is it legally permissible ? and, Is the paying out of company assets economically sound ? 23. Dividends may be paid in cash (most common means), shares, scrip, or some other asset. Dividends, other than a stock dividend, reduce the shareholders' equity in a corporation
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