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Which of the following events would cause a corporation's total shareholders' equity to decrease?
ACustomers settle their outstanding balances
BNew ordinary shares are issued for cash
CThe business earns a profit for the period
DCash dividends are distributed to the owners
Answer & Solution
Correct answer: D. Cash dividends are distributed to the owners
1. Equity rises when shares are issued or the business earns a profit.
2. Equity falls when dividends are distributed or the business takes a loss.
3. Issuing shares (B) and earning a profit (C) both raise equity, so they are ruled out.
4. Collecting receivables (D) is an asset swap with no equity effect.
5. Distributing cash dividends reduces retained earnings, lowering total equity.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §6.1 "Accounting Equation", p.243_
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