Question

Assertion (A): Declaration of Proposed (Final) Dividend results in an Outflow of Cash.

Reason (R): It does not affect the cash of the company since there is no payment or receipt in cash.

In the context of the above two statements, which option is correct?

Options

• Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation of Assertion (A).

• Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation of Assertion (A).

• Assertion (A) is correct, but Reason (R) is not correct.

• Assertion (A) is not correct, but Reason (R) is correct.

Answer 1

Assertion (A) is not correct, but Reason (R) is correct.

Explanation:

Assertion (A) is false because the mere declaration of a dividend is a non-cash event that simply creates a liability, meaning no cash leaves the company at the time of declaration. Reason (R) is true because a cash outflow only happens later when the dividend is actually paid out to shareholders, so the declaration itself does not involve any cash movement or affect the company’s current cash balance.