What does increasing dividends impact in financial statements?

When a company increases its dividends, it directly affects its cash flow and retained earnings on the financial statements. Dividends are paid out of retained earnings, which represent the accumulated profits that have not been distributed to shareholders.

When dividends are declared and paid, cash is reduced since the company disburses actual cash to shareholders. Concurrently, retained earnings decrease because the allocation of profits to shareholders removes that portion from the equity section of the balance sheet. This dual effect is reflected in the financial statements, showing a decrease in both cash (an asset) and retained earnings (part of equity).

Thus, the conclusion that increasing dividends reduces both cash and retained earnings accurately captures the financial implications of dividend distributions, making it the correct answer.