Which of the following best describes a dividend?

• A. A liability created when a company borrows money from a bank.
• B. A distribution of a corporation's earnings to its shareholders.
• C. An expense incurred by a company in the process of generating revenue.
• D. A payment made by customers to purchase company stock.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of a dividend. A dividend is a distribution of a corporation's earnings to its shareholders, typically in the form of cash or additional stock. It represents a return on investment for shareholders.
2. Step 2: Analyze the options provided in the question. Each option describes a different financial concept, and you need to identify which one aligns with the definition of a dividend.
3. Step 3: Eliminate incorrect options. For example, 'A liability created when a company borrows money from a bank' refers to debt, not a dividend. Similarly, 'An expense incurred by a company in the process of generating revenue' refers to operating expenses, not dividends. Lastly, 'A payment made by customers to purchase company stock' refers to stock purchases, not dividends.
4. Step 4: Focus on the correct option. 'A distribution of a corporation's earnings to its shareholders' matches the definition of a dividend, as it involves sharing profits with shareholders.
5. Step 5: Confirm your understanding by reviewing the concept of dividends in financial accounting. Dividends are typically declared by the company's board of directors and are paid out of retained earnings, reflecting the company's profitability and financial health.