While preparing for an upcoming exam, you are studying with some classmates when one of them states the following:
“I always get confused when I am preparing the financing activities section of the statement of cash flows. I’m pretty certain that the payment of loan interest is a financing activity. I sometimes mix this up with how dividend payments are treated. I think that the declaration of dividends reduces retained earnings, but does not affect the statement of cash flow.”

Required

Evaluate your classmate’s response. Identify the elements that are correct and incorrect.