How are cash dividends paid to stockholders classified on the statement of cash flows?
The cash flow statement provides important information about a company's cash receipts and cash payments during an accounting period as well as information about a company's operating, investing and financing activities. Although the income statement provides a measure of a company's success, cash and cash flow are also vital to a company's long-term success. Information on the sources and uses of cash helps creditors, investors, and other statement users evaluate the company's liquidity, solvency, and financial flexibility. Show Cash receipts and cash payments during a period are classified in the statement of cash flows into three different activities: Operating Activities These involve the cash effects of transactions that enter into the determination of net income and changes in the working capital accounts (accounts receivable, inventory, and accounts payable). Cash flows from operating activities (CFOs) reflect the company's ability to generate sufficient cash from its continuing operations. CFOs are derived by converting the income statement from an accrual basis to a cash basis. For most companies, positive operating cash flows are essential for long-run survival. The major operating cash flows are (1) cash received from customers, (2) cash paid to suppliers and employees, (3) interest and dividends received, (4) interest paid, and (5) income taxes paid. Special items to note:
Investing Activities These include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plants, and equipment. In general, these items relate to the long-term asset items on the balance sheet. Investing cash flows reflect how a company plans its expansions. Examples are:
Financing Activities These involve liability and owner's equity items, and include:
In general, the items in this section relate to the debt and the equity items on the balance sheet. Financing cash flows reflect how the company plans to finance its expansion and reward its owners. Examples:
Purchase of debt and equity securities from other entities (sale of debt or equity securities of other entities) and loans to other entities (collection of loans to other entities) are considered investing activities. However, issuance of debt (bonds and notes) and equity securities is a financing cash inflow, and payment of dividend, redemption of debt, and reacquisition of capital stock are financing cash outflows. Non-cash Activities Some investing and financing activities do not flow through the statement of cash flows because they don't require the use of cash:
For example, if a company purchases $200,000 of land by issuing a long-term bond, this transaction is a non-cash one, as it does not involve direct outlays of cash. Therefore, it is excluded from the statement of cash flows. These types of transactions should be disclosed in a separate schedule as part of the statement of cash flows or in the footnotes to the financial statements. Differences between IFRS and U.S. GAAP The above discussions are based on the U.S. GAAP. Under IFRS there is some flexibility in reporting some items of cash flow, particularly interest and dividends.
Learning Outcome Statements a. compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items; b. describe how non-cash investing and financing activities are reported; c. contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (US GAAP); CFA® 2022 Level I Curriculum, Volume 3, Module 19 How are dividends paid classified in the statement of cash flows?(c) dividends paid should be classified as financing cash flows.
How do you record cash dividends paid to stockholders?When a dividend is later paid to shareholders, debit the Dividends Payable account and credit the Cash account, thereby reducing both cash and the offsetting liability.
Is cash paid for dividends an operating activity?Dividends received by a company for its own investments are reported as an operating activity under GAAP.
Is cash paid to stockholders an investing activity?Answer and Explanation: In the statement of cash flows, cash paid to stockholders for dividends is classified as cash used in financing activities. The financing activities section is used to present all the cash flows related to transactions with shareholders, including the issuing of stock and dividend payments.
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