How is accrued dividend reflected in cash flow?
We account for the dividend payable by decreasing retained earnings. In the cash flow statement, the impact of the dividend payable is shown as a change in payables within the working capital adjustments. However, the cash flow does not exactly match the dividend payable figure. What other element in the cash flow ensures that the net effect balances out to zero?
One response
Accrued dividends are indeed a bit complex when it comes to cash flow statements, and your understanding is on the right track.
When you declare dividends, you reduce retained earnings, recognizing a liability for the dividends payable. In the cash flow statement, this liability affects working capital. Specifically, when you account for the change in dividends payable in the operating activities section, it typically shows as an increase in payables, which can reduce net cash used in operating activities.
However, to reconcile this and ensure the net effect of cash flow becomes zero, you need to consider two primary aspects:
Adjusting Net Income: Since accrued dividends are not an actual outflow of cash until they are paid, the increase in dividends payable should be added back to net income in the operating section of the cash flow statement. This ensures that the profit reflects the non-cash nature of the accrued dividends during that period.
Subsequent Cash Payment: When you eventually pay the dividends, that cash outflow will show up in the financing activities section of the cash flow statement, further impacting cash flow when the actual payment is made.
In essence, the accrued dividends impact the working capital adjustments in the operating section, and once the cash payment is made, it will hit the financing section. This two-step acknowledgment ensures that the net effect of the cash flow remains balanced.
So, in summary, the increase in dividends payable (accrued dividends) is added back in the operating section, while the actual cash payment reduces cash flows in the financing section, keeping everything in check.