Dividend paid in cash flow statement

An investor might want to know how much a company has paid out in dividends in the past year. If the company has not directly disclosed this information, it is still possible to derive the amount if the investor has access to the company's income statement and its beginning and ending balance sheets. If these reports are available, the calculation of dividends paid is as follows:

1. Subtract the retained earnings figure in the ending balance sheet from the retained earnings figure in the beginning balance sheet. This calculation reveals the net change in retained earnings derived from activity within the reporting period.

2. Go to the bottom of the income statement and extract the net profit figure.

3. If the net profit figure on the income statement matches the net change in retained earnings from the first calculation, then no dividend was issued during the period. If the net change in retained earnings is less than the net profit figure, the difference is the amount of dividends paid out during the period.

The concept can be further refined by dividing the derived amount of dividends paid by the number of outstanding shares (which is listed on the balance sheet). The result is dividends paid per share.

Example of Dividends Paid

A business reports beginning retained earnings of $500,000 and ending retained earnings of $600,000, so the net change in retained earnings in the period was $100,000. During the year, the company also reported $180,000 of net profits. In the absence of any dividend payments, the entire $180,000 should have been transferred to retained earnings. However, there was only a residual increase of $100,000 in retained earnings, so the $80,000 difference must have been paid out to investors as a dividend.

There are four components of the financial statements. The following table shows how dividends appear in or impact each one of these statements (if at all):

* Also known as the statement of changes in stockholders' equity

A brief narrative description of a dividend issuance may also be included in the notes that accompany the financial statements, though these notes may not be included if the statements are only issued for internal use.

Before dividends are paid, there is no impact on the balance sheet. Paying the dividends reduces the amount of retained earnings stated in the balance sheet. Simply reserving cash for a future dividend payment has no net impact on the financial statements.

If a dividend is in the form of more company stock, it may result in the shifting of funds within equity accounts in the balance sheet, but it will not change the overall equity balance.

Shareholders receive value from the corporations they own or invest in through dividends or increases in company value. These dividends increase the per-share price of privately held company stock. However, most small corporations deliver value primarily through dividends, as comparatively few corporations are sold as ongoing businesses or have an initial public offering, or IPO. These stock dividends affect only one section on the cash flow statement -- the financing section.

Shareholder Withdrawals -- Stock Dividends

1. Stock dividends are shareholder withdrawals or cash distributions to owners. As a shareholder, or owner, of a corporation, you are entitled to use funds distributed from the corporation's retained earnings as you deem fit. If your corporation has multiple shareholders, all of you must reach a consensus on the dividend amount and timing. Incorporating a dividend policy into your shareholders' agreement or corporate bylaws can drastically decrease the likelihood of disagreements.

Dividends and Cash Flow

1. Your corporation pays dividends out of its available cash. When your corporation issues dividends, this dividend issuance shows as a reduction in cash under financing activities on the cash flow statement. Dividend payments are recorded on the cash flow statement in the financing section, because they involve owners and affect cash flow. This is the sole impact that dividend issuance has on the cash flow statement.

Cash Flow Statement

1. The cash flow statement is an analysis tool for reviewing the cash flows across all the activities your corporation engages in. It links the income statement to the balance sheet and assists in understanding what is happening in the company and why it's happening. Cash flow statements record cash inflows and outflows over a specified period, typically a year or a quarter, and divide those into three major areas: operating, investing and financing.

Financing Activities

1. The financing section of the cash flow statement shows how your company's financing and capital raising activities impact cash. It records the impact of activities involving the liabilities and shareholders' equity sections of the balance sheet -- those actions relative to creditors and owners. These activities include actions that increase cash -- including new term loans, mortgages, stock issuance and sales -- and actions that decrease cash, including principal repayments, balloon payments and dividends.

Example

1. Say your corporation declares and issues $35,000 in stock dividends. On the cash flow statement under financing activities, the company records: stock dividends, -$35,000. By doing this, a lender or investor reviewing the statement can clearly see that the dividend issuance reduced cash by $35,000.

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