Cash flow statement represents one of the main financial statements for operating companies, along with the income statement and balance sheet. When a company makes any cash payments or receives cash, it must show these inflows and outflows on the cash flow statement. Dividend payments represent a use of cash, and the company records them on the cash flow statement in the appropriate accounting period.
Cash Flow Statement
The cash flow statement shows the actual cash generated and used by a company, without factoring in accounting practices such as accruals and the revenue and expense matching principle. Investors and analysts rely on the cash flow statement's presentation of actual cash inflows and outflows, including dividends paid, without needing to adjust the income statement or balance sheet entries.
Dividends represent a company's earnings, paid in cash to investors that own the company's stock. Dividend payments directly reduce a company's earnings, so only stable, well-established companies make regular dividend payments. Smaller firms must keep their earnings to reinvest in growing the company. Companies do not consider dividends an expense, but a distribution of the company's profits to shareholders. For this reason, dividend payments do not show on the income statement as an expense. However, companies paying dividends on preferred stock must deduct these dividends from net income to arrive at the remaining net income available to common shareholders. This calculation is part of the income statement.
Dividend Payment Formula
An accountant records dividend payments on the company's cash flow statement for each applicable accounting period. The dividends paid in that period show in the financing activities section of the cash flow statement. The formula for calculating the amount of dividend payments consists of the per-share dividend multiplied by the number of shareholders. For example, if the company issues a $0.25 dividend in the third quarter of the financial year, and has 100,000 shareholders, the third-quarter cash flow statement will show an outflow of cash for $0.25 x 100,000 = $25,000.
Some companies issue both common and preferred shares of stock. Preferred stock gives investors the right to receive dividend payments before common shareholders. Additionally, dividend-paying companies occasionally run into financial issues, causing them to skip dividend payments. A certain type of preferred stock, cumulative, gives preferred shareholders the right to receive all of their missed dividend payments if the company resumes dividend payments. This can affect the timing and amount of paid dividends shown on the cash flow statement, causing fluctuations from one period to the next.
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