Cash Flow Statement:
Dividends Paid under Financing or Operating Activities?

by Shamil Hassan
(Islamabad, Pakistan)

DividendsQ: Does the payment of dividends go under financing activities or operating activities in the cash flow statement?



A:
The answer to this is not so straightforward.

According to the definitive international statement on this, International Accounting Standards (IAS) 7, Statement of Cash Flows:

"Dividends paid may be classified as a financing cash flow because they are a cost of obtaining financial resources. Alternatively, dividends paid may be classified as a component of cash flows from operating activities in order to assist users to determine the ability of an entity to pay dividends out of operating cash flows."

However, according to US GAAP (Generally Accepted Accounting Principles) Accounting Standards Codification Topic 230, dividends paid
must be classified under financing activities .

But that's the rule for the US. From what I was taught (which was outside the US), the usual practice is to put it under
cash flow from operating activities . The reason for this is that it could be considered to be a regular part of one's operations or operating activities - one usually pays dividends once a year to one's investors (the business owners) as standard company practice.

Sample cash flow statement


However, I have also heard that it is possible to place dividends
paid under cash flow from financing activities . This also makes sense as the investors were the source of finance for the business, and paying them dividends is a sort of repayment to them.

Since repayments of loans to the business also go under this section (cash flow from financing activities), it seems logical to include dividends paid to investors in this section too. Both investments and loans are sources of
finance , so paying them should also go under this section.

So bottom line: If you're outside the US, dividends paid can go under either operating activities or financing activities. If you're in the US, financing activities only.

If you're outside the US, I would also check with your local accounting authority if they have any preference or follow any particular option (teacher, lecturer, textbook or accounting standards board).

Sorry if you were looking for a totally definitive answer, this one is not so cut-and-dry.

Good luck in your studies!

Best,
Michael Celender
Founder of Accounting Basics for Students


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Comments for Cash Flow Statement:
Dividends Paid under Financing or Operating Activities?

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Financing activity
by: Anonymous

If the question is regarding a mutual fund company, then where will be the "dividend received" go into cash flow statement-operating or financing?

dividends are paid under financing activities
by: clever

Dividends are paid under financing activities since they (the financiers of the entity) provided finance for the business and this is not a daily or operating activity of the business. This money does not arise as a result of the business interacting with its customers. It is a smart way to include dividends under Financing activities since the root and reason of giving out dividends arise as a result of financing activities. However, it is not wrong to take it as an operating activity since this will never alter the cash flow of the business in any way.

Wording on this post is incorrect
by: Anonymous

Dividends RECEIVED from their investments are part of CFO, but Dividends PAID are part of CFF.

Cash flow statement section
by: Dr accounting

Companies issue stock as a way to raise capital. So it's a financing source. Dividend payments would be shown in the financing activities section of the cash flow statement.

The operating section is for normal expenses relating to revenue generation. So paying of dividends would not go here. It is not directly related to revenue generation. And belongs under financing activities.

dividends
by: Anonymous

under operatinq activities because we get income

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