Dividends Paid under Financing or Operating Activities?
by Shamil Hassan
Q: Does the payment of dividends go under financing activities or the operating activities?
A: From what I understand 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 a standard company practice.
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 also include dividends paid to investors here too. Both investments and loans are sources of finance, so paying them should also go under this section.
I would check with your accounting authority (teacher, lecturer or accounting standards board) in your area as to what they recommend as the preferred choice here.