A cash dividend payment to shareholders during the year should be reported on the statement of cash flows as:Multiple ChoiceA decrease in cash flows from operating activities.An increase in cash flows from financing activities.A decrease in cash flows from financing activities.A decrease in cash flows from investing activities.An increase in cash flows from investing activities.
Question
A cash dividend payment to shareholders during the year should be reported on the statement of cash flows as:Multiple ChoiceA decrease in cash flows from operating activities.An increase in cash flows from financing activities.A decrease in cash flows from financing activities.A decrease in cash flows from investing activities.An increase in cash flows from investing activities.
Solution
A cash dividend payment to shareholders during the year should be reported on the statement of cash flows as a decrease in cash flows from financing activities.
Here's why:
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Operating activities: These are the primary activities that a company engages in to do business, like selling goods or services. Dividend payments are not part of these activities.
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Financing activities: These are activities that result in changes in the size and composition of the equity capital or borrowings of the company. Dividend payments fall under this category because they are a distribution of profits to shareholders, which reduces the company's equity.
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Investing activities: These are activities relating to acquisition and disposal of long-term assets and other investments not included in cash equivalents. Dividend payments are not part of these activities.
So, when a company pays dividends, it is using its available cash, which reduces the cash from financing activities. Hence, it is reported as a decrease in cash flows from financing activities.
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