Confused What is the accounting treatment of Proposed Dividend in Cash Flow statement in Class 12? Where will the proposed dividend go in the cash flow statement?
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What is the Proposed Dividend (Final Dividend)?
Let’s first discuss what is the proposed dividend
Proposed Dividend is also called Final Dividend, both on Equity Shares and Preference Shares are paid after being declared and approved by the shareholders in the Annual General Meeting.
Annual General Meeting is held after the end of the financial year, i.e, that is next financial year.
What is the accounting treatment of Proposed Dividend in Cash Flow Statement?
In the current year, the Proposed Dividend of previous year will be declared (approved) by the shareholders in their Annual General Meeting because the meeting will be held after the end of the financial year.
Treatment of Proposed Dividend of Previous year in Cash Flow
Thus the proposed dividend of the previous year is shown as appropriation, i.e., as a deduction from surplus, i.e. Balance in the statement of Profit and Loss Account.
In the cash flow statement, the Proposed Dividend of the Previous year is added back to determine Net Profit Tax and Extraordinary Items.
The Same amount is deducted as an outflow in Financial Activity. If information of Unpaid Dividend (Dividend Payable) is given. The treatment would be
[Proposed Dividend of Previous year – Unpaid (unclaimed) Dividend] is deducted as an outflow in financing activity.
Treatment of Proposed Dividend of current year in Cash Flow
The dividend proposed by the Directors for the current year is shown in the notes to Accounts as Contingent Liability. This dividend is not considered anywhere in the Cash Flow Statement as it is just proposed and not declared and paid yet.
Accounting of Proposed Dividend
|Proposed Dividend of Previous Year|
1. It is added to determine Net Profit before tax and extraordinary items.
2. The same amount is deducted as an outflow in Financing Activity
3. If Dividend payable is also given. (Proposed Dividend – Dividend Payable) is shown as an outflow in Financing Activities.
|Proposed Dividend of Current Year||It is not considered anywhere in the Cash flow statement.|
Note:- Unless stated otherwise, it is presumed that dividend proposed for the previous year has been declared at the AGM in the current year at the proposed amount and has also been paid during the current year.
Examples of Treatment of Proposed Dividend in Cash Flow Statement
Example – 1
Example – 2
Note:- Dividend Payable would be deducted from the Proposed dividend of the previous year as an outflow of cash in financing activity.