Dividend Payable is a current liability. Any dividend declared is made payable by crediting "Dividend Payable A/c". So a reduction in Dividend implies
Dividend declared been paid off. Dividend payable reduced on payment of dividends. Thereby,
$5000 is a cash outflow on account of dividend payment (Previously declared).Opening Balance $100,000
+ Net Income $ 40,000
- Dividend declared xxxxxxxxx
=
Closing balance of
retained earnings $125,000
On reverse working we arrive at Dividend declared current year as $15000
As stated in question, $8000 is on account of stock dividend - which involves no cash outflow.
so Balance $7000 dividend declared is paid as cash.
So aggregate Cash outflow on account of dividends is $(5000+7000) =
$12,000.------------------------------
Arunachalam Sivaraman
Student
Chennai
India
------------------------------
Original Message:
Sent: 03-27-2020 05:35 PM
From: Samer Ahmad
Subject: CMA Exam Support MCQ A8 - need explanation
Hello Kristin,
To clear it out, we have to separate between the (2) accounts structure: (I would always recommend to use T account illustration for such cases)
- Dividends payable A/C
- Retained Earnings A/C
Dividends payable A/C has decreased throughout the year by $5000 >>> it is cash outflow, even considering the cash flow preparation methodology, any decrease in current liabilities would be considered as Cash Outflow
Retained Earnings A/C illustration as follows:
Result:
$5,000 (Dividends Payable A/C reduction) + $7,000 (Retained Earnings A/C cash movement) = $12,000 cash paid for dividends.
Hope this demonstration will be helpful
Kind regards
------------------------------
Samer Ahmad, FMVA, SCA
Kuwait
Original Message:
Sent: 03-27-2020 01:56 PM
From: Kristin McIntire
Subject: CMA Exam Support MCQ A8 - need explanation
Hello, can someone help explain why the $5000 decrease in Dividends Payable on the Balance Sheet is an adder in the provided answer. It would seem that a decrease would mean that much more cash flowed out to pay the dividends, a reduction in the payable amount due.
Here's the question:
Bertram Company had a balance of $100,000 in Retained Earnings at the beginning of the year and $125,000 at the end of the year. Net income for this time period was $40,000. Bertram's Statement of Financial Position indicated that Dividends Payable had decreased by $5,000 throughout the year, despite the fact that both cash dividends and a stock dividend were declared. The amount of the stock dividend was $8,000. When preparing its Statement of Cash Flows for the year, Bertram should show Cash Paid for Dividends as...
Here's the provided answer:
$100,000 + $40,000 - $8000 + $5000 - X = $125,000
$137,000 - X = $125,000
X = $12,000
In discussion with some others, we all thought the "plus $5000" means more cash in should be "minus $5000" because more cash flowed out.
Thanks!
------------------------------
Kristin McIntire
Director/Manager
Hamilton MI
United States
------------------------------