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  • 1.  CMA Exam Support MCQ A8 - need explanation

    Posted 03-27-2020 01:56 PM
    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! 



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    Kristin McIntire
    Director/Manager
    Hamilton MI
    United States
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  • 2.  RE: CMA Exam Support MCQ A8 - need explanation

    Posted 03-27-2020 05:36 PM
    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)
    1. Dividends payable A/C
    2. 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
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  • 3.  RE: CMA Exam Support MCQ A8 - need explanation

    Posted 03-28-2020 10:47 AM
    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.

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    Arunachalam Sivaraman
    Student
    Chennai
    India
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  • 4.  RE: CMA Exam Support MCQ A8 - need explanation

    Posted 03-29-2020 04:09 PM
    Samer,
    So the $7K is arrived at by balancing the RE earnings account and "backing" into the cash dividends, right? 
    The other part of the of the solution is to recognize that the $5K reduction in Div payable is the reduction of a liability through payment of dividends?
    Thanks,
    Joseph





  • 5.  RE: CMA Exam Support MCQ A8 - need explanation

    Posted 03-29-2020 07:57 PM
    Hi Joseph,

    Yes, that's right. As you mentioned and the other gentlemen illustrated, the result came from $7K RE a/c + $5K Div Payable a/c.
    I prefer to use T account instead of solving Algebra equation because we spent our career lives with DR/CR JVs & ledger A/C formats, letting our apps do the math.
    Finally, it is just a kind of preference. But, for exam presentation, off-course it should be equation view.

    Regards

    ------------------------------
    Samer Ahmad, FMVA, SCA
    Kuwait
    ------------------------------



  • 6.  RE: CMA Exam Support MCQ A8 - need explanation

    Posted 03-28-2020 01:35 PM
    You're looking at it backwards. If a payable accounts decreases then cash flow is positive, and vice versa. that is the concept of operating cash flow activities.








  • 7.  RE: CMA Exam Support MCQ A8 - need explanation

    Posted 03-28-2020 01:36 PM
    You're looking at it backwards. If a payable accounts decreases then cash flow is positive, and vice versa. that is the concept of operating cash flow activities.

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    Don Hadjian
    Accountant
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  • 8.  RE: CMA Exam Support MCQ A8 - need explanation

    Posted 03-28-2020 01:53 PM
    Sorry for my answer, to clarify: A decrease in accounts payable increases net income, but decreases cash balance when adjusting net income in the cash flow statement. I think this is correct.




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    Don Hadjian
    Accountant
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  • 9.  RE: CMA Exam Support MCQ A8 - need explanation

    Posted 03-29-2020 08:39 AM
    Hi Kristin, 

    I am trying to explain, It may be work for you. 

    Info - As per cash flow statement, Whenever we spend any amount means cash is going to decrease same vice versa if purchased credit means increasing cash flow directly. While paid as stock never impacted cash flow statement.

    As per question :- 

    Opening Balance - 100000
    Closing balance - 125000 
    Net income is - 40000, 
    So dividend will be opening + net income - Closing balance = 100000+40000-125000 = 15000 Dividend paid,  Out of this amount there is 8000 as stock dividend so remaining balance need to pay will be (15000-8000 )= 7000 Which need to cash outflow and 5000 already paid during the period. Thus total amount will be = 7000+5000 = 12000 will be in cash flow statement.