Definition of Cash Dividends
Cash dividends are a distribution of a corporation’s earnings to its stockholders or shareholders. For cash dividends to occur, the corporation’s board of directors must declare the dividends.
Examples of How Cash Dividends Affect the Financial Statements
When a corporation’s board of directors declares a cash dividend on its stock, the following will occur:
- Retained earnings (a part of stockholders’ equity) will decrease
- Current liabilities (such as Dividends Payable) will increase
When the cash dividend is paid, the following will occur:
- Current liabilities (Dividends Payable) will decrease
- Current assets (Cash) will decrease
The income statement is not affected by the declaration and payment of cash dividends on common stock. (However, the cash dividends on preferred stock are deducted from net income to arrive at net income available for common stock.)
The statement of cash flows will report the amount of the cash dividends as a use of cash in the financing activities section.
