Dividends are cash payments to equity investors. For example, if you buy a share of a company’s stock for $10.00, the company could pay you a dividend of $0.30 in the future. Dividends do not affect a company’s taxes, so they do not show up on the Income Statement. In the Cash Flow Statement, dividends appear as a negative item in Cash Flows from Financing Activities. Dividends therefore reduce cash balance and equity.

For the case of “Organic Food Everyday”, we issued $8,000.00 dividends to the founders. We must record $8,000 dividends in the Cash flows from financing activities section.

Cash Flow StatementYear 1Year 2
Cash flows from operating activities
Net Income28,804.0051,034.00
(Gains) / Losses on disposal of quoted shares0.00(1,000.00)
Changes in working capital
(Increase)/Decrease in Inventory0.00(22,000.00)
(Increase)/Decrease in Accounts Receivable0.00(45,000.00)
(Increase)/Decrease in Prepaid Expenses0.00(16,000.00)
Increase/(Decrease) in Accounts Payable0.004,000.00
Increase/(Decrease) in Deferred Revenue0.0011,500.00
Net cash from operating activities28,804.00(11,466.00)
Cash flows from investing activities
Capital Expenditures0.00(18,000.00)
Acquisition of quoted shares0.00(10,000.00)
Disposal of quoted shares0.0011,000.00
Net cash from investing activities0.00(17,000.00)
Cash flows from financing activities
Proceeds from bank borrowings0.0050,000.00
Repayment of bank borrowings0.00(5,000.00)
Shares Issuance0.0010,000.00
Dividends Issued0.00(8,000.00)
Net Cash from financing activities0.0047,000.00
Net Change in Cash28,804.0018,534.00

Paying dividends will reduce Equity and Cash Balance in the Balance Sheet.

Balance SheetYear 1Year 2Explanation
Current Assets
Accounts Receivable0.0045,000.00
Prepaid Expenses0.0016,000.00
Short-Term Investments0.000.00
Total Current Assets30,000.00131,534.00
Long Term Assets
Property, plant and equipment0.0012,000.00
Total Long Term Assets0.0012,000.00
Total Assets30,000.00143,534.00
Liabilities & Equity
Current Liabilities
Accounts Payable0.004,000.00
Deferred Revenue0.0011,500.00
Total Current Liabilities0.0015,500.00
Long Term Liabilities
Total Long Term Liabilities0.0045,000.00
Toal Liabilities0.0060,500.00
Equity30,000.0083,034.00We also have to change the formula of calculating equity:

[Year 2 Equity] = [Year 1 Equity] + [Net Income] + [Shares Issuance] – [Dividends Issued]

83,034.00 = 30,000.00 + 51,034.00 + 10,000.00 – 8,000.00

Dividends will decrease cash balance and equity.
Total Liabilities & Equity30,000.00143,534.00

Impact of Dividends Paid to the Financial Statements in a Glance

Impact of Dividends Paid to the Financial Statements in a Glance

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