Question

The cash flow statement report is an important tool for the board of directors to measure their success in managing a nonprofit entity. A nonprofit organization, organized under section 501(c) of the tax code, is subject to the same operational and fiscal restraints as, and in some cases more than, a for-profit business. One more stringent requirement is that many nonprofits must use the accrual method of accounting, a method that is optional for other businesses. The Generally Accepted Accounting Practices (GAAP) are more detailed for this method, making the process more complex. When preparing a statement of cash flows using the indirect method, can an increase in dividends payable add to net income for adjustments in the cash flow statements?

Answer 1

Yes, When preparing a statement of cash flows using the indirect method, an increase in dividends payable can be added to net income for adjustments in the cash flow statements.

Because, Dividend Payable is a current liability. It is recorded when dividend is declared. It is basically a Non-cash Transaction, which shifts an amount from Shareholders' Equity to Current Liabilities.There is no impact on cash.

Eg: Last year, Dividend Payable was $0. In the current year Dividend of $2000 is declared. The entry passed will be :

Dividend Dr $2000

To Dividend Payable $2000

Retained Earnings Dr $2000

To Dividend $2000

Thus, the transaction reduces the Income, whereas dividend payment is yet not made, so no effect is there on cash.

Thus, the increase in Dividend Payable should be added back to Net Income while preparing Cash Flow statement through Indirect Method.