Calculating Cash Flow from Financing Activities: Dividend Payment

Cash flow from financing activities includes transactions that change the size and composition of the equity capital and borrowings of the enterprise. Examples include:

• Proceeds from issuing shares
• Redemption of preference shares
• Proceeds from long-term borrowings
• Repayment of long-term borrowings
• Payment of dividends

The question asks us to determine the cash outflow relating to dividend payments based on the given information about proposed dividends and dividend payable.

Understanding Proposed Dividend and Dividend Payable

The proposed dividend for a year is the amount of dividend recommended by the directors for that financial year. However, dividends are usually paid in the subsequent accounting period after approval by shareholders. Dividend payable represents the amount of dividend that has been declared but not yet paid as of a specific date (the balance sheet date).

To find the actual cash paid for dividends during a year, we need to consider the proposed dividend for the previous year (as it's typically paid in the current year) and adjust for any changes in the dividend payable liability.

Given Information

Let's look at the provided figures:

Calculating Cash Paid for Dividends

The cash paid for dividends during the year ending March 31, 2022, would typically be the dividend proposed for the year ending March 31, 2021, adjusted for the opening and closing balances of dividend payable.

Here is the formula to calculate cash paid for dividends:

\(\text{Cash Paid for Dividends} = \text{Proposed Dividend (Previous Year)} + \text{Opening Balance of Dividend Payable} - \text{Closing Balance of Dividend Payable}\)

Using the given data:

• Proposed Dividend (for the year ending 31 March 2021) = ₹2,40,000
• Opening Balance of Dividend Payable (as on 31 March 2021) = ₹30,000
• Closing Balance of Dividend Payable (as on 31 March 2022) = ₹40,000

Now, let's plug these values into the formula:

\(\text{Cash Paid for Dividends} = ₹2,40,000 + ₹30,000 - ₹40,000\)

\(\text{Cash Paid for Dividends} = ₹2,70,000 - ₹40,000\)

\(\text{Cash Paid for Dividends} = ₹2,30,000\)

Alternatively, we can think of it as: Dividend Proposed for Previous Year less the increase in Dividend Payable during the current year.

• Proposed Dividend (for the year ending 31 March 2021) = ₹2,40,000
• Increase in Dividend Payable = Closing Balance - Opening Balance
• Increase in Dividend Payable = ₹40,000 - ₹30,000 = ₹10,000

\(\text{Cash Paid for Dividends} = ₹2,40,000 - ₹10,000 = ₹2,30,000\)

This amount represents an outflow of cash related to dividend payments, which is a part of cash flow from financing activities.

Conclusion on Cash Outflow from Financing Activities

Based on the calculation, the cash outflow from financing activities specifically due to dividend payments is ₹2,30,000.

Revision Table: Key Concepts

Additional Information on Dividend Accounting and Cash Flow

When preparing a statement of cash flows, dividend payments are always shown under financing activities. This is because dividends are a distribution of profits to the owners (shareholders), which is a transaction related to the equity component of the financing structure.

It's important not to confuse the proposed dividend (which is a recommendation) with the dividend paid (which is the actual cash outflow). The dividend payable account helps reconcile the proposed/declared amount with the cash actually paid out during the period.

An increase in Dividend Payable from the beginning to the end of the year means that some portion of the dividend proposed/declared was not paid in cash during the year, reducing the cash outflow. A decrease in Dividend Payable would mean that cash payments exceeded the current year's declared dividend, potentially including payments for dividends declared in prior periods.

In this specific case, the increase in dividend payable by ₹10,000 (₹40,000 - ₹30,000) means that out of the ₹2,40,000 proposed for 2021, ₹40,000 remained unpaid at the end of 2022, while ₹30,000 from the beginning balance was paid. The net effect is that ₹10,000 of the payable amount was carried forward or increased, resulting in a lower cash payment than the full ₹2,40,000 plus the opening payable.