Dividend as an Operating Activity

Dividend refers to the distribution of profits by a company to its shareholders. It is considered as an operating activity in the cash flow statement when it is paid out of the profits generated from the company's core operations. Dividend payments can be classified as either cash dividends or stock dividends.

Operating Activity:
Operating activities involve the day-to-day operations of a business that generate revenue and incur expenses. These activities are directly related to the company's primary business operations and are reported in the operating section of the cash flow statement.

Dividend Classification:
Dividends can be classified into two categories: cash dividends and stock dividends.

1. Cash Dividends:
- Cash dividends are the distribution of cash to shareholders as a return on their investment.
- When a company pays cash dividends to its shareholders, it is considered an operating activity because it represents a cash outflow from the company's core operations.
- Cash dividends are deducted from the net profit of the company, reducing the amount available for reinvestment or retained earnings.

2. Stock Dividends:
- Stock dividends involve the distribution of additional shares of the company's stock to existing shareholders.
- Stock dividends do not result in a cash outflow from the company and are not considered as an operating activity. Instead, they are classified as a financing activity in the cash flow statement.

Reporting Dividends in the Cash Flow Statement:
Dividends, whether cash or stock, are typically reported in the financing section of the cash flow statement. However, if the dividend payment is directly related to the company's core operations, it can be classified as an operating activity.

Example:
For instance, if a company generates significant cash flows from its operations and decides to distribute a portion of the profits as cash dividends to its shareholders, these dividend payments would be considered as an operating activity. This is because the cash used for dividend payments is derived from the company's core operations and represents a direct cash outflow related to the operation of the business.

In conclusion, dividend payments are considered as operating activities in the cash flow statement when they are paid out of the profits generated from the company's core operations. However, if the dividend payment is not directly related to the company's core operations, it is reported in the financing section of the cash flow statement.