B Com Exam > B Com Notes > Accountancy and Financial Management > Introduction - Dividend Decision, Accountancy and Financial Management
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Introduction
The financial manager must take careful decisions on how the profit should be distributed among shareholders. It is very important and crucial part of the business concern, because these decisions are directly related with the value of the business concern and shareholder’s wealth. Like financing decision and investment decision, dividend decision is also a major part of the financial manager. When the business concerns decide dividend policy, they have to consider certain factors such as retained earnings and the nature of shareholder of the business concern.
Meaning of Dividend
Dividend refers to the business concerns net profits distributed among the shareholders. It may also be termed as the part of the profit of a business concern, which is distributed among its shareholders. According to the Institute of Chartered Accountant of India, dividend is defined as “a distribution to shareholders out of profits or reserves available for this purpose”.
Types of Dividend/ Form of Dividend
Dividend may be distributed among the shareholders in the form of cash or stock. Hence, Dividends are classified into:
A. Cash dividend
B. Stock dividend
C. Bond dividend
D. Property dividend
Fig. Types of Dividend
Cash Dividend
If the dividend is paid in the form of cash to the shareholders, it is called cash dividend. It is paid periodically out the business concerns EAIT (Earnings after interest and tax). Cash dividends are common and popular types followed by majority of the business concerns.
Stock Dividend
Stock dividend is paid in the form of the company stock due to raising of more finance. Under this type, cash is retained by the business concern. Stock dividend may be bonus issue. This issue is given only to the existing shareholders of the business concern.
Bond Dividend
Bond dividend is also known as script dividend. If the company does not have sufficient funds to pay cash dividend, the company promises to pay the shareholder at a future specific date with the help of issue of bond or notes.
Property Dividend
Property dividends are paid in the form of some assets other than cash. It will distributed under the exceptional circumstance. This type of dividend is not published in India.
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FAQs on Introduction - Dividend Decision, Accountancy and Financial Management - Accountancy and Financial Management - B Com
| 1. What is the dividend decision in accountancy and financial management? |  |
Ans. The dividend decision in accountancy and financial management refers to the process of determining the amount of profit that should be distributed to shareholders as dividends and the amount that should be retained in the company for future growth and investment.
| 2. How is the dividend decision influenced by financial management? | |
Ans. The dividend decision is influenced by financial management as it considers various factors such as the company's profitability, cash flow position, capital requirements, and growth opportunities. Financial managers analyze these factors to determine the optimal dividend payout ratio, which strikes a balance between rewarding shareholders and reinvesting in the business.
| 3. What are the factors that affect the dividend decision? | |
Ans. Several factors can influence the dividend decision, including the company's earnings, cash flow, profitability, liquidity, debt levels, growth prospects, and shareholder expectations. Additionally, external factors such as economic conditions, industry trends, and legal requirements may also impact the dividend decision.
| 4. How does the dividend decision impact shareholders? | |
Ans. The dividend decision directly impacts shareholders as it determines the amount of profit they receive as dividends. A higher dividend payout may attract income-seeking investors and increase the company's stock price, while a lower dividend payout may indicate that the company is retaining earnings for future growth. Ultimately, the dividend decision affects shareholders' income and their perception of the company's financial health.
| 5. What are the advantages and disadvantages of dividend payments? | |
Ans. The advantages of dividend payments include providing regular income to shareholders, attracting investors, signaling financial stability, and reducing the company's retained earnings. On the other hand, the disadvantages of dividend payments include reducing the company's ability to reinvest in growth opportunities, increasing the company's borrowing costs, and potentially disappointing investors if dividends are reduced or omitted. Financial managers must carefully consider these pros and cons when making the dividend decision.
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