Is there a difference between dividends and cash dividends when accounting for dividends?

Question

I'm studying for the CFA Level I, and I thought dividends were always paid in cash, but am a bit confused since it appears that there is just a rearranging of the equity- retained earnings and paid-in capital- when accounting for dividends. Please advise. Thanks.

Answer 1

You are right. Dividends are paid out in cash. However there are usually 2 stages. First, you announce or declare the dividend to be paid on a certain date. When a corporation declares a cash dividend on its stock, its retained earnings are decreased (debited) and its current liabilities (Dividends Payable) are increased (credited). Later, when the cash dividend is actually paid, the Dividends Payable account is decreased (debited) and the corporation’s Cash account is decreased (credited).

The income statement is not affected by the declaration and payment of cash dividends on common stock. Dividends are reported in the Statement of Changes in Equity. The cash dividends will also be reported as a use of cash in the financing activities section of the cash flow statement.