How do dividends impact working capital?
When a company declares a dividend, they must record a liability on the balance sheet until the dividend is paid out to shareholders. Since the dividend is typically paid within 12 months, the dividend would be classified as a current liability. As you can see in the visual below, when the company records the dividend, current liabilities increase, which cause net working capital to decrease. There is no impact to cash flow until the dividend is actually paid to the shareholders.
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When must a company record a liability for a cash dividend?
When the Board of Directors approve and announce a cash dividend, then the company must record a liability for the dividend. This date is known as the “Declaration Date”.
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How to calculate Net Working Capital (NWC)?
Teaches you how to calculate net working capital.
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What is the journal entry to record a dividend payable?
As soon as the Board of Directors approves and announces a dividend (on the declaration date) , the company must record a payable in the liability section of the balance sheet. Cash dividends are paid out of the company’s retained earnings, so the journal entry would be a debit to retained earnings and a credit...
When must a company record a liability for a cash dividend?
When the Board of Directors approve and announce a cash dividend, then the company must record a liability for the dividend. This date is known as the “Declaration Date”.
How to calculate Net Working Capital (NWC)?
Teaches you how to calculate net working capital.
What is the journal entry to record a dividend payable?
As soon as the Board of Directors approves and announces a dividend (on the declaration date) , the company must record a payable in the liability section of the balance sheet. Cash dividends are paid out of the company’s retained earnings, so the journal entry would be a debit to retained earnings and a credit...
