Under what section of the statement of cash flows would you classify dividends paid on common stock?
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Publication date: 29 Nov 2020 us Financial statement presentation guide 6.7 ASC 230 identifies three classes of cash flows—investing, financing, and operating—and requires a reporting entity to classify each discrete cash receipt and cash payment (or identifiable sources or uses therein) in one of these three classes. The classification is based on the nature of the cash flow, without regard to whether a cash flow stems from another item (hereafter referred to as the Nature Principle). A cash flow is first evaluated to determine if it meets either the definition of an investing or financing cash flow. If a cash flow does not meet the definition of an investing activity or a financing activity, the cash flow is classified as an operating activity. Cash flows from operating activities are generally the cash effects of events that enter into the determination of net income (see FSP 6.7.3 for a discussion of events that enter into the determination of net income that are not classified as operating cash flows). The definitions of the activity classes within ASC 230, combined with its waterfall model, results in a bias toward classifying cash flows as operating activities. When determining the appropriate classification, the FASB acknowledged that, in some situations, a reasonable case can be made for alternative classifications. As a result, we believe that a change in classification of a cash flow item represents a reclassification of information and not a change in accounting principle, if both the old and new classifications are acceptable under US GAAP. In such circumstances, all years presented must reflect the reclassification, and the reclassification should be disclosed in the footnotes. 6.7.1 Investing activitiesInvesting activities include making and collecting loans, purchasing and selling debt or equity instruments of other reporting entities, and acquiring and disposing of property, plant, and equipment and other productive assets used in the production of goods or services. As discussed in ASC 230-10-45-12, the following items should be classified as investing activities:
6.7.2 Financing activitiesFinancing activities include borrowing money and repaying or settling the obligation, and obtaining equity from owners and providing owners with a return on, or return of, their investment.
6.7.3 Operating activitiesCash flows that are not investing or financing activities are operating cash flows. Typically, operating cash flows are receipts and payments that enter into the determination of net income.
ASC 230 defines operating activities. Excerpt from ASC 230-10-20 Cash flows from operating are generallythe cash effects of transactions and other events that enter into the determination of net income. Figure FSP 6-2 includes common transactions that enter into the determination of net income, but are not classified as operating cash flows. Figure FSP 6-2
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Is dividend received an investing activity?In the case of other enterprises, cash flows arising from interest paid should be classified as cash flows from financing activities while interest and dividends received should be classified as cash flows from investing activities.
How are cash dividends paid to stockholders classified on the statement of cash flows?In the statement of cash flows, cash paid to stockholders for dividends is classified as cash used in financing activities.
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