A dividend is a distribution made to shareholders that is proportional to the number of shares owned. It is paid out from the retained earnings of a business, and may be paid to the holders of common stock or preferred stock. A dividend is not an expense to the paying company, but rather a distribution of its retained earnings.
There are four components of the financial statements. The following table shows how dividends appear in or impact each one of these statements (if at all):
Before dividends are paid, there is no impact on the balance sheet. Paying the dividends reduces the amount of retained earnings stated in the balance sheet. Simply reserving cash for a future dividend payment has no net impact on the financial statements.
If a dividend is in the form of more company stock, it may result in the shifting of funds within equity accounts in the balance sheet, but it will not change the overall equity balance.
A brief narrative description of a dividend issuance may also be included in the notes that accompany the financial statements, though these notes may not be included if the statements are only issued for internal use.
Dividends paid out are reported on the statement of cash flows as a use of cash. This is included in the cash flow from financing activities section of the report.
