08 December 2014
why interim dividend in fund flow comes in debit side of p&l appropriation account where only the items not affecting working capital comes in indirect method?
24 July 2024
The treatment of interim dividend in fund flow statements and its placement in the debit side of the Profit and Loss Appropriation Account can be understood through the following explanations:
### Interim Dividend and Fund Flow Statements:
1. **Nature of Interim Dividend:** - Interim dividend is declared and paid by a company during its financial year before the finalization of annual accounts. It is based on the company's interim profits and is distributed to shareholders. - From a fund flow statement perspective, dividends (both interim and final) are considered cash outflows from financing activities because they involve the distribution of cash to shareholders.
2. **Placement in Profit and Loss Appropriation Account:** - The Profit and Loss Appropriation Account categorizes items that affect the distribution of profits after tax. It includes appropriations such as dividends (both interim and final), transfer to reserves, payment of taxes, etc. - Interim dividend is treated as an appropriation of profits made during the year and is deducted from the net profit in the Profit and Loss Appropriation Account.
### Indirect Method in Fund Flow Statements:
1. **Working Capital Adjustment:** - In the indirect method of preparing a fund flow statement, adjustments are made to net profit to convert it from an accrual basis to a cash basis. - Only non-working capital items are adjusted in the indirect method because changes in working capital (current assets and current liabilities) are separately shown in the working capital schedule.
2. **Interim Dividend and Cash Flow Impact:** - While interim dividend is included in the Profit and Loss Appropriation Account, it is considered a cash outflow from financing activities in the cash flow statement because it represents cash paid to shareholders. - Since fund flow statements focus on changes in financial position based on cash flows, interim dividend (as a cash outflow) is relevant in the cash flow statement rather than the fund flow statement.
### Conclusion:
- **Fund Flow Statement:** Interim dividend does not directly affect the working capital adjustments shown in the fund flow statement. It is included in the Profit and Loss Appropriation Account to reflect the distribution of profits but does not impact the movement of funds (except for the cash outflow effect). - **Cash Flow Statement:** Interim dividend is treated as a cash outflow from financing activities in the cash flow statement because it involves the payment of cash to shareholders, which is crucial for understanding the company’s cash position and its impact on liquidity.
Therefore, interim dividend appears in the debit side of the Profit and Loss Appropriation Account to indicate its appropriation from profits, but it is primarily considered a cash flow item in the cash flow statement, reflecting its impact on the company’s cash flows and financial position.
CAclubindia
