Do they have the same effect of subtracting from retained earnings?
Being subtracted from R/E, yes, but they have a different effect on the financial statements.
Dividends declared = liabilities go up, retained earnings go down Dividends paid = assets go down, retained earnings go down
So, if it’s dividends declared followed by dividends paid some time later (which I guess is what would happen), it’ll be
Dividends declared: L goes up, RE goes down Then Dividends paid: L goes down, A goes down?
Yes, that’s correct
This would only be true if dividends were declared and paid simultaneously.
It never happens that way.
This is the way it works in real life, and this is the way it’ll work on the exam (unless they explicitly say that they’re declared and paid simultaneously).
I mean to say that would be the net affect, because I have yet to receive a question about the accounting treatment of those two events. They merely present a balance sheet and say dividends were declared, calculate X. Or dividends were paid, calculate X.
But yes, I am aware one step follows the other!
Good. I just wanted it to be clear. (Just because you haven’t yet seen a question . . . .)
As always, your help is appreciated immensly. I wish I had you on speed dial and could just be like S2000magician, can you explain this for me?
I’m working on that.
Be sure to let me know when that comes to fruition!
Clear with dividend declared. But if only dividend paid is mentioned along with an income statement, then do we substract it to get retained earnings or leave it as it is?
If it’s only paid then it doesn’t affect retained earnings.
S2000Magician,
In the CFAI mock material is subtracts Dividend paid in calculation of Ending Retained Earnings
The Elan example I have does not. subtract dividends paid, only declared.
From the text (2013 Reading 26 B/S pp 231)…“For companies that pay dividends, the amount of dividents are shown separately as a reduction from Retained Earnings…”
Any thoughts? I can post questions if necessary…
If they subtract dividends paid (not dividends declared) from retained earnings (and shareholders’ equity), they err.
In the two examples I have, the CFA material has only dividends paid (not declared) in the given info, and subtracts div paid to calculate RE.
In the Elan question, it has BOTH declared and paid in the given info, but fails to subtract paid in RE calcuation.
So CFA is wrong in both examples. Thanks!