why are dividends received classified as an operating activity (pg 253 of CFA FSA text)? a dividend is a cash flow from an equity investment made in another company - shouldn’t this fall under the ‘long term investments in equity’ section of investing activities?
I am not positive about this, but my logic tells me that because most companies have investments in equity securities, receiving dividends from holding those securities is considered normal and just ‘happens’ in the course of operating a business. That’s how I think of it anyways.
good point, but GAAP says CFO so take it as it is…keep in mind that cash raised from selling held to maturity investments = CF from investing… this stuff can get pretty dicey
I would point out to the reason mentioned by jmuc85. Operating activity = core activity, something that happens usually and not as a result of one-off action. GAAPs probably assume that investing is something very common and so income from dividends. Therefore, for me it is classified as CFO.
in a class I was once at, they said “cos you’re getting income from another company’s operations” but it doesn’t seem right to me either.
Your answer will lie within the level of control that the investing firm has over the investee. This is a topic covered more in depth at Level 2, but suffice it to say that if equity ownership is less than 20% and no significant influence over operations is in effect, then dividends received are reported in the income statement and CFO. This changes with higher levels of investment.