Many people on this forum have concluded that dividends paid is NOT subtracted from Net Icome (s2000magician for one, who I believe has considerable authority), while in the CFAI mock exam they seemed to have done exactly the opposite (AM session Q. 58.). Whats the final verdict?
I never received a straight answer either…
When both div paid and declared are in the data, in calc of RE I subtract only declared. NI remains the same as it is a final calculation. NI period.
When just div declared is in the data, I’ve been subtracted it in calc of RE.
When just Div paid is in the data, I’ve been subtracted it from NI (as shown in the mock).
I doubt this is the way to most effectively go about it…
Also Investments I"ve left out of calc of NI, whereas Income from investments is added to NI.
it is subtracted from net income as part of calculating owner’s equity balance at the end of the year. i was a bit confused when i first read your question as i thought you meant div paid is on the income statement.
i know for sure it is subtracted when calculating ending owner’s equity (beginning balance+contributed capital+net income-dividends paid+*beginning retained earnings=ending balance), and i THINK it is deducted from the cash account on the assets side in the balance sheet
from my understanding, dividends declared but not paid will be a liability of dividends payable. only the amount that has been paid will be subtracted to get retained earnings
CFA Institute thinking that dividends paid is subtracted from net income isn’t the stupidest idea of which I’ve ever heard, but it’s close.
Dividends have nothing – _ nothing! _ – to do with the income statement.
Dividends declared are removed from retained earnings and added to dividends payable, a liability account. (Dividends declared reduces retained earnings, but not net income; once net income hits the balance sheet, it’s not net income any more.) When dividends are paid, dividends payable is reduced, as is cash. Dividends paid are a cash (out)flow from financing. Dividends declared reduce shareholders’ equity in the Statement of Changes in Equity.
So: balance sheet, statement of cash flows, statement of changes in equity.
No income statement.
Period.
Wow!
I know some stuff.
I haven’t any authority. Especially where my cats are concerned.
S2000magician is absolutely correct. I have an accounting background and dividends declared is never shown in any income statement I’ve seen bc it’s just improper.
Cfai has lost the plot this year. There were several errors in the level II mock that they put out. But this definitely tops them all.
CFAI shall be wrong !
Some friends of mine who were candidates in previous years told me that there were some mitakes in CFAI’s mock or practice exams from time to time.
I can not imagine why CFAI has been not so serious in their solutions which can be misleading. It’s better to have someone to advise CFAI regarding the mistakes made by them.
I actually got no. 58 right. The solution is correct, only the presentation may be a bit confusing for non-accounting people. In the solution, dividends was deducted from net income in order to get the increase in retained earnings. To simplify, you may want to solve it another way, using the following equation:
Beg RE + Net Income - Dividends declared = End RE
225 + 53 - 10 = 268 End RE
CC + End RE = Total Equity
50 + 318 = 368
Assets - Equity = Liability
800 - 318 = 482
I believe the question clearly mentions dividends paid…
A= L+ CC + Beg R/E + (Rev - Exp - DIV)
Subtract Dividends.
The question says Dividends paid
^^^ Yes it says dividends paid…which is entirely misleading.
Nonetheless thanks for the insight guys!! I dare this show up on the exam. Because I’ll get it right.