# Q Bank question #2348 - CFF

Can someone please explain this, it’s just not clicking: Galaxy, Inc.’s balance sheet as of December 31, 2004 included the following information (in \$): Accounts Payable 300,000 12-31-03 500,000 12-31-04 Dividends Payable 200,000 12-31-03 300,000 12-31-04 Common Stock 1,000,000 12-31-03 1,000,000 12-31-04 Retained Earnings 700,000 12-31-03 1,000,000 12-31-04 Galaxy’s net income in 2004 was \$800,000. What was Galaxy’s cash flow from financing (CFF) in 2004? A) -\$500,000. B) -\$300,000. C) -\$700,000. D) -\$400,000. -------------------------------------------------------------------------------- Click for Answer and Explanation Dividends declared in 2004 are net income less the increase in retained earnings (\$800,000 - \$300,000 = \$500,000). Dividends declared less the increase in dividends payable is dividends paid (\$500,000 – (\$300,000 - \$200,000) = \$400,000). This is a cash outflow so it is a negative number. Dividends are always cash flow from financing. Note that accounts payable changes are included in cash flow from operations (CFO).

NI is 800,000 and retained earnings increased by 300,000. that means they were supposed to pay 500,000 as dividend… Dividend payable increased by 100,000 => they didn’t actually pay this amount to shareholders. So CFF = -500,000 + 100,000 = -400,000 REMEMBER dividend paid is always CFF under GAAP.

The part that’s not clicking is why NI minus the increase in retained earnings is equal to dividends declared.

Ok, I got it now. Since retained earnings went up \$300,000 they must have paid the rest of their NI out in dividends, which would be \$500,000. Since dividends payable went up \$100,000 they only paid out \$400,000.