Pinto Corporation is an automobile manufacturer located in North America. Pinto owns a 5 percent interest in one of its suppliers, Continental Supply Company. Each year, Pinto receives a cash dividend from Continental. Pinto’s engine supplier, National Supply Company, recently increased prices on goods sold to all customers due to higher labor costs. Should Pinto report the dividends received from Continental and the price increase from National as an operating or nonoperating component on its year-end income statement? Dividends received Price increase A) Nonoperating Operating B) Nonoperating Nonoperating C) Operating Operating D) Operating Nonoperating The Answer is A, but I always thought that Dividends paid were part of financing and dividends received were part of operating?? The only thing I can think of is that since the dividends received are of a subsidiary, it would not make it operating since its not the main product of your business? But if you received dividends from YOUR OWN company shares, the dividends would qualify as operating? Hope this isn’t a dumb question, thanks for your help!
You wouldn’t record dividends received from your own company as income. It’s like moving money from your right pocket to your left. Its a reduction in the investment/equity you have in that subsidiary. Pinto makes automobiles. You want to accurately measure how well it does that to compare it to peers. Including dividend income it earned because it had some extra cash and invested it in some stock would distort any measures of profitability and operating efficiency of its primary activity (auto mfg). Edit: Also, I think that you mixing income statement and cash flow. Dividends received get included in cash from ops while paid is CFF.