Week 3 - Dividends Flashcards
(18 cards)
What are dividends used for?
Dividends are the most common method companies use to distribute profits to their shareholders
Where are the laws regarding dividends found?
Companies Act 2006
Under the companies act…
Only distributable profits can be paid out as dividends
What will we assume in this module about retained earnings?
Retained earnings = distributable profits
What are the required steps before a dividend can be paid?
- directors propose dividend amount
- voted on by shareholders
- shareholders either approve (can be paid) or reject proposal
At what point is dividend recognised in financial statements and why?
When approved, because the dividend isn’t certain until the shareholders approve it
What is the rule that ensures all shareholders are treated equally?
The same dividend must be paid to on all shares within the same class
What is the equation for calculating the total value of the dividend?
Pence per share x Number of shares in issue
What is the equation for calculating the total value of the dividend as a percentage?
% x nominal value x number of shares in issue
What is the timing of dividends?
- propose final dividend before year end
- shareholders vote at AGM (usually after year end)
- if approved, dividend paid in new financial year
What is an interim dividend and when is it paid?
When (usually large) companies pay a dividend in the middle of the year
Usually paid after interim results released for first 6 months
Dividends on ordinary shares are…
NOT an expense
Where are dividends on ordinary shares not recorded?
Dividends on ordinary shares are NOT recorded in the Statement of Profit or Loss - they are instead deducted directly from retained earnings
Define retained earnings
Retained earnings represents the accumulation of all profits made by the company, less any dividends paid as a distribution of those profits
In the trial balance, what will the retained earnings be?
Retained earnings figure will always be the figure from the start of the year, the brought forward balance
How do we get to the closing balance figure for the end of the year?
Add profit for the year (taken from statement of profit or loss)
Subtract:
- interim dividend
- final dividend
What does the closing balance figure go into?
The statement of financial position
How will interim dividends appear in the trial balance and why?
As a debit balance as an interim dividend account, as interim dividends will have been recorded when they were paid
