Question

During a financial year, Zenith Ltd. paid \(\$50,000\) as an interim dividend to its equity shareholders. Under which specific activity classification must this transaction be reported within a Cash Flow Statement prepared as per AS-3?

• A. \( \text{Operating Activities} \)
• B. \( \text{Investing Activities} \)
• C. \( \text{Financing Activities} \)
• D. \( \text{Cash and Cash Equivalents} \)

Hint:

Any cash flow item involving the payment of returns to providers of capital—such as paying interest on debentures or dividends on shares—is classified as a Financing Activity outflow.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Accounting Standard-3 (AS-3) classifies cash flows into three categories:
1. Operating Activities: Core business revenue-generating activities.
2. Investing Activities: Purchase and sale of long-term assets and investments.
3. Financing Activities: Activities that change the capital and borrowing structure of the firm.
Dividends are payments made to shareholders as a return on the capital they provided.
Because equity capital is a "financing" source, any payment made to service that capital is a "financing" outflow.
Step 2: Detailed Explanation:
When Zenith Ltd. pays an interim dividend, it is rewarding its equity owners.
- Dividend payment relates to the equity share capital of the company.
- Issuing shares is a financing activity (inflow).
- Paying dividends on those shares is the corresponding outflow associated with that capital source.
Therefore, it is classified as a cash outflow under Financing Activities.

It is important to distinguish this from Dividend Received:
- If Zenith Ltd. received a dividend from another company, it would be an Investing Activity (income from an investment).
- However, paying its own dividend is always a Financing Activity for a non-financial company.
Step 3: Final Answer:
The payment of \$50,000 as an interim dividend must be reported as a cash outflow under Financing Activities in the Cash Flow Statement.