CBSE Class 12-commerce Answered

The concept of proposed dividend is explained by AS-4 on Contingencies and Events Occurring After the Balance Sheet Date:

• It prescribes that the amount of proposed dividend should be accounted as liability only after it has been declared i.e., approved by the shareholders however, such amount should be disclosed in the Notes to Accounts attached to the financial statements.  

Effect of such item on the Cash Flow Statement is as follows:

• Amount of dividend proposed for the previous year is shown as outflow of cash assuming that the shareholders have approved the proposed dividend as was recommended. Also, it will be added to determine Net Profit Before Tax and Extraordinary Items under Cash Flow from Operating Activities.
• No effect is to be given for Dividend that is proposed for the current year. When such dividend is approved in the AGM, entry is passed debiting ‘Balance in Statement of Profit and Loss’ and crediting the ‘Dividend Payable Account’ and thereafter such declared dividend is paid. Net dividend paid (i.e., Proposed and Approved Dividend less Dividend still payable) is shown as Cash Used in Financing Activity.