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  • The Daily Technical #68: What does change in net working capital tell you about a company's cash flows?

The Daily Technical #68: What does change in net working capital tell you about a company's cash flows?

How to answer "What happens to the three financial statements if a company initiates a dividend?"

December 13, 2024

Good morning. Welcome to the 68th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What happens to the three financial statements if a company initiates a dividend?

When a company initiates a dividend, the impact on the financial statements is distinct.

On the income statement, there are no changes; however, a note below net income will indicate the dividend per share ("DPS").

On the cash flow statement, the cash from financing section decreases by the dividend payout amount, reducing the ending cash balance.

On the balance sheet, the cash balance decreases by the dividend amount, while retained earnings decrease by the same amount, reflecting the dividend's deduction from retained earnings.

Common Mistakes

  1. Forgetting that dividends reduce retained earnings, not net income. Always connect dividends to retained earnings, as they lower accumulated profits, influencing shareholder equity.

  2. Ignoring how dividends reduce the cash balance on both the cash flow statement and balance sheet. To become adept at financial correlations, remember that any cash outflow must reflect in both statements.

  3. Wrongly altering operations or investing sections on the cash flow statement. Focus on the financing section for dividend payouts.

TL;DR

  • Income Statement: No changes; note below net income states dividend per share ("DPS").

  • Cash Flow Statement: Cash from financing decreases by dividend payout, lowering ending cash balance.

  • Balance Sheet: Cash balance decreases by dividend amount; retained earnings also decrease by the dividend amount.

TODAY’S QUESTION
What does change in net working capital tell you about a company's cash flows?

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