In case of financial enterprises, cash flow arisen from dividend received and paid is shown in cash statement under which one of the following activities?

Correct option is D

The cash flow statement categorizes cash flows into three main activities:

1. Operating Activities – Cash flows related to the core business operations.

2. Investing Activities – Cash flows related to asset purchases and investments.

3. Financing Activities – Cash flows related to borrowing, debt repayment, and equity financing.

For financial enterprises (such as banks, insurance companies, and investment firms), the classification of dividend-related cash flows differs from non-financial enterprises.

• Dividend Received: Since financial institutions generate revenue from interest and dividends, dividend received is considered an Operating Activity because it is part of their main business.

• Dividend Paid: Paying dividends is a financial decision related to equity holders and is classified as Financing Activity.

Information Booster:

• Financial enterprises include banks, mutual funds, and insurance companies, where dividends are a key part of business revenue.

• Dividend received is part of their regular income, which is why it is treated as an Operating Activity for financial firms.

• Dividend paid represents a return to shareholders and is classified under Financing Activities as it relates to the firm's capital structure.

• In contrast, for non-financial enterprises, dividend received is classified as Investing Activity, and dividend paid remains a Financing Activity.

• This classification aligns with IAS 7 (International Accounting Standard 7) and AS 3 (Indian Accounting Standard 3) guidelines on cash flow statements.

Additional Knowledge:

1. Option (1) Operating Activities (Incorrect)

   • While dividend received is an operating activity for financial enterprises, dividend paid is not.

   • Dividend paid is always a Financing Activity, so this option is incomplete.

2. Option (2) Financing Activities (Incorrect)

   • Dividend paid falls under Financing Activities, but dividend received does not.

   • Since dividend received is an Operating Activity for financial firms, this option is incorrect.

3. Option (3) Investing Activities (Incorrect)

   • Dividend received is classified as an Investing Activity only for non-financial enterprises.

   • Since the question specifically refers to financial enterprises, this classification does not apply.​