Authoritative Pronouncements

Question: When reporting cash flows from operating activities for the year ended December 31, 2008, EMC

Corporation listed an inflow of over $240 million labeled as “dividends and interest received” as well as an

outflow of nearly $74 million shown as “interest paid.”

Unless a company is a bank or financing institution, dividend and interest revenues do not appear to relate to its

central operating function. For most businesses, these inflows are fundamentally different from the normal sale of

goods and services. Monetary amounts collected as dividends and interest resemble investing activity cash inflows

because they are usually generated from noncurrent assets. Similarly, interest expense is an expenditure normally

associated with noncurrent liabilities rather than resulting from daily operations. It could be argued that it is a

financing activity cash outflow.

Why is the cash collected as dividends and interest and the cash paid as interest reported within operating

activities on a statement of cash flows rather than investing activities and financing activities?

Answer: Authoritative pronouncements that create U.S. GAAP are the subject of years of intense study,

discussion, and debate. In this process, controversies often arise. When FASB Statement 95, Statement of Cash

Flows, was issued in 1987, three of the seven board members voted against its passage. Their opposition, at least

in part, came from the handling of interest and dividends. On page ten of that standard, they argue “that interest

and dividends received are returns on investments in debt and equity securities that should be classified as cash

inflows from investing activities. They believe that interest paid is a cost of obtaining financial resources that

should be classified as a cash outflow for financing activities.”