Profits Available for Distribution

Profits Available for Distribution Distributable Profits Dividends Shareholder Payouts Corporate Finance Earnings Financial Management
Profits available for distribution refer to the earnings or surplus that a company can allocate to its shareholders in the form of dividends or other forms of payouts.
On this page

Definition

Profits available for distribution (PAD) are the financial resources derived from a company’s net income, which can be distributed to shareholders. These profits are typically determined after accounting for all expenses, taxes, and necessary reserves. PAD is essential in determining the extent to which a company can reward its shareholders through dividends or other financial benefits.

Examples

  1. Corporation A: Corporation A reports a net profit of $1 million. After setting aside statutory reserves and retaining earnings for future expansion, $600,000 is available for distribution to shareholders as dividends.

  2. Start-Up B: Start-Up B, after accounting for operational costs and tax liabilities, has $150,000 in profits. However, the company decides only to distribute 70%, keeping the remaining 30% for future growth, which translates to $105,000 being available for distribution.

Frequently Asked Questions (FAQs)

Q: Can all of a company’s net income be available for distribution? A: Not necessarily. Companies often retain a portion of their profits for future investments, expansions, or as a safeguard against future uncertainties. Only the remaining profits after such allocations are available for distribution.

Q: How are profits available for distribution calculated? A: They are calculated by subtracting expenses, taxes, statutory reserves, and retained earnings from the company’s net income.

Q: Must all profits available for distribution be given out as dividends? A: No, companies may choose to reinvest a portion of these profits back into the business or use them for other purposes like share buybacks or debt repayment.

Dividends

Payments made by a company to its shareholders, typically from profits available for distribution, representing the shareholders’ share in the company’s earnings.

Retained Earnings

Portion of net income not distributed as dividends but retained by the company for reinvestment in its core business or to pay debt.

Earnings Per Share (EPS)

The portion of a company’s profit allocated to each outstanding share of common stock, used as an indicator of the company’s profitability.

Net Income

The total profit of a company after all expenses, taxes, and costs have been subtracted from total revenue.

Statutory Reserve

Mandatory reserve that a company has to maintain as per statutory requirements, usually not available for distribution to shareholders.

Online References

Suggested Books for Further Studies

  1. Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
  2. Financial Management: Theory & Practice by Eugene F. Brigham and Michael C. Ehrhardt
  3. Accounting Made Simple by Mike Piper
  4. Corporate Finance: The Core by Jonathan Berk and Peter DeMarzo
  5. Financial Accounting by Walter T. Harrison Jr. and Charles T. Horngren

Accounting Basics: “Profits Available for Distribution” Fundamentals Quiz

### What are profits available for distribution primarily used for? - [x] To distribute dividends to shareholders - [ ] To reinvest in new product development - [ ] To pay off short-term debt - [ ] To cover daily operating expenses > **Explanation:** Profits available for distribution are primarily used to distribute dividends to shareholders, representing their share in the company’s earnings. ### Which financial figure serves as the starting point to calculate profits available for distribution? - [x] Net income - [ ] Gross revenue - [ ] Operating profit - [ ] Total assets > **Explanation:** The calculation of profits available for distribution begins with the company's net income, from which expenses, taxes, and necessary reserves are subtracted. ### Do statutory reserves affect the amount of profits available for distribution? - [x] Yes, they reduce the amount available - [ ] No, they have no impact - [ ] Only if the reserves are higher than 50% of net income - [ ] Only if the reserves are mandated by the shareholders > **Explanation:** Statutory reserves reduce the amount of profits available for distribution as they must be set aside by regulatory requirements. ### Can retained earnings influence the calculation of profits available for distribution? - [x] Yes, they are subtracted from net income - [ ] No, retained earnings are not included - [ ] Only if they exceed 20% of net income - [ ] Only in the fiscal year they are accounted for > **Explanation:** Retained earnings decrease the portion of net income that is available to be distributed as dividends. ### Which of the following statements is true regarding profits available for distribution? - [ ] They must always be reinvested in the business - [ ] They are not affected by tax - [x] They can be distributed as dividends or retained within the company - [ ] They are always higher than retained earnings > **Explanation:** Profits available for distribution can be either distributed as dividends to shareholders or retained within the company for further use. ### What financial statement typically indicates the portion of profits retained and distributed? - [x] The statement of retained earnings - [ ] The balance sheet - [ ] The cash flow statement - [ ] The auditor's report > **Explanation:** The statement of retained earnings indicates the portion of profits that are retained and the amount distributed to shareholders. ### When might a company decide not to distribute profits to shareholders? - [x] When it plans to reinvest in the business - [ ] When it has zero retained earnings - [ ] When shareholders prefer a lower share price - [ ] When it experiences a surplus in profits > **Explanation:** A company might decide not to distribute profits when it plans to reinvest in the business for future growth or other strategic purposes. ### If a company earns $500,000 in net income and designates $100,000 for statutory reserves, what are the profits available for distribution (assuming no other deductions)? - [ ] $600,000 - [x] $400,000 - [ ] $500,000 - [ ] $200,000 > **Explanation:** Subtracting the $100,000 statutory reserve from the $500,000 net income leaves $400,000 as profits available for distribution. ### How do dividends impact the calculation of retained earnings? - [x] Dividends reduce the retained earnings - [ ] Dividends are added to retained earnings - [ ] Dividends multiply the retained earnings - [ ] Dividends have no impact on retained earnings > **Explanation:** Dividends reduce the retained earnings as they are payouts to shareholders from the company's profits. ### Why is knowing the profits available for distribution vital for investors? - [ ] It determines the company's asset value - [x] It indicates potential dividend payouts - [ ] It shows the company's operational efficiency - [ ] It forecasts future stock performance > **Explanation:** Knowing the profits available for distribution is vital for investors as it indicates potential dividend payouts, providing insights into their expected returns.

Thank you for exploring our comprehensive breakdown of the term “Profits Available for Distribution” and engaging with our challenging quiz questions. Continue enhancing your financial acumen!

Tuesday, August 6, 2024
Proforma Invoice
Profits and Commissions Form
Appropriation (Accounting) January 1, 1
Bilateral Netting January 1, 1
Bonus Dividend January 1, 1
Budget Director January 1, 1
Capital Distribution January 1, 1
Capital Expenditure (CapEx) January 1, 1
Capital Expenditure Budget January 1, 1
Cash Outflows January 1, 1
Chart of Accounts January 1, 1
Chief Financial Officer (CFO) January 1, 1

Accounting Terms Lexicon

Discover comprehensive accounting definitions and practical insights. Empowering students and professionals with clear and concise explanations for a better understanding of financial terms.