Dividends, retained earnings and company financial statements
Dividends share profits with shareholders after the board checks the solvency test. Profit not paid out builds retained earnings, shown in the statement of changes in equity.
Dividends and the solvency test
A dividend is a distribution of profit to shareholders. Interim dividends are paid during the year; a final dividend is decided after the year end. Preference dividends are a fixed percentage of preference capital; ordinary dividends are declared per share. Under the Companies Act No. 7 of 2007, the board may authorise a dividend only if it is satisfied that the company will pass the solvency test immediately afterwards, and it must obtain a certificate of solvency from the auditors. The test: the company must be able to pay its debts as they become due in the normal course of business, and the value of its assets must be greater than its liabilities plus stated capital. A dividend declared after the reporting date is not a liability at that date; it is disclosed in the notes.
Income statement of Serendib Foods PLC for the year ended 31 March 2026 (Rs. '000)
| Item | Rs. '000 |
|---|---|
| Revenue | 120,000 |
| Cost of sales | (78,000) |
| Gross profit | 42,000 |
| Other income | 1,500 |
| Distribution costs | (9,000) |
| Administrative expenses | (8,500) |
| Operating profit | 26,000 |
| Finance costs (debenture interest) | (3,000) |
| Profit before tax | 23,000 |
| Income tax expense | (4,500) |
| Profit for the year | 18,500 |
Other information
- Stated capital: 4,000,000 ordinary shares, Rs. 40,000,000; 100,000 10% irredeemable preference shares issued at Rs. 100 each, Rs. 10,000,000.
- Retained earnings at 1 April 2025: Rs. 22,000,000.
- Paid during the year: the full preference dividend and an interim ordinary dividend of Rs. 1.50 per share.
- On 20 May 2026 the board declared a final ordinary dividend of Rs. 2.00 per share.
- Rs. 25,000,000 of 12% debentures were in issue all year.
Worked example 1: dividends and retained earnings
Calculate the dividends for the year and the retained earnings of Serendib Foods PLC at 31 March 2026. Also check the finance cost.
- Operating profit check: 42,000 + 1,500 − 9,000 − 8,500 = 26,000 (Rs. '000).
- Finance cost check: 12% × 25,000,000 = 3,000,000.
- Preference dividend: 10% × 10,000,000 = 1,000,000.
- Interim ordinary dividend: 4,000,000 × 1.50 = 6,000,000.
- Final dividend: 4,000,000 × 2.00 = 8,000,000, declared after the year end, so it is disclosed in the notes, not recorded at 31 March 2026.
- Retained earnings: 22,000,000 + 18,500,000 − 1,000,000 − 6,000,000 = 33,500,000.
Dividends recognised in the year: Rs. 7,000,000. Retained earnings at 31 March 2026: Rs. 33,500,000.
Statement of changes in equity for the year ended 31 March 2026 (Rs. '000)
| Item | Ordinary shares | Preference shares | Retained earnings | Total |
|---|---|---|---|---|
| Balance at 1 April 2025 | 40,000 | 10,000 | 22,000 | 72,000 |
| Profit for the year | 18,500 | 18,500 | ||
| Preference dividend | (1,000) | (1,000) | ||
| Interim ordinary dividend | (6,000) | (6,000) | ||
| Balance at 31 March 2026 | 40,000 | 10,000 | 33,500 | 83,500 |
Statement of financial position of Serendib Foods PLC at 31 March 2026 (Rs. '000)
| Item | Rs. '000 |
|---|---|
| Property, plant and equipment | 90,500 |
| Inventories | 13,000 |
| Trade receivables | 15,000 |
| Cash and cash equivalents | 5,000 |
| Total assets | 123,500 |
| Stated capital: ordinary shares | 40,000 |
| Stated capital: 10% preference shares | 10,000 |
| Retained earnings | 33,500 |
| Total equity | 83,500 |
| 12% debentures (non-current liability) | 25,000 |
| Trade payables | 11,700 |
| Income tax payable | 2,300 |
| Accrued expenses | 1,000 |
| Total current liabilities | 15,000 |
| Total equity and liabilities | 123,500 |
Worked example 2: prove the statement of financial position
Check that the statement of financial position of Serendib Foods PLC balances (Rs. '000).
- Current assets: 13,000 + 15,000 + 5,000 = 33,000.
- Total assets: 90,500 + 33,000 = 123,500.
- Equity: 40,000 + 10,000 + 33,500 = 83,500.
- Current liabilities: 11,700 + 2,300 + 1,000 = 15,000.
- Equity + liabilities: 83,500 + 25,000 + 15,000 = 123,500.
Both sides total Rs. 123,500,000. These statements are used for the ratio analysis in the next two topics.
Company statements vs sole-trader statements
Listed Sri Lankan companies such as Hayleys PLC and John Keells Holdings PLC announce their dividends through the Colombo Stock Exchange. Before each payment, the board must be satisfied that the company passes the solvency test in the Companies Act.
Short answer: “What is the solvency test?” The board must be satisfied that after a distribution the company can pay its debts as they become due in the normal course of business and its assets exceed its liabilities plus stated capital (Companies Act No. 7 of 2007).
Structured question: “Calculate the dividends for the year and the closing retained earnings from the given data.” Preference dividend = rate × capital; ordinary dividend = shares × rate per share; retained earnings = opening + profit − dividends recognised in the year.
Essay: “Prepare the income statement, statement of changes in equity and statement of financial position of a company from the given data.” Income statement by function to profit for the year; equity statement with stated capital and retained earnings columns; then the SFP, with debentures as non-current and tax payable as current liabilities.
Retained earnings = opening + profit − dividends. A dividend declared after the year end is not a liability at the year end; it goes in the notes.