Cash distributions entail the issuance of cash from surpluses or profits of an organization to shareholders. Usually, when corporations make profit or surpluses from their operations, they have to pay back the investors for forgoing expenditure. For this reason, the fund managers have to make appropriate dividend policies that ensure equity and concern for all shareholders. In this case, the amount that investors receive depends on their shareholding. This is because cash payments are calculated from the segment of profit divided by the outstanding shares. In this regard, governments subject taxes to the recipients. This implies that investors with large shareholding will be disadvantaged due to large portions of the payments. Regardless of the demerits of cash distribution, the policy increases investors’ returns while attracting potential investors. Thus, an organization does not report the payments directly on the balance sheet, but are deducted from the retained earnings (Ross, 2008).
To illustrate the utilization of cash distributions, we assume a company that has generated an annual profit of $ 400000. In this case, we assume the dividend policy of the company stipulate that 40 percent of the profit is issued while 60 percent is kept as retained earnings for reinvestment. In addition, the number of outstanding shares is 40,000. For this reason, cash distributions will be calculated from the portion of profits, which is $160000 attributed to shareholders. To determine the amount received for each share, the number of outstanding shares, 40000 in number, divides $160000. The outcome of the calculation will be $ 4 per share. This indicates the earning per share. Through this process, depending on the shareholding of the individual, large investors will receive large proportion while small investors receive small returns. For instance, an investor with five thousand shares will receive $20000. On the other hand, an investor with 200 shares will receive $800 as returns. This depicts the value of shareholding with corporations that have cash distributions.