Final answer:
Cash dividends paid on common stock are reported in the financing activities section of the statement of cash flows. This is because they represent distributions to shareholders and are part of the transactions that change the equity structure of the company.
Step-by-step explanation:
Cash dividends paid on common stock would be reported on the statement of cash flows in the financing activities section. Dividends are a form of return to shareholders and represent a distribution of earnings by the company. Since they are payments made to owners of the company, they are considered a financing activity, as opposed to operating or investing activities. Operating activities involve transactions related to the primary operations of the business, while investing activities concern investments in long-term assets and securities. Financing activities, on the other hand, pertain to transactions that alter the equity and borrowing structure of the company.
When a firm decides to issue stock, it recognizes that investors expect a return. This return can come as direct payments called dividends, or through capital gains, which are increases in the stock value between when one buys and sells the stock. The declaration and payment of dividends is a decision made by a company's board of directors and reflects the company's desire to return profits to its shareholders. Capital gains, however, result from market transactions and are not reported on the statement of cash flows.