What Are Financing Activities?
Financing activities are transactions involving long-term liabilities, owner’s equity and changes to short-term borrowings. These activities involve the flow of cash and cash equivalents between the company and its sources of finance i.e. the investors and creditors for non-trading liabilities such as long-term loans, bonds payable etc.
The cash flow from financing activities are the funds that the business took in or paid to finance its activities. It’s one of the three sections on a company’s statement of cash flows, the other two being operating and investing activities.
What this article covers:
- What Is Financing Activities in Cash Flow Statement?
- What Goes Under Financing Activities?
- What Are Some Examples of Financing Activities?
What Is Financing Activities in Cash Flow Statement?
In the cash flow statement, financing activities refer to the flow of cash between a business and its owners and creditors. It focuses on how the business raises capital and pays back its investors. The activities include issuing and selling stock, paying cash dividends and adding loans.
A positive number on the cash flow statement indicates that the business has received cash. This boosts its asset levels. On the other hand, a negative figure indicates the business has paid out capital such as making a dividend payment to shareholders or paying off long-term debt.
What Goes Under Financing Activities?
The source of capital for a business can either be from equity or debt. When business takes on debt, it does so by taking a loan from the bank or issuing a bond. It makes interest payments to the creditors and the bondholders for loaning their money.
If the business takes the equity route, it issues stock to investors who purchase it for a share in the company. These activities are used to support operations and strategic activities of a business.
An example of financing activities involving long-term liabilities (noncurrent liabilities) is the issuance or redemption of debt, such as bonds. A positive amount signifies an improvement in the bonds payable and indicates that cash has been generated by the additional bonds issued.
A negative sum implies a decrease in bonds payable. It indicates that the cash was used up in repurchasing or redeeming the bonds payable.
An escalation in the owner’s stock accounts is stated as positive totals in the financing activities segment of the cash flow statement. It indicates that the cash was offered by issuing more shares of stock.
The examples of the uses of cash which are stated as negative sums include cash expenditure on repurchasing the stock previously issued, to settle for a debt, to pay interest on the debt, and to settle the dividends to the shareholders.
What Are Some Examples of Financing Activities?
Both cash inflows and outflows from creditors and investors are considered financing activities. Anything to do with the movement of money is a financial activity.
Some examples of cash flows from financing activities are:
- Issuing bonds (positive cash flow)
- Sale of treasury stock (positive cash flow)
- Loan from a financial institution (positive cash flow)
- Repayment of existing loans (negative cash flow)
- Cash from new stock issued (positive cash flow)
- Payment of cash dividend to stockholders (negative cash flow)
- Purchase of treasury stock (negative cash flow)
- Repurchase of existing stock (negative cash flow)
- Redemption of bonds (negative cash flow)
These activities may or may not involve the use of cash. However, only activities that affect cash are reported in the cash flow statement. The activities that don’t have an impact on cash are known as non-cash financing activities. These include the conversion of debt to common stock or discharging of a liability by the issuance of a bond payable.
The financing activities of a business provide insights into the business’ financial health and its goals. A positive cash flows from financing activities may show the business’ intentions of expansion and growth. With more money is flowing in than flowing out, a positive amount indicates an increase in business assets.
Negative cash flows from financing activities, on the other hand, can signal improving liquidity position of the business and also provide information about its dividend policy.