Cash flow financing activities is the section of cash flow statement contains and displays the movement of those cash flows which are connected with the activities performed during the year to finance the business. A company may need cash during any period to finance its main operations and thus uses several available sources to acquire required amount of cash. A business may issue its unpaid capital for this purpose. Similarly loans from directors, banks, financial institutions and other businesses are the sources from which business is financed in time of need. Cash receipts from issuance of debentures, bonds and other long and short term borrowings also come under the category of ‘financing activities’.
Definition
According to IAS-7, financing activities are those result in changes in the size of and composition of the contributed equity and borrowings of the company.
Likewise, these receipts and payments made in connection with the said receipts of funds are also shown under cash flow financing activities. These payments encompass dividends paid, lease rentals paid, redemption of debentures etc. The International Accounting Standards dealing with statement of cash flows and principles thereof lists the following activities of cash receipts and payments which will be reported under financing activities.
- Cash receipts from issuance of shares
- Cash proceeds from issuance of debentures, bonds, notes, mortgages
- Cash receipts from banks and other loans obtained
- Cash receipts from long term and short term borrowings
- Cash payments to owners for the redemption of shares or debentures
- Cash payments made against principal amount of finance leases
In case where the business is using assets held under finance leases. This portion of installments related to the principal amount will only be reflected under the financing activities. While the interests paid with installments shall be shown under operating activities.
Example and Preparation
To understand the cash flow financing activities, consider the following example. The following are the changes in balance sheet of A Traders for year ended December 31, 2015.
| Account Heads |
Debit
|
Credit
|
|
Cash
|
1,000
|
|
|
Accounts Receivables
|
15,800
|
|
|
Inventories
|
10,000
|
|
|
Goodwill
|
|
12,000
|
|
Building
|
35,000
|
|
|
Machinery
|
4,000
|
|
|
Equipment
|
1,500
|
|
|
Allowance for depreciation (Building & Machinery)
|
|
1,400
|
|
Allowance for depreciation (equipment)
|
|
1,500
|
|
Discount on issuance of debentures
|
1,200
|
|
|
Accounts Payable
|
|
2,000
|
|
Debentures
|
|
44,600
|
|
Preferred Shared
|
6,000
|
|
|
Ordinary Shares
|
|
8,000
|
|
Premium on ordinary shares
|
|
2,000
|
|
Retained earnings
|
|
3,000
|
|
74,500
|
74,500
|
Addtional information
- Disposal of part of building
Book value$ 20,000
Sales proceeds$ 22,000
- Preference shares were redeemed $ 7,500
- Interim dividend paid $ 8,000
- Goodwill written off against retained earnings
- Exchange of machinery:
Old machinery cost$ 4,000
Acc: depreciation$ 1,000
New machinery cost$ 8,000
Cash paid$ 5,000
From the above given data, students will learn to prepare financing cash flow using indirect method.
| CASH FLOW FROM FINANCING ACTIVITIES |
$
|
$
|
|
Dividends Paid
|
-8,000
|
|
|
Proceeds from issuance of debenture
|
43,400
|
|
|
Proceeds from issuance of ordinary shares
|
10,000
|
|
|
Redemption of preference shares
|
-7,500
|
|
|
Net cash used in Financing activities
|
|
37,900
|
Working
|
Proceeds from issuance of debentures
|
$
|
|
Debentures issued
|
44,600
|
|
Less: Discount on debentures
|
-1,200
|
|
Net proceeds from issuance of debentures
|
43,400
|
|
Proceeds from Issuance of ordinary shares
|
$
|
|
Face value of the shares issued
|
8,000
|
|
Add: Premium on iddued shares
|
2,000
|
|
Total proceeds from issued shares
|
10,000
|