Cash flow statement is a financial statement that shows the inflows and outflows of cash and cash equivalents of an enterprise. The activities affecting the cash flows of an organization can be classified into operating activities, investing activities and financing activities.
Financing activities comprise of activities that affect the capital or the long-term funds of the enterprise. As per AS-3 (Revised): Cash Flow Statements, financing activities are the activities that result in a change in the size and composition of the owners’ capital (including preference share capital in case of a company) and borrowings of the company.
It can thus be said that financing activities are the activities that have a long-term impact on the organization’s finances and Balance Sheet. AS-3 also requires a separate disclosure of cash flows arising from the financing activities as it is helpful in determining the future cash flows by the capital and loan fund providers.
Cash Inflows from financing activities include
- Cash proceeds from the issue of equity or preference shares or similar other instruments.
- The cash proceeds from the issue of debentures, bonds, and similar other instruments.
- The cash receipts from donors limited to long-term purposes, in case of non-profit organizations.
- Cash proceeds from loans and other short-term or long-term borrowings.
Cash Outflows from financing activities include
- Redemption of preference shares or similar other instruments.
- Buy-back of equity shares.
- Redemption of debentures, bonds, and similar other instruments.
- Repayment of loans and other borrowings.
- Payment of interest on debentures, bonds, and loans.
- Payment of dividends on equity and preference share capital.
It should also be kept in mind that the same activity can be classified differently for different enterprises. For example, the purchase of machinery will be an investing activity for a manufacturing enterprise whereas it will be an operating activity for a trading firm dealing in machinery as its goods.
Browse more Topics under Cash Flow Statement
- Classification of Activities for the Preparations of the Cash Flow Statement
- Benefits of Cash Flow Statement and Cash Equivalents
|A. Inflows from financing activity:|
|An issue of equity or preference shares||–|
|An issue of debentures and bonds||–|
|Loans and other short-term or long-term borrowings.||–|
|B. Outflows from financing activity:|
|Redemption of preference shares||–|
|Redemption of debentures and bonds||–|
|Repayment of loans and other borrowings||–|
|Payment of interest on debentures, bonds, and loans||–|
|Payment of dividends on equity and preference share capital||–|
|Net cash flow from financing activity (A-B)||–|
Solved Example for You
Question: From the information given below calculate the cash flow from financing activity.
During the year a loan of 50000 was repaid.
Solution: Cash flows from financing activity:
An issue of equity shares 1,00,000
Proceeds from Loans 50,000
Total A 1,50,000
Redemption of debentures 50,000
Total B 50,000
Net cash flow from financing activities (A-B) 1,00,000
Long-term Loan A/c
|To Bank A/c (repaid)
|By balance b/d
|To balance c/d||150000||By Bank A/c (new loan raised)||100000|
Proceeds from Loan:
Proceeds from new loan 100000
Less: Loan repaid (50000)
Net proceeds from loan 50000