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Accountancy > Cash Flow Statement > Financing Activities and Cash Flow
Cash Flow Statement

Financing Activities and Cash Flow

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.

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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.

Financing Activities and Cash Flow

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

Specimen

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.         –
                                                                                             Total A         –
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          –
                                                                                             Total B           –
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.

                                      Particulars       2017      2018
Long-term loan 100000 150000
Share capital 300000 400000
Debentures 250000 200000

During the year a loan of 50000 was repaid.

Solution: Cash flows from financing activity:

Inflows

An issue of equity shares                                                    1,00,000

Proceeds from Loans                                                              50,000

Total A               1,50,000

Outflows

Redemption of debentures                                                   50,000

Total B                  50,000

Net cash flow from financing activities   (A-B)             1,00,000

Working Notes:

Long-term Loan A/c

Dr.                                                                                                                                                 Cr.

            Particulars J.F.     Amount            Particulars J.F.     Amount
To Bank A/c (repaid)

 

 

50000

 

 

By balance b/d

 

 

100000

 

 

To balance c/d 150000 By Bank A/c (new loan raised) 100000
     Total 200000 Total 200000

Proceeds from Loan:

Proceeds from new loan                             100000

Less: Loan repaid                                        (50000)

Net proceeds from loan                                50000

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