CASH FLOW FROM FINANCING ACTIVITIES- ALL ABOUT FINANCING ACTIVITIES WITH EXAMPLE AND MCQs

 

What is a cash flow statement?

A cash flow statement is simply an analytical statement that exhibits the flow of incoming and outgoing cash and cash equivalent. It assesses the ability of the enterprise to generate cash and utilise cash. A Cash Flow Statement is one of the tools for assessing the liquidity and solvency of the enterprise.

Cash flow statement is a required financial statement under US GAAP, Indian AS, Indian Companies Act 2013 and IFRS whenever a company presents its results of operations for a period. A Cash Flow Statement is considered to be a summarized statement showing sources of Cash Inflows and the application of cash outflows of an enterprise during a particular period of time. It is prepared on the basis of the published data as disclosed by the financial statements of two different financial periods.

Classification of activities in a cash flow statement

The various activities of an enterprise that result in cash flows (inflows or receipts and outflows or payments) which is the subject matter of a cash flow statement, are to be classified into three categories:

  • Cash flow from operating activities,
  • Cash flow from investing activities, and
  • Cash flow from financing activities

cash flow from operating activities

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What is cash flow from financing activities?

As the name suggests, financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from the issue of equity shares, debentures, raising long-term bank loans, repayment of bank loans, etc. The financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in the case of a company) and borrowings of the enterprise.

Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds ( both capital and borrowings ) to the enterprise.

 

Examples of cash flow from financing activities

The following are examples of cash flows arising from investing activities

  • Cash proceeds from issuing shares (equity/ common stocks or/and preference).
  • Cash proceeds from issuing debentures, loans, bonds and other short/ long-term borrowings.
  • Cash repayments of amounts borrowed.
  • Interest paid on debentures and long-term loans and advances.
  • Dividends paid on equity and preference capital

 

Format of cash flow from financing activities

 

Cash flows from financing activities

Proceeds from issuance of share capital (inflow)

Proceeds from long-term borrowings (Inflow)

Repayments of long-term borrowings (Outflow)

Interest paid Dividend paid (Outflow)

 

Practice examples (MCQs)

 

Question 1

Which of the following activities would NOT be considered a financing activity?

A. retirement of preferred shares

B. issuing bonds payable

C. paying cash dividends

D. purchasing land for cash

Answer: Option D. Purchase of land is the cash outflow for investing activities. The other 3 options are financing activities.

 

Question 2

The following events occurred during the accounting period: Cash of $46,000 was received from the issue of common shares. Cash dividends of $11,000 were paid to shareholders. Cash of $19,000 was received from an investment. Payment of cash of $14,000 was paid for interest payments to bondholders. Cash of $10,000 was used to retire preferred shares. Net cash provided or used by financing activities was:

A. $44,000 provided

B. $29,000 provided

C. $25,000 provided

D. $35,000 used

Answer: Option C– $ 25,000 provided

Explanation: Cash received from the issuance of common stock $46,000 – $ 11,000 cash dividends – $ 10,000 cash payments to retire preference shares = $25,000. Cash received from investments are investing cash flows and interest to bondholders is cash flow from operating activities.

 

Question 3

Cash dividends of $42,500 were declared. The beginning and ending balance of the cash dividends payable account was $10,000 and $12,500, respectively. On the statement of cash flows, the cash dividend activity would be shown as a(an):

A. investing activity of $45,000

B. financing activity of $40,000

C. financing activity of $42,500

D. investing activity of $12,500

Answer: Option B– financing activity $40,000

Explanation:

            Opening balance of dividend payable            – $ 10,000

            Add: Declared                                                        – $ 42,500

            Less: Closing balance                                           – $ 12,500

            Dividend paid (financing activity)                     – $ 40,000

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