Financing Activities Cash Flows
Financing refers to the process of acquiring capital to fund a start-up, an expansion, basic operations, or whatever else the company needs the extra funds for. The financing activities cash flows section of the statement of cash flows covers these types of activities.
Most of the time, changes in liabilities (the debt a company uses to fund asset purchases) and owners’ equity (the ownership purchases whose proceeds are used to fund asset purchases) impact cash, regardless of whether the company is acquiring or repaying the cash.
Thus, the following types of financing activities show up in the statement of cash flows (yep, you guessed it — in the financing activities portion):
Sale of securities: When a company sells another company’s securities, that sale is considered an investing activity. When a company sells its own stock, the sale is considered a financing activity. The difference is that a company purchases another company’s stock with the hopes that it will increase in value, while a company sells its own stock to generate income meant to finance the purchase of assets.
So when a company sells its own securities, it contributes to a positive balance of cash in the financing activities.
Dividend payments: A company that makes money instead of losing it must give the money it makes back to its stockholders either as a reinvestment in the company through retained earnings or directly as cash through dividends. Whenever a company pays out dividends, the amount of cash the company has available decreases by the total amount of dividends paid.
Purchase of treasury shares: Treasury shares are those shares in the possession of the company that the shares represent. In other words, a company purchases shares of its own stock, and those shares become treasury shares. If the company uses cash to purchase these shares, the total amount of cash the company has decreases as a result of financing operations.
Loans received: Companies often accept loans as a way of financing operations or expansion. In some cases, they receive the loan in the form of cash, which increases the total amount of cash they have available. Accepting a cash loan, then, translates as an increase in cash from financing activities.
Loans collected: Companies must also pay back the loans they accept, an action they typically do by using cash (banks don’t often accept livestock these days). So when a company gives cash to someone to repay a loan, that cash no longer belongs to the company and the company must deduct the amount from the cash flows from financing activities.
When you add up the positive values of the preceding bullets and subtract the negative ones, you get the net cash provided by financing activities. This value shows up at the end of the financing activities portion of the statement of cash flows.
As with the other sections of the statement of cash flows, a positive balance here means the financing operations are positively contributing to cash, while a negative balance means they’re reducing the total amount of cash available.