Accounting for Financing Activities

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

Financing activities show transactions with lenders such as long-term liabilities (paying or securing loans beyond a period of 12 months from the balance sheet date) and equity items (the sale of company stock and payment of dividends).

The one main financing cash source is cash proceeds if a business issues its own stock or debt. For example, ABC Corp. sells $3,000 of its own stock to XYZ, Inc. The cash ABC receives from XYZ for this transaction is a financing source of cash on ABC’s statement of cash flows.

Short-term and long-term debt the company issues is included in the financing section. How long the creditor plans to hold the debt determines whether it’s recorded on the creditor’s books as short- or long-term debt.

Now, here are the uses of cash that would appear in the financing section of the statement of cash flows:

  • Treasury stock transactions: Treasury stocks are shares of corporate stock that were previously sold and have since been bought back by the issuing corporation. The use of the cash is to buy back stock from shareholders.

  • Cash dividend payments: Cash dividends are earnings paid to shareholders based on the number of shares they own. Dividends can also come in the form of stock dividends, which don’t involve cash changing hands. So remember, only cash dividends go in the financing section.

  • Paying back debt: Any principal payment a company makes on bonds or loans is a financing activity.