Financing activities section is the third and the last section of the statement of cash flows that reports cash flows resulting from financing activities of the business. It usually involves flow of cash between company and its sources of finance i.e., owners and creditors. Here, the creditors mean the creditors for non-trading liabilities such as bonds payable and long term loans etc. The payment made to creditors for purchase of raw materials or merchandise inventory is not reported in financing activities section. Such creditors are known as trade creditors and cash paid to them is included in the operating activities section of the statement of cash flows.
Examples of financing activities:
Some examples of cash flows from financing activities are given below:
- Obtaining cash from common stockholders by issuing common stock,
- Obtaining cash from preferred stockholders by issuing preferred stock,
- Sale of treasury stock,
- Issuance of bonds,
- Payment of cash dividend to common stockholders,
- Payment of cash dividend to preferred stockholders,
- Purchase of treasury stock,
- Redemption of preferred stock,
- Redemption (repurchase) of bonds.
Understanding cash and non-cash financing activities:
Financing activities may or may not involve the use of cash. Examples of financing activities that affect cash include issuing common or preferred stock for cash, issuing bonds for cash and obtaining loan from a financial institution. We only report those activities on the statement of cash flows that affect cash. Activities that have no impact on cash are known as ‘non-cash financing activities’ and are disclosed in the foot notes under the caption ‘non-cash investing and financing activities’. Examples of non-cash financing activities include converting a debt to common stock and discharging a liability by issuing a note or a bond payable.
Treatment of interest on debt and dividend on stock:
Companies pay interest on debt and dividend on common and preferred stock. Both the payments affect cash and must be disclosed in the statement of cash flows. Under US GAAP, interest paid must be treated as cash outflow from operating activities and dividend paid on common and preferred stock must be treated as cash out flow from financing activities. Under IFRS, companies can, however, treat both the cash flows as either operating or financing cash flows. Where a company chooses or is required to prepare its financial statements in accordance with IFRS, such cash flows must be disclosed on consistent basis from period to period.
The format of financing activities section is illustrated below:
The following information belongs to KLM company:
- KLM earned a net income of $250,000 for the year 2013 and paid a cash dividend of $110,000 during the year.
- The decrease in bonds payable represents their redemption during the year 2013.
- Company issued all shares of common stock for cash.
Required: Calculate net cash flows from financing activities of KLM company during the year 2013.
- 300,000 – 220,000
- 440,000 – 120,000
- 272,000 + 250,000 – 412,000