What are financing activities? Is issuing stock a financing activity? The discussion below will serve to offer the responses to these questions and provide a better understanding.
What are financing activities?
These are transactions or flow of cash between the firm and its investors and creditors (i.e. the creditors for non- trading liabilities such as long- term loans, bonds payable etc.). The section of financing activities is among the three segments on the statement cash flow of the business. The other two sections are the investing and operating activities.
Financing activities primarily involve stockholder’s equity or owner’s equity, long-term liabilities, and the alterations that occur to short- term liabilities. The financing activities are often reported in a distinct segment of the financial statement referred to as the cash flow statement or the statement of cash flows, (SCF).
What are some of the examples of the financing activities?
Long- term liabilities
Examples of the financing activities that include the long- term debts comprise the redemption or issuance of bonds. An escalation in the bonds payable is stated as a positive amount in the cash flow statement section. The positive amount signifies cash that was generated by the issuance of extra bonds or simply a source of cash. A decline in the bonds payable is reported as a negative sum in the financing activities segment of the SCF. A negative sum implies that cash was used up in redeeming or repurchasing the bonds of the corporation.
Examples of Financing Activities comprising the owner’s equity involve the issuance of preferred or common stock. Escalation in these stock accounts is stated as positive totals in the financing activities segment of the cash flow statement. The positive sums connote that cash was offered by issuing more shares of stock which is a source of cash. The examples of the uses of cash which are sated as negative sums in the financing activities portion of the statement of cash flow include cash expenditure on repurchasing the stock previously issued, to settle for a debt, to pay interest on debt, and to settle the dividends to the shareholders.
It is important to note that the financing activities may either involve the use of cash or may not. It is only those activities that affect cash that are reported in the statement of cash flow. The activities that have no impact on cash are referred to as non- cash financing activities. Such activities include discharging of a liability by the issuance of a bond payable or a note and conversion of a debt to a common stock.