Cash Flows from Financing Activities
International Accounting Standard 7 (IAS 7) defines financing activities as the “activities that result in changes in the size and composition of the contributed equity and borrowings of the entity”.
Cash flows mean the inflows and the outflows of cash and cash equivalents. By cash we mean cash on hand and demand deposits. While the cash equivalents comprise short-term liquid investments that are quickly convertible to cash and which are subject to very little risk of changes in value.
Cash flows from financing activities represent the funds that an entity took in or paid out to finance its activities. Financing activities include obtaining financial resources from and returning the financial resources to the owners or shareholders of the organization. This class of cash flows also includes the financial resources obtained from lenders through borrowings (short term or long term) and repayments of the principal amounts of loans.
Following are some of the common examples of cash flows from financing activities.
Examples of inflows:
- Receipts from issuance of new equity shares
- Cash received from issuance of debt instruments such as debentures
- Proceeds from bank borrowings or borrowings from other financial institutions
Examples of outflows:
- Cash paid shareholders as dividends
- Repayment of principal portion of loans
- Repayment of finance lease obligations
- Repayment of borrowings from banks
Cash paid to shareholders for dividends can also be presented under the class “cash flows from operating activities”. Cash paid for redemption of preferred shares or for buying back the shares is also an example of cash flows from financing activities.Cash flows from financing activities provide important insights about the financial health of an organization and about its future plans. Positive cash flows from financing activities may indicate intentions of the organization about expansions and growth. Negative cash flows from financing activities can be a sign of improving liquidity position of the company if the debts are repaid. Negative cash flows from financing activities can also provide information about the dividend policy of the organization.