Financing-Activities

Financing Activities

Financing Activities

            These are the activities which result in changes in size and composition of the capital of the owners of the organization i.e. equity shares and preference shares. The financing activities of the organization are a part of cash flow statement being prepared by it. It is essential to ensure that, following terms are being understood before moving forward with the identification of financing activities being carried out by the organization at a particular point in time.

Cash Flow Statement

            The cash flow statement of the organization is a statement which provides information regarding cash inflow and outflows being incurred by the organization during a particular period of time. There are certain classes of companies on which cash flow statement of the organization is compulsorily required to be prepared. The cash flow statement of the organization provides information regarding various kinds of cash inflows and outflows being carried out within the organization.

Division of Cash Flow Statement

            Cash flow statement of an organization is being divided into three parts on the basis of the nature of items of balance sheet and profit and loss statement of the organization is taken into consideration. The divisions of cash flow statement of the organization include cash flow from operating activities, cash flow from investing activities and cash flow from financing activities arising at a particular point in time.

a.       Operating Activities: Cash flow from operating activities include cash being generated by the organization in the normal course of the business. It is being derived by way of activities which produce main revenue of the organization. The activities generating main revenues of the organization would include the activities such as a sale of goods etc. Other activities being included in operating activities of the organization include the activities in the name of operating expenses, payment of taxes and duties, receipts from debtors, payment to creditors, and others. All other kinds of cash flows do not form part of operating activities.

b.      Investing Activities: This involves inflow and outflow of cash in the case of disposal or acquisition of fixed assets, sale of investments and other kinds of activities which involve investments being made by the organization. The examples which involve investing activities include the purchase of land and building, the sale of machinery, purchase of shares, long-term loans given to third parties.

c.       Financing Activities: The changes in the share capital of the organization are being included in the area of financing activities. Buyback of shares and issuances of shares to other individuals are included in the category of financing activities. These are being included in the category of financing activities being carried out by the organization.

Items included in Financing Activities

a.    Issue of equity shares

b.      Issues of preference shares

c.       Issue of debentures

d.      Issue of bonds

e.       Acceptance of deposits

f.       Proceeds against short term or long term borrowing from any bank or financial institution.

Cash Outflows

a.       Buy back of shares

b.      Redemption of preference shares

c.       Maturity of deposits

d.      Redemption of debentures

e.       Payment of final and interim dividend

f.       Payment of interest of borrowings or debentures or deposits

Transactions not included in the Cash flow statement

a.       Issue of stock on redemption of debentures or preference shares

b.      Issue of stock to creditors or lenders against the settlement of dues

c.       Exchanging stock against the purchase of stock.

Uses of Financing Activities

            It is essential for the organization to study the entire cash flow statement for the purpose of ensuring that, liquidity and cash strength of the organization is being taken into consideration in a proper and appropriate way. Financial activities in a cash flow statement are being used for the purpose of the following activities being required to be carried out by the organization.

ü  It is being useful for the investors for making decisions regarding the fact that, whether, the company was being financially strong or not. In case, a company has a higher level of long term borrowings and does not have long term investing then, it is going to be a scenario that, the company has made utilization of its long term borrowings for operating activities. In this case, the liquidity position of the organization will be considered to be very sensitive to a certain extent.

ü  It is also useful for a prospective client to find out whether the person should make an investment in the organization or not.

ü  The management will identify whether there is a large level of liabilities of the organization in the area of its working. This particular thing is going to help the organization to work out its liabilities and take a decision towards making the reduction of the same.

ü  Evaluation of the capital structure of the organization is also going to be possible for the organization with the help of this particular thing in the course of doing the working at a particular point of time.

Cash and Cash Equivalents

            In the balance sheet of the organization, cash includes cash in hand, cash at bank, and cash equivalents includes short term liquid investments which are being readily available for conversion into cash. In case of cash flow statement, it is essential that, closing balance of cash and cash equivalents is being equal to the cash balance being available in the balance sheet of the organization.

Sample of Cash Flow Statement

Issuance of Common Stock: This thing results in a change in capital structure of the company therefore, this would be in the category of financing activity being carried out by the organization. Therefore, it can be said that, common stock is being considered as a financing activity.

Investment in associate, subsidiary & joint venture: This particular thing does not result in the change in capital structure of the organization therefore, investment in the subsidiary and Joint Venture Company will be considered to be in the category of investing activity.

Interest payment and dividend: Payment made towards interest on borrowed funds and dividend to shareholders is a part of financing activity of the organization. It involves raising capital and borrowing money in the course of financing activities.