Reporting Financing Activities

Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement.

On the liability side, a company may take out a loan. Everything concerning the loan is a financing activity. Receiving the money is a positive cash flow because cash is flowing into the company, while each individual payment is a negative cash flow. However, when a company makes a loan (by extending credit to a customer, for example), it is not partaking in a financing activity. Extending credit is an investing activity, so all cash flows related to that loan fall under cash flows from investing activities, not financing activities.

Non-cash financing activities may also be included on the cash flow statement as footnotes. Non-cash financing activities may include:

• Leasing to purchase an asset;
• Converting debt to equity;
• Exchanging non-cash assets or liabilities for other non-cash assets or liabilities; and
• Issuing shares in exchange for assets.

Generally speaking, the rules for reporting financing activities include the following:

1. Include as outflows reductions of long term notes payable (as would represent the cash repayment of debt on the balance sheet),
2. Or as inflows, the issuance of new notes payable.
3. Include as outflows all dividends paid by the entity to outside parties.
4. Include as outflows the repurchase of stocks or bonds,
5. Or as inflows, the receipt of payments for such financing vehicles by outside investors.

In the case of more advanced accounting situations, such as when dealing with subsidiaries, the accountant must:

1. Exclude intra-company dividend payments.
2. Exclude intra-company bond interest.

Financing Activities

An example of a financing activity to be included on a firm's statement of cash flows would be the issuance of new stock on its affiliated stock exchange.