A business generates funds in various ways and adds them to the books. But, the picture is double-sided. If it is generating funds, it surely will payout some. Keeping an optimal balance between payables and receivables will keep things in line. Financing activities of cash flow are no different when we talk about generating funds and paying them out. These activities require long-term obligations, owner’s equity, and changes to short-term obligations. This article will cover this topic in detail. Keep reading to know more about financing activities.
What are financing activities:
Financing activities refer to transactions including long-term liabilities, owner’s equity value, and changes to transient borrowings. These exercises include the progression of money and money counterparts between the organization and its stakeholders of account. When it comes to listing stakeholders, there could be many. Investors, creditors, and financial backers could be termed as stakeholders.
The income from financing activities is the business’s assets or paid to finance its assets. It’s one of the three segments on an organization’s cash flow statement; the other two are operating activities and investing activities. Financing activities refer to the flow of cash between a business and its owners/creditors. Either pay dividends to shareholders to pay back the loan to creditors, it falls under this category.
What are the major inclusions in financing activities?
Financing activities are crucial for any business. Irrespective of the business natures, you should manage these activities and funds skillfully. The best way to well manage these activities is to hire the best accounting firms in Dubai. Following are some of the main financing activities that you should know about. Let us go through them one by one.
i) Long-term liabilities:
Corporations often issue bonds for the redemption of debt. The issuance of these bonds is an example of financial activities involving long-term liabilities. Companies tend to issue additional bonds to generate cash. The activity can go either of the following two ways:
- If the amount is positive, it signifies an improvement in the bond payables. It means cash has been generated by issuing the additional bonds.
- If the amount is negative, it indicates a decrease in bond payables. It means one used the allocated cash was used in repurchasing or redeeming the bonds payable.
ii) Shareholders’ equity:
Large corporations have to payout dividends to their shareholders. The shareholders (Common and preferred) are the firm’s owners, holding its stocks in value. The shareholders’ equity account in the financing activities of the cash flow is recorded in the following ways.
- An increase in the owners’ stock account means a positive addition to the financing activities of the cash flow.
- When negative sums are recorded, it indicates one used the cash for repurchasing the stock previously issued. The reasons to do so are: to settle for a debt, pay interest on the borrowed loan, or pay out dividends to the shareholders.
Examples of financing activities:
Financing activities of the cash flow are hard to understand without good examples and illustrations. These activities include cash inflow from the creditors and cash outflow to the owners/shareholders. Both of them fall under the financing activities of cash flow. Below is the list of activities.
- Redemption of bonds (negative cash flow)
- Issuing bonds (positive cash flow)
- Repurchase of existing stock (negative cash flow)
- Sales of treasury stock (positive cash flow)
- Purchase of treasury stock (negative cash flow)
- Cash from new stock issued (positive cash flow)
- Payment of cash dividend to shareholders (negative cash flow)
- A loan from a creditor/bank/financial institutions (positive cash flow)
These activities might include the utilization of money. Notwithstanding, exercises that influence cash are accounted for in the income statement. The activities that don’t affect cash we known them as non-cash financing exercises. These incorporate the transformation of obligation to regular stock or releasing of risk by issuing bonds payable.
Counting on the benefits of financing activities, there are countless. When done and recorded correctly, they can produce extravagant results. The accounting tasks are easier and well-managed when you have the best accounting firms. Following are the most prominent benefits of financing activities.
- These activities provide solid insights into a company’s financial health.
- They help determine the end goals of any business.
- A positive number of these activities may indicate the growth and expansion of a business.
- A positive cash inflow signifies an increase in business assets.
- When it comes to deciding about a firm’s dividend policy, these activities can provide useful insights.
- It also provides useful insights into improving the liquidity position of a company.
Seek experts’ help when managing your accounting activities!
The accounting department in every firm is dynamic of all. With numerous strategic positions, the departments should be run by industry experts. Consider joining hands with expert accounting firms for more sophisticated accounting operations.