Financial activities

What are financial activities?

Financial Activities are monetary transactions relating to long-term liabilities, owner’s equity and changes to short-term borrowings. These activities include the flow of cash and cash equivalents between the business and investors or creditors for non-trading liabilities such as long-term loans and bonds payable.

The cash flow from Financial Activities is the fund that the company took in or paid to finance its activities. It’s one of the three sections on a company’s cash flows statement including operating and investing activities.

What are financial activities in CFS?

In the statement of cash flows, these activities refer to the flow of cash between a company and its owners or creditors. It focuses on how the company raises capital and pays back its investors / creditors. The financial activities contain issuing and selling stock (which is normally done in the stock market), giving cash dividends and adding loans.

An increase on the cash flow statement shows that the company has received cash. It enhances company’s assets levels. Similarly, a decrease indicates the business has paid out capital such as paying a dividend to shareholders or paying off long-term debt.

What goes under financial activities?

The total capital of a company can either be from equity or debt. When company takes on debt, it does so by taking a loan from a bank or issuing a bond / certificate. It makes interest payments to the creditors and the bondholders for providing their cash.

Other possible way of financing is by issuing stock to investors who buy it for a share in the business. These activities are used to support operations and strategic activities of a business.

Some examples of financial activities

Financial activities include both cash inflows and outflows from creditors and investors. Anything to do with the movement of cash and cash equivalent is a financial activity.

Some examples of cash flows from Financial Activities are:

  • Repurchase of existing stock
  • Issuing certificates / bonds
  • Loan from a financial institution
  • Cash from new stock issued
  • Payment of cash dividend to stockholders
  • Repayment of existing loans
  • Redemption of bonds
  • Sale of treasury stock
  • Purchase of treasury stock

It is not necessary that financial activities must use cash it can be in any other form as well. However, only activities that affect cash are reported in the cash flow statement. The activities that don’t have an impact on cash are known as non-cash Financial Activities. These include the conversion of debt to common stock or discharging of a liability by the issuance of a bond payable.

Mudassir

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