The Statement of Cash Flows is divided into three categories:
operating activities, investing activities, and financing activities.
This video will focus on the Financing Activities section.
Financing activities relate to transactions effecting cash inflows and outflows
for long-term liabilities and equity.
These areas are sometimes called debt financing and equity financing
and are the two ways businesses can finance their long-term assets.
In order to prepare a Statement of Cash Flows, we need some financial information.
Specifically, we need a current year’s Income Statement,
a comparative Balance Sheet,
and some additional financial data.
A comparative Balance Sheet is just a balance sheet that compares two years of data.
So let’s use the example of Apu’s Quick-E-Mart.
Here is the Income Statement we will reference.
Here is the comparative Balance Sheet and you can see the years 2015 and 2016.
And finally some additional financial data.
Many assignments you might encounter will provide this information to you
in case you run into a problem that doesn’t present all the pertinent financial data needed.
The items highlighted in red are those that relate to long-term liabilities and equity.
So a partial Statement of Cash Flows is shown here.
The financing activities section is shown directly after the investing activities section.
I’ve identified a couple of items that will go into this section.
The first item I’ve identified is some information about the issuance of common stock.
The issuance of common stock for $2,600 is added in the financing activities section
because cash is being received in exchange for stock.
The next item is a dividend payment of $100.
Since cash is being paid for dividends,
$100 is deducted in the financing activities section.
And actually that is it for this section.
But let me explain why the other long-term liability item isn’t listed here.
We issued Bonds in exchange for PP&E.
I’ve shown the journal entry here so you can see that the Cash account is not involved.
In fact, this is called a non-cash investing and financing transaction,
and there is a separate video that explains how these are reported on the Statement of Cash Flows.
Finally, you may encounter questions
in which you are not given all the information you need with the additional financial data.
When this happens, I strongly encourage you
to write out the T accounts with the data you know,
and then start to solve for what you weren’t given.
Here I’ve listed the beginning and ending balances related to common stock.
So I can solve for the missing amounts
and determine that the total of the stock issuance was $2,600.
Another common example you may encounter a question
in which either Net Income or Dividends is not provided.
However, if we know one of these amounts, we can figure out the other.
In our example, we know Net Income is $6,100.
So dividends must be $100 to make the Retained Earnings account balance.
Finally here is what our Statement of Cash Flows looks like
after the completing the operating, investing, and financing activities sections.
You see we have positive net cash flow from financing activities of $2,500.
Investors and creditors don’t really have expectations about this section
other than growth companies tend to have positive cash flows
while more mature businesses generally have negative cash flows from investing activities.
This is because the growth companies need cash to grow
while mature business pay out cash in the form of dividends or in liability reduction.
So please watch the video “Completing the Statement of Cash Flows – Indirect Method”
to see how this information is all brought together.