Accountancy · Ch 10 — Cash Flow Statement
Cash from Financing Activities
Cash from Financing Activities
Financing activities deal with the long-term funds of the business — the money that comes from owners and lenders. The name itself tells you: these are activities that finance the enterprise, i.e., provide the capital base.
As per AS-3, financing activities are those that change the size and composition of two things:
- Owners’ capital (which includes equity share capital and preference share capital in a company).
- Borrowings of the enterprise (long-term loans, debentures, bonds, etc.).
Why is this separate disclosure important? Because it helps predict future claims on cash flows by the people who provided the funds. If a company has borrowed heavily, lenders will expect repayment and interest; if it has issued shares, shareholders expect dividends. Knowing the cash flows from financing tells you how much pressure there will be on future cash.
Cash Inflows from Financing Activities
Money coming in from financing sources:
- Cash proceeds from issuing shares (equity or preference).
- Cash proceeds from issuing debentures, loans, bonds, and other short-term or long-term borrowings.
Cash Outflows from Financing Activities
Money going out to repay or reward those who provided funds:
- Cash repayments of amounts borrowed (principal repayment of loans, debentures, etc.).
- Interest paid on debentures and long-term loans and advances.
- Dividends paid on equity and preference capital.
A common confusion: Interest paid is not an operating activity under the indirect method for most enterprises — it is classified under financing activities because it is the cost of borrowed funds. Similarly, dividends paid are a return to owners, hence financing.
Important Distinctions in Classification
A single transaction may contain cash flows that belong to different categories. For example, when you buy a fixed asset on a deferred payment plan (instalment basis), each instalment has two parts:
- The interest element → classified under financing activities (cost of borrowing).
- The loan/principal element → classified under investing activities (payment for the asset).
Also, the same activity can be classified differently for different enterprises. For instance:
- Purchase of shares by a share brokerage firm → operating activity (it is their main business).
- Purchase of shares by a manufacturing company → investing activity (it is a long-term investment, not part of daily operations).
Cash Inflows and Cash Outflows by Activity (Exhibit 6.1)
The textbook summarises all three activities in one exhibit:
| Activity | Cash Inflows | Cash Outflows |
| :--- | :--- | :--- | …