- Calculate cash flows from financing activities
Financing activities would include any changes to long-term liabilities (and short-term notes payable from the bank) and equity accounts (common stock, paid in capital accounts, treasury stock, etc.). We would get most of the information from the balance sheet, but it may be necessary to use the Statement of Retained Earnings as well for any information on dividends. As with investing, if there has been a change in a long-term liability or equity (increase or decrease during the year), we must account for the item in the Financing section of the statement of cash flows.
When analyzing the financing section, just like with investing, a negative cash flow is not necessarily a bad thing and a positive cash flow is not always a good thing. Once again, you need to look at the transactions themselves to help you decide how the positive or negative cash flow would affect the company.
To summarize our investing and financing sections, review this chart (remember, use the wording “provided” if positive cash flow and “used” if negative cash flow):
| Cash flows from Investing activities: |
|---|
| + cash received from sale of long-term assets |
| – cash paid for purchase of new long-term assets |
| Net cash provided (used) by Investing Activities |
| Cash flows from Financing activities: |
|---|
| + cash received from long-term liabilities |
| – cash paid on long-term liabilities |
| + cash received from issuing stock |
| – cash paid for dividends |
| – cash paid to purchase treasury stock |
| Net cash provided (used) by Financing Activities |
Here is the balance sheet for Rumble Corp.:
| Description | Amount | Total |
|---|---|---|
| In millions | ||
| Panel A – Balance Sheet | 12/31/X1 | 12/31/X0 |
| Cash | $5,040 | $1,640 |
| Accounts Receivable | 1,735 | 1,750 |
| Equipment | 24,920 | 24,500 |
| Accumulated Depreciation | (1,565) | (1,540) |
| Total Assets | Single line $30,130 Double line |
Single line $26,350 Double line |
| Accounts Payable | $1,039 | $1,007 |
| Wages Payable | 135 | 55 |
| Income Taxes Payable | 60 | 42 |
| Note Payable – Long Term | 500 | 0 |
| Total Liabilities | Single line 1,734 |
Single line 1,104 |
| Common Stock | 13,500 | 12,500 |
| Retained Earnings | 14,896 | 12,746 |
| Total Liabilities and Owner’s Equity | Single line $30,130 Double line |
Single line $26,350 Double line |
We’ve now accounted for the changes in all of the accounts except long (and short) term debt and changes in common stock. Those changes are considered financing activities. For Rumble Corp., we see an increase in long-term debt of $500 and an increase in common stock of $1,000. Once again, we need to dive into the accounting records to see what the changes are because the $500 increase in debt could have been due to $600 in borrowing and $100 in repayment, but let’s assume for purposes of this example that the company borrowed $500 on a long-term note and issued additional stock that brought in $1,000 in new capital.
In addition, the company paid out dividends in the amount of $460, which is also considered a financing activity.
The financing section of our statement of cash flows would look like this:
| Description | Amount | Total |
|---|---|---|
| Cash flows from financing activities | ||
| Proceeds from issuance of common stock | 1,000 | |
| Proceeds from issuance of long-term debt | 500 | |
| Dividends paid | (460)Single Line | Single Line |
| Net cash used in investing activities | 1,040 |